If you’re new to fix-and-flip real estate investing, you may have many questions about how to proceed, particularly when it comes to securing financing and buying a property. Learning the answers to those questions is crucial to getting your fix-and-flip career off the ground. Here’s a quick look at what you should know as a fix-and-flip beginner.
How much cash does a fix-and-flip beginner need?
For beginning fix-and-flip investors, cash flow is crucial to turning a profit. Depending on the heat of the market you’re operating in, the best deals might be snapped up quickly by other investors with quick access to capital, so be prepared in advance by knowing what your property flip will cost and how much capital you have available.
The two most obvious costs associated with a fix-and-flip project are the property’s purchase price and the cost of renovations. To get an idea of what it will cost to buy and renovate your investment property, research the home sale prices in your target area well ahead of any project; know what homes similar to yours have recently sold for, and determine the cost of repairs and upgrades your property will need to make it competitive in that market.
In addition to acquisition and renovation costs, there are other expenses to consider. If your property’s title is encumbered with unpaid back taxes, for example, it could cost you thousands of dollars. Know these costs in advance, and don’t forget to build them into your budget!
Are you using your own savings to pay for your investment property, or will you need to borrow money to leverage your cash on hand? If you plan to use bank or hard money financing, be sure to include interest and loan fees to your project budget.
Finally, don’t neglect to plan for utilities, agent commissions and closing costs. It's unlikely that any one of these costs will bust your budget on its own. However, several added together may make a big impact on your bottom line.
What are the best fix-and-flip financing options for beginners?
There are a number of ways to finance your first fix-and-flip investment. In addition to non-lender funding sources such as savings, 401(k) funds, or private gifts or loans, there are a few different commercial loan types a beginning fix-and-flip investor should consider:
- Loan type #1: a hard money loan. A hard money loan typically features a higher interest rate and shorter term than most bank loans. Approval is based more on the value of a “hard” asset (in this case, the home you’re rehabilitating), than the credit history of the borrower, so these loans often feature significantly lower qualifying restrictions compared to conventional loans. After making a down payment of 15 to 20 percent, a hard money borrower makes interest-only payments followed by a balloon repayment of the principal at the end of the loan term when the rehabbed property is sold.
- Loan type #2: a HELOC. A Home Equity Line of Credit or HELOC allows you to borrow against the value of your current home, making this a good option for beginning investors that already own a home. Using a HELOC, investors can borrow as much or as little as they need for a fix-and-flip project, up to the limit set by the equity in their home.
- Loan type #3: conventional bank financing. Though experienced investors may prefer fewer qualifying restrictions and faster funding, a new fix-and-flip investor may be more willing to bear the strict approval criteria and slower funding pace common to traditional bank loans.
What other steps should a beginning fix-and-flip investor take?
In addition to understanding financing, there are some other steps a fix-and-flip beginner may want to consider:
Find a mentor:
While experience is a great teacher, aligning with a mentor can help you avoid costly mistakes. An experienced mentor can share with you the details of their successes and their failures and may also be willing to help you identify the best projects to pursue. How do you find one? In this post for BiggerPockets.com, real estate investor Michael Zuber offers some great guidance on identifying and selecting a mentor.
Consider wholesaling:
It may be wise for a fix-and-flip beginner to start their real estate investment career as a wholesaler. Wholesalers develop a keen eye for distressed properties and learn how to network with owners and potential buyers to find deals and execute purchase contracts quickly. Wholesalers do not perform repairs on properties, nor do they need huge cash reserves, as they will act as a go-between between sellers and fix-and-flip investors looking for lucrative projects, as explained by Investopedia in this scenario:
A typical wholesaling scenario looks like this: The wholesaler has a house under contract for $90,000 that he estimates needs $20,000 in repairs but will sell for $150,000 once the repairs are made. Using his network of investors, he finds an eager buyer at $100,000. He assigns the contract to this investor, who then has a profitable fixer-upper project. The wholesaler makes a $10,000 profit without ever owning the home.
By starting your real estate investment career as a wholesaler, you can build important relationships with investors and other key players in your target market as you build up your cash reserves to help fund your first fix-and-flip project.
Find a team:
Finally, it’s crucial for beginning fix-and-flip investors to assemble a reliable group of collaborators. A successful house flip can’t be done alone. You’ll need some combination of contractors, designers, insurance and real estate agents, a reliable lender and other specialists to help you achieve your investment goals. Focus on building your fix-and-flip team early and you’ll reap the rewards later in your investment career.
When you’re ready to invest, Anchor Loans can help with financing
Once you’re ready to begin investing, Anchor Loans can help you with the next steps. We’re happy to work with fix-and-flip investors early in their journey, as long as they meet certain conditions. The Anchor Blog is a great resource for investors of all experience levels to help you build a long-term investment strategy or get approved for a fix-and-flip loan. And once you’re ready to get started, Anchor Loans is happy to speak with you about beginning your fix-and-flip journey.
