We’ve all seen the TV shows giving us a glimpse into making money by flipping houses. They make it seem easy, right? These investors generally buy a cheap house, put some money, hard work and TLC into it and sell it for a large return on their investment. With the popularity of these shows, no wonder it is such a new and exciting playground for investors of all sizes, but is it really a good decision to fix and flip the property, or should you buy and hold it?
We here at Patch of Land will introduce you the benefits of both to give you a better idea of which method would work best for your investments goals.
Fix and Flip Real Estate Investing
It is a common practice for real estate investors to buy homes, usually at auction or in foreclosure, fix them up and sell them a few months later for a quick profit. For some, using this method can indeed make you a lot of money, for others, especially those new to flipping houses, this can be a disaster.
Flipping houses can require the investor to have plenty of cash and nerves of steel. While some investors are able to turn these properties around rather quickly, those that don’t, end up sitting on their property for a longer period of time. When you sit on the property, you have to continue to pay the mortgage on their primary residence and also the mortgage on the investment, along with utility bills, insurance and taxes. In some cases, if the investment property is located in a neighborhood with an active homeowners association, the investor will have to pay the HOA dues as well.
Those looking to get started with flipping houses should take the following into consideration:
- Credit score: if you need to borrow money you already know the lender will be checking your credit. At Patch of Land we use 'Makes Sense' underwriting techniques while performing our due diligence process to ensure we gather an entire credit profile to evaluate our borrowers. So while credit is important, we understand it's not the whole story.
- Cash: cash for a down payment to avoid paying unnecessary added fees and costs that are associated. Part of the benefit of working with Patch of Land is our ability to offer prefunded real estate investments. This means our borrowers will receive their project funding up-front so they can begin construction right away. Opposed to many other real estate crowdfunding platforms that make their borrowers wait until the loan is fully funded by the crowd before moving forward.
- Location: it is important to buy your investment property in a great area to sell it quickly. The longer you hold onto the house, the more it will cost. Patch of Land also performs our fix and flip real estate projects in areas who's economy is growing and showing signs of turnaround. Locations such as Newark, New Jersey and the Chicagoland area are prime examples of cities where the government is putting a lot of money into the housing market to stimulate the local economy.
- Right property: Bring someone knowledgeable to know what to look for. In most cases of auctions, there is no time to hire a home inspector.
- Value: research the value to make sure it is below its value in the local market, or you will not make money.
- Overestimate: overestimate the amount of time, repairs and costs than you think.
Flipping houses offers many benefits which make it attractive to investors. It allows you to receive a fast return on your investment. If done correctly, it is not uncommon to make 10%-30% of the original cost of the property. Flipping houses also means there are no property management issues involved. You fix it and sell it. There are no tenants or rental issues to deal with. The money you make can then be rolled into your next project. Patch of Land's Investors also reap the benefits of being able to diversify their portfolio with short-term notes that give an average yield of 12% interest. Clearly there are many great reasons to participate in fix and flip real estate investing.
Do you have experience with fix and flip real estate investing? What advice do you have for people who are looking to get involved?
This entry was originally published on March 9, 2015.