Walnut Street Finance Blog

Getting Started on Your First Fix and Flip

Posted by Walnut Street Finance Team on Apr 18, 2018 8:00:00 AM

Fix and flip: Maybe you’ve seen it done on TV, maybe you heard about it through a friend who’s just quit their job to become a full-time flipper. If you’re looking for a tell-all guide to fixing and flipping houses for profit, you’re in the right place.

fix and flip

“Fix and flip” is pretty self-explanatory: It describes the purchase of property meant to be “fixed” up (whether through rehab or a total rebuild) with the goal of increasing the property value. This property is then either sold or used to rent for profit. Some people flip as a full-time job, while others do so simply to build an alternate stream of revenue.

One thing is certain: while it may not be easy work, when flipping is done right, it has the potential to yield a huge profit. If you’re interested in learning more, read on - this post covers everything from the definition of flipping to how you can execute your own successful fix and flip.

Why Should you Invest in Real Estate?

There’s been a huge boom in real estate investment over the last few decades, as people have discovered the potential to make serious money flipping properties for profit. The fact is, real estate investment is no longer a rich man’s world, as more accessible financial products have opened the doors for any intelligent investor to enter the market.

Keys with Word Investment on Golden Label over Black Wooden Background. Closeup View, Selective Focus, 3D Render. Toned Image.-1

Here’s how it works: House flippers identify properties in suboptimal condition selling for below market value. Then they hire a contractor to either renovate the home or rebuild the entire house (or even do the work themselves if they have the proper experience). Flippers then sell the house at a higher price point. Some more experienced  flippers can sell at a lower margin, making up for it with a much higher volume of flips per year.

Flipping can be done both as a full-time job or to supplement the income from an existing job. One thing to note, if you’re going to flip as a side gig, your job should afford you some flexibility - you’re going to need to stop by the property from time to time, whether to manage an inspection, check on progress, or to meet with your wider team (more below on how to build a great team for your fix and flip).

Whether it’s done as a full-time job or not, you should also be aware of the risks of flipping houses. The process requires hard work and careful attention, and like an investment of any kind, comes with a certain level of risk. Working with a qualified, local lender can help you figure out if you’re ready for the investment, and if so, how to get started.

Now that you understand how fix and flip investing works and why you’d want to do it, let’s take a deeper look at how profit is actually calculated.

What’s the Profit on a Fix and Flip?

When calculating how much money you’re going to make on flipping a house, you need to consider all costs against the ARV (a real estate acronym meaning “after repair value", or the expected value of the home once all renovations are complete).

Close up of a pink piggy bank with dollars beside miniature house model on white background

Below, you’ll find a breakdown of all the factors that go into calculating the profit of a fix and flip.

Calculating ARV

To calculate after repair value, you’ll want to look at comparable houses that have sold recently in the area. This is important: you should look for the actual sale price of homes, not the asking price for homes that are currently for sale. If you can’t find any homes that have recently sold, this could signal low demand in the neighborhood, meaning you may want to reconsider your choice of location.

The properties you look at should be comparable on as many fronts as possible: everything from the general (lot size, number of bedrooms and bathrooms, kitchen quality, etc.) to the specific (appliances, technology, overall cosmetic quality) - you get the idea.

When calculating ARV, remember to be realistic and to keep the prospective buyer’s budget in mind. Your house is only worth what people will pay for it, meaning the price will need to be competitive in order to be attractive to buyers.

ARV is important for two reasons:

  1. ARV is how lenders typically calculate the terms of a loan for a fix and flip, meaning you’ll need an accurate calculation to get the best financing for your project.
  2. ARV will help you calculate your expected profit margin based on the costs of flipping (which are outlined below).

Building your Fix and Flip Budget

When it comes to cost, there are a few key factors to keep in mind that will affect your bottom line. On top of all of these calculations, you’ll want to budget some additional money as “just in case” - when it comes to flipping, it’s usually better to expect the unexpected. Additional costs always come up, so better to be prepared.

