When dealing with real estate, it can sometimes be hard to see the line in the sand between deals that will be profitable and deals that leave you wishing you hadn’t gotten involved, even though things looked good on the surface.
We’ve come up with a few tips on how to find good and profitable deals to invest in.
This adage is especially important if you’re new to fixing and flipping. While it’s good to have big, audacious goals, starting small is the best way to accomplish those bigger goals. Start by picking a simple and straightforward property. Perhaps one that requires simple cosmetic fixes, such as a new kitchen and baths versus doing a full-on condo conversion or tackling a new multi-family construction.
Set a Budget and Be Prepared to Move Quickly
Whether you’re new to fixing and flipping or have been at it for a while, it’s wise to keep in mind that profitability is directly tied to budget and timeline. Start with setting a realistic budget. Take the number you think is your budget and multiply it by 1.5 - that is your realistic budget. Set guidelines and limits from the beginning to avoid last minute or haphazard decision making during the process. Once you’ve set your budget, move quickly. Time can be the killer of deals and profitability.
Know Your Market
It goes without saying that investors want a return on investment (ROI). This means doing your homework. It’s vitally important to know the market you’re dealing with, especially when it comes to investing in fixer uppers. Knowing the market means knowing the numbers before doing repairs, and the numbers after doing repairs, in comparison to similar properties in the neighborhood. Seek out active comps to help you get an accurate picture of the after repair value (ARV) and ensure you only rehab at a level that’s appropriate for the neighborhood.
It takes time and money to learn the market you’ll be working in, and it’s important to understand that you won’t be able to learn that market overnight. However, there are a few things you can do that can help speed the learning process along; this includes networking, watching and attending auctions, getting to know wholesalers - just to name a few. Auctions can take a bit of work to prepare for, but you never know when you’ll find that diamond in the rough that kick starts your real estate investing career. Networking, whether with real estate agents, wholesalers or even fellow real estate investors, can help expand your reach.
Shoot For Buy and Fix Deals
It’s important to keep the ARV of your investment property in mind. ARV is value of the home after all repairs. This number is most commonly used by fix and flip investors who buy, rehab, and sell properties within the span of twelve months.
When calculating ARV, you want to include “the purchase price and the value of the renovations.” The formula most commonly used is:
ARV = (Property’s Purchase Price) + (Value of Renovations)
When looking for a fix and flip, you want to aim for seventy-five percent of ARV in order to get good ROI. It’s especially important to look at comps during this time so you can determine what repairs will best suit the home. Under- or over-estimating ARV can leave you short on profit in the end. Underestimating ARV means you won’t make enough to cover costs or fund your next property, while overestimating the ARV can lead to long lead times on making a sale. Therefore, getting as close as possible to true ARV is critical.
Check your ARV numbers by finding comparable properties. Good comps should include:
- properties within the same location, a quarter-to-half-mile from your subject property,
- properties sold within the past 6-to-12 months,
- and have similar characteristics as your subject property such as size, bedrooms/bathrooms, condition of home, etc.
If your estimated ARV is higher than your comps, either your calculations are wrong or it’s a warning sign this project is not a good investment. You want to find comps that are similarly priced to your estimated ARV.
Is Your Fix and Flip Deal Worthwhile?
If you’re willing to do the legwork, you’ll see the payoff in the long run. Be realistic with your goals - start small. Setting a budget can help determine how small (or big) you can go. Sticking to the budget will help your overall earning potential. Take the time to find the right property by understanding the market and researching the neighborhood. Gather data to help determine your renovation costs and after repair value. If you spend more than seventy-five percent of the ARV minus renovation costs, you run the risk of losing money. However, if the value of your renovations outweighs the cost of your renovations, there’s greater potential for profit.
If you’re interested in learning more about the basics of fix and flip investing, check out our free ebook, Essential Math for the Fix and Flipper.