Can purchasing a house be as easy as the internet claims? Given the old saw of not posing through life, paying for your champagne-tastes on a beer-budget, can you really build a property portfolio with limited income? How do you find deals and discounts, especially when searching for your first real estate investment? These and many more are the questions facing most new and would-be property investors. And this is where fix-and-flip, or sometimes just plain old leave-broke-and-flip, shine.
What is Fix & Flip?
A fix and flip real estate strategy is fundamentally premised on turning something ragtag into a ready-for-company gem. Speed and timing are of utmost importance with this strategy. In a fix and flip, an investor purchases a property that is well-past its move-in-ready prime due to neglect, deferred maintenance or outright abuse (requiring drywall and carpet at the low end, or roofing and HVAC systems at the high end), rehabs it in days if possible or a few months tops, and sells it either to a homeowner or another investor. Homeowners tend to be the target customer when the neighborhood has all the markings of family friendliness— a great school system, a community brimming with charm, and a subdivision with curb appeal. Investors tend to be the target when the community is on the upswing (beware the seller who talks a blue streak about how XYZ city is finally really and truly poised to take-off this time) or the rent to value ratio is high (for instance, the purchase price of the house is $50,000 and the monthly rent is $1,000, yielding a 25% return on value). A fix and flip strategy offers several advantages including a quick return on investment and limited exposure to housing price swings (after all, you’re buying and selling the property in a matter of months). But with that comes the attendant pressures of a short timeframe: the whims of Mother Nature, contractor delays and fickle buyers. Leading one to wonder, why fix and flip at all?
In a word— profits.
Fix & Flip Returns
According to Attom Data, publisher of a national property database, the average gross profits on houses that were flipped in the U.S. during the third quarter of 2021 (that is, the average price that an investor sold a house for vs. the price the investor bought the house for) were a cool $68k, translating into a 32% return on investment. And these margins, high though they may seem, are actually at their lowest point since 2011. Queue the tiny violin for those still crying over their lowest-in-a-decade returns.
Financing Fix & Flip Properties
Banks, credit unions and other traditional mortgage lenders are often put off by the very attributes that make fix and flips attractive: a lightening fast close horizon and value-enhancing renovations. Hard money lenders— also known as alternative lenders, private lenders and non banks— face few of these restrictions, allowing investors quick access to purchase and renovation loans. The fees and interest rates for such loans are hefty and should be approached with caution. But for investors with limited equity, so-so credit or an immediate opportunity, hard-money loans provide an entry point.