Renovation Costs

You can do the work yourself, but remember, if you’re not a renovation expert, and especially if this is one of your first flips, best to leave the work to the professionals. Anything but top-quality work will scare away potential buyers, lengthen the flip timeline, and ultimately hurting your bottom line.

Assuming you’re working with a qualified, professional contractor, you can work together with them to draw up the plans and get an accurate estimate of cost.

Realtor Fees

Whether you decide to hire a realtor or try to sell the property yourself is up to you. The key here is that, as with most phases of the fix and flip process, hiring an expert will increase overall expenses and ultimately eat into your bottom line.

If you go for a realtor, you will have to pay a commission, usually 6% of the sale value. So, while a good agent might be able to negotiate a better selling price for you in a shorter time frame, it’s important to run the numbers ahead of time to figure out what’s best for your bottom line.

Financing Costs

Because the majority of financing from flips comes from lenders (not the borrower), this is an important cost to factor into the fix and flip process. Hard money loans are the most advisable and most attractive for early or first-time flippers. The key advantages of working with a hard money lender is the speed at which financing can be acquired and the less stringent requirements required for approval.

In short, hard money loans can help you get underway as soon as you’ve put together your business plan and found the property that’s right for you. These loans can usually come in at up to 75% of ARV, and have interest rates of around 10-12%.

You can read more on financing in the next section.

Additional Costs

There are other costs associated with holding and transferring property, all of which should be considered when calculating your expected profit. For instance, for the entirety of the time the property is in your name, you’ll have to pay maintenance, utilities, taxes, and insurance. You’ll also face costs for permitting and inspection throughout, and title transfer costs when you’re ready to sell.

Finally, remember that when it comes to fix and flip investments, time is money. A shorter project timeline will pay off in three ways:

  1. The faster you complete the project, the sooner it hits the market - meaning you minimize exposure to economic shocks or changes in the housing market.
  2. The sooner you close a deal, the sooner you can move onto your next project, meaning a higher volume of projects and more revenue for the flipper.
  3. The shorter a timeline, the lower the financing charges, as you will avoid any costs associated with extending your loan.

Now that you know how to balance a fix and flip budget, it’s time to put together your plan of action.

Building a Fix and Flip Action Plan

Before any money changes hands or any documents are signed, it’s highly advisable to have an accurate and well-thought-out business plan prepared. Not only will this help cut down on incidental costs throughout, but it will also keep you and the team focused and working towards a singular goal with a strict timeline.

Below is everything you should consider during the planning phase of the fix and flip.

Overview and Goals

Above all else, it’s important to know up front why you’re getting into flipping, and what your specific goals are. This is the pitch you’ll make to lenders and contractors alike, and the goal that will give your project focus and meaning - make sure you have it down pat before you get started on anything else.

Building the Right Fix and Flip Team

As mentioned above, one of the decisions you’ll have to make is whether to hire a contractor or to do the renovation yourself. We’d usually advise going with a contractor; unless you’re a professional builder, this will save you hassle, reduce risk, and help you hit your goals in a more effective way.

There are plenty of ways to find effective contractors - you can speak with local real estate agents or brokers. You could also go online to search for certified professionals with positive reviews. Your goal here should be to find a handful of promising candidates and have them provide references. Next, get competing bids to make sure you’re getting the best possible deal for the work ahead. Once you decide on a contractor, double-check their qualifications, and make sure you agree on the scope of work and payment schedule.

While a contractor is an important part of the team, there are a number of other key players who can make the entire flipping process easier and more efficient. To name a few, you might need an experienced realtor, an intelligent and local financier, and a trusted attorney to help with title transfers and general legal advice. You’ll also want to identify key players like government officials who play a role in the flipping process through inspections and permitting. You might even want to find a local mentor who’s been through the process before and can give you guidance if you hit any roadblocks.

Remember, the success of your investment relies on building a team of qualified experts - the people are just as important as the property.

Finding the Right Neighborhood for a Fix and Flip

Location, location, location. When you’re prepping for a fix and flip, it’s important to identify the “where”, as this will play a key role in how successful and profitable your project is.

