The risky, profitable investment: Fix n Flips.
A ‘Fix n Flip’ is one of the most popular short-term real estate investing strategies. Lately, these short-term real estate investments have become even more popular among investors.
If there was a “quick” way to make money in real estate, it’s this. When attempting real estate flipping, an investor will buy a property with the intent to sell it fast for a profit, rather than hold onto it like a buy and hold investment property. In fact, some real estate investors prefer to take the fix and flip path over long-term investments.
We’ve created a breakdown of the process to highlight where you can capitalize on your investment and make the most profit by figuring out how to find property to flip. Check out our 4 simple steps.
Related: Real Estate Investment Strategies Guide: Fix and Flip
Step #1: Location
If there’s something we always address in our blogs, it’s location. And this is no different when we’re talking about how to find property to flip. When attempting to find an investment property in the real estate market, the exact location can either make it, or it can break it for you.
When we say location we mean either:
City – Choosing the right city to invest in is very important. You can either choose to invest in the city you reside in or opt for out-of-state investing. Whichever one you choose, make sure that you’re investing in a profitable city, real estate investment wise. For flipping an investment property, this means a city with more housing inventory where you can still find discounted property and get a good ROI. Ideally, the rate of house flipping would be on the low side so you won’t run into too much competition.
There are many lists of the best places to invest in real estate, and these are constantly changing as cities adopt new laws, new construction plans, or change economically. Be sure to Sign Up to Mashvisor to stay updated on these ever-changing lists!
Related: The Best Cities to Flip Houses and Make a Profit in 2019
Neighborhood – While your choice of city when considering how to find property to flip is a huge part of locating the ideal piece of real estate, your choice of neighborhood is equally, if not more, important. So what makes a neighborhood a good choice for a flip?
A good ‘flip’ neighborhood should:
- Have good values for real estate metrics/indicators: Some real estate indicators include CoC return, cap rate, rental income, among others. However, for house flipping, you need to focus on median property prices and values, real estate appreciation, average days on the market, and rental comps. These tell you a lot about how good of an investment you can make when flipping a specific property in a certain neighborhood.
- Be in a competitive market: If you want to sell your fix and flip fast, you have to look in markets where there’s high competition – so you can guarantee a sale. By competitive, we mean investment properties don’t stay on the market too long. This is important when learning how to find property to flip. However, as mentioned before, competition for flix and flip real estate should be ideally low. Competitive neighborhoods are usually ones that are well connected with transport options, have good schools, are safe, and have an overall decent quality of life rating.
The purpose of conducting neighborhood analysis is to find out whether the specific neighborhood you’re looking into is a good fix and flip investment. After all, a neighborhood can be a good investment for a traditional buy-and-hold, or for an Airbnb investment, but not for a fix and flip. For help with conducting neighborhood analysis, click here, and search for the city or neighborhood in mind. Mashvisor allows you to view and compare different neighborhoods in your city of choice.
Step #2: Figure out the finances
Fix and flips are all about achieving that quick profit – but they’ve got a higher risk factor. So how do you guarantee you are going to profit?
Usually, the advice on how to find property to flip is to find one that is below its market price (or below market value property), renovate, and resell. But often times, properties that are below market price require more renovation and can end up costing you more. And flipping property costs a significant amount of money. Consequently, you need to make sure to account for all costs involved in the flipping process. These include the costs of renovation (including labor, tools, etc.), taxes, marketing, and insurance.
We hear many times about real estate investors’ horror stories with fix and flip properties where they end up spending more on the income property than they made off of it. Once you’ve chosen a property, make sure to run inspections. Since you are flipping the property, you’re not expecting it to be perfect. However, you don’t want to end up having to fix major problems and exceeding the cost limit you have in mind. Inspecting the property will, therefore, make it easier to estimate the renovation or “fixing” costs for the property.
And if you want to guarantee a profit, your fixing costs should ideally be lower than the price you got the property for. You should also make sure the selling price is higher than the property price, costs of renovation, and estimated holding costs.
Related: 5 Tricks to Save on Fix-and-Flips
Step #3: Forced appreciation
Real estate appreciation is an increase in a property’s value over a period of time. ‘Natural’ appreciation occurs when inflation, interest rates, or demand for property change. Forced appreciation, on the other hand, is an increase in a property’s value due to actions you, as an investor, take. The value of your property is determined by dividing the net operating income (NOI) by the cap rate. So to increase the value, you would have to increase your NOI. To do that, you can run renovations to your property, add some space, improve your curb appeal, or even add an extra room or bathroom. This will, in turn, improve the overall quality of your property, and you can sell it for a higher price.
It’s important to pay attention to one fact when attempting improvements and renovations: You cannot overdo it.
What is ‘overdoing’ it, you may ask?
Imagine this. You’re flipping in a neighborhood where the average property sells for $150,000. You invest in a property, renovate and improve it, and then ask for $275,000 because:
1) The value of the property has increased
2) You want to cover the costs of renovations
One problem is, it may be more difficult to sell at a price which is higher than that of the market’s and you may not be able to flip your investment property quickly. So make sure that if you do end up running major improvements, to stay within your neighborhood’s range of pricing. This can be done by comparing your income property to real estate comps in the neighborhood to figure out an appropriate after repair value.
Related: 8 Best Practices for Flipping Homes for Maximum Returns on Investment
Step #4: Flipping the property
Now that you know how to find property to flip and how to ensure it’s profitable, it’s time to market the investment property. If you’re new to this, you can work with a real estate agent who has experience with marketing and advertising renovated properties for sale. Just be sure to do everything you can to sell the property quickly in order to enjoy a higher return on investment.
So will I be making a profit?
It all depends. Following the steps above won’t definitely guarantee a profit-making investment, because other factors go into the equation as well. But breaking down the process as above will allow you to find out which steps you can capitalize on, and which aspect of your real estate investment plan you need to improve.
Now that you can confidently say you know how to find property to flip, will you become a house flipper?