How do you find the right neighborhood for your fix and flip? There are a number of factors that signal whether a neighborhood will be attractive to potential buyers - the good news is, they’re all pretty straightforward to the intelligent investor.

Look for neighborhoods with good and convenient commute times. If the area is in or near a city, it should be connected to a local business district via well-maintained roads, highways, bike paths, or even pedestrian walkways. Proximity to good schools is also important, as it opens the door to the huge swath of potential buyers who either have a family or plan to start one in the near future.

Finally, take a look at the neighborhood itself. There should be a mix of older and newer homes, signaling that you’re not the only investor with a vested interest in the neighborhood’s success. As a result, the area as a whole will become more attractive to buyers, as they can tell it’s on the upswing. This will create a more competitive market, which is a net good - while finding a deal might be harder during the purchasing process, you’ll be able to set a better price when selling, thus increasing your overall profit.

Scope of Work, Timeline, and Financials

Now that you have the “where” and the “who”, you should think about the “how” and the “when”. Present your plan to your contractor to get an accurate idea of how much the project will cost all-in, and what timeline you can expect to work against. This will help take your project from a “flipping a house” idea to a highly specific plan with actionable steps. It will also give you a concrete measure of success to evaluate your progress, and make the process of securing a fix and flip loan much easier - but more on that below.

This stage presents a great opportunity to double- and triple-check that the financials line up. Once you’ve outlined your final budget, timeline, and expected profit margin, make sure that this investment is feasible and attractive, and that it’s worth your time and money.

Pro tip: Once you’ve budgeted everything out, set aside some extra time and money for the inevitable - there’s nary a construction project where the unexpected doesn’t occur, so the smartest thing you can do is prepare for it by having the time and money to act accordingly.

Your Fix and Flip Exit Strategy

Whether your ultimate plan is to sell or rent your property, this portion of your business plan gives you contingencies for both the best-case and worst-case scenarios.

Keep in mind that, like any investment, things may not go according to plan. Knowing ahead of time what actions you’ll take for all outcomes can help you minimize losses in a worst-case scenario. For instance, if you can’t manage to sell the house, you might want to convert it to a rental property - knowing ahead of time how that will impact your finances will prepare you for that situation, and save you the headache of needing to make a decision during what is already a stressful situation.

Securing Financing for Your Fix and Flip

Choosing the right financial partner can be the make-or-break decision for your fix and flip. If you want your flip to be successful, you’ll need a financier that excels in each of the three categories listed below.

Local Knowledge

A lender’s experience and tenure in the neighborhood can be the determining factor of your project’s success. No matter what the project, you’ll need someone who has invested in properties in the area, knows the key players, and has a track record of success in helping local borrowers achieve their goals.

Speed and Responsiveness

Once you’ve found the right place, the right people, and the right property, you’re going to want to move quickly - and your lender should never be the one holding you back. Working with a hard money lender can make this easier, as they tend to have more experience with fix and flip projects and can get you the financing your project requires in a matter of days.

Simple Borrowing Process

The devil is in the details: When you’re investing in a fix and flip, you’ll want to identify a lender that can provide a simple borrowing process with terms outlined in the clearest possible way. This means a process that’s streamlined to help you hit your goals, without any hidden fees or surprises.

The Bottom Line

That’s everything you need to know to get ready for your first fix and flip investment.

Fixing and flipping a house may not be as easy as they make it look on TV, but having a strong plan, a capable team, and a qualified financial partner will put you in the best possible position to successfully hit your goals.

Walnut Street Finance has 20 years of investing experience, with a proven record of success in Washington, DC, Northern Virginia, Southern Virginia, Maryland, Delaware, and North Carolina. We provide quality financial products to local investors and look for focused investors whose goals and success we can enable and share. If you’re interested in a real estate investment of any kind, you can check Walnut Street Finance’s loan offerings, or check out our free ebook, Essential Math for the Fix and Flipper.

Essential Math For the Fix and Flipper

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Topics: Fix And Flip Advice

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