A Beginner’s Guide to Fix & Flip Investments

If you’re thinking about investing in a fix & flip home, chances are you’ve got a great eye for potential. Many buyers run the other way when they see peeling paint and a 1970s-style kitchen, but fixing and flipping a neglected home can often be profitable. However, investing in a fixer-upper is not easy – it takes time, money, patience, and know-how to be successful. The more fix & flips you complete, the more you’ll learn, but before diving in, there are a few key things you should know.

Finding a Fix & Flip

It’s easy to think that most fixer-uppers are the same, but that often isn’t the case. You’ll want to look for homes that mostly need cosmetic updates, like fresh paint or new fixtures. Keep an eye out for available properties in up-and-coming neighborhoods in your area. If you’re able to pay cash, consider going to estate or foreclosure auctions. An experienced realtor can offer expert insight on property values as well.

When deciding how much to offer for a fix & flip, you should have a good understanding of the after repair value (ARV), or the value of the home once you’ve completed your renovations and it’s ready to go on the market. Some flippers follow a 70% rule: determine 70% of a home’s ARV, then add the projected cost of renovations, and stay below that number when making an offer.

Financing a Fix & Flip

In order to finance a fix & flip, you’ll either need to have tons of extra cash, or you’ll need to take out a loan. If you’re already a homeowner, you’re probably familiar with how the conventional home loan process works, but obtaining a fix & flip loan is a bit different. 

First, a fix & flip loan is typically a short-term loan between 12-24 months, versus a conventional home loan that can last as long as 30 years. The interest costs of a fix & flip loan will likely be more than a conventional home loan because it’s riskier for the lender, particularly if you’re a novice flipper. Additionally, a fix & flip loan can be used to cover not only the cost of the home, but also the cost of renovations.

Typically when borrowers seek a conventional home loan, the lender will review things like debt and credit score before deciding whether to finance them. Fix or flip loans are paid back after a home sells, so lenders are mostly looking at the potential value and risk factors of the fixer-upper. 

If you’re approved for a fix & flip loan, you’ll get the funds much quicker than a conventional home loan – some lenders can even approve you the same day. This comes in handy when you need to jump on repairs quickly, particularly in a competitive market.

Renovating a Fix & Flip

Once you’ve found and financed your fix & flip, it’s time to roll up your sleeves and get to work on renovations! Many buyers today are looking for updated kitchens and bathrooms, so focusing your budget on these areas will be important when it comes to resale value. You’ll save money if you can complete renovations on your own, but you’ll likely need to hire a contractor to help with more complicated upgrades.

As many homeowners know, there are often unpredictable costs that arise when renovating a home. Tearing down walls or pulling up old carpet can expose all kinds of issues you weren’t aware of, so be sure to have a reserve of cash ready to cover unforeseen costs.

Selling a Fix & Flip

Once it’s time to sell your fix & flip, working with a realtor again can help you accurately determine the home’s value. You might be tempted to price it high. After all, you’ve put lots of time and money into its repairs. But the longer you own your home, the longer you’ll have to pay carrying costs like utilities, taxes, and insurance. The last thing you want to do is languish on the market while more affordable homes sell around you. 

The time it takes to sell your fix & flip will depend on many factors, including the housing market, location, and price of the home. Don’t be discouraged if it takes time to sell or if you have to reduce the asking price. Every fix & flip will be a learning experience and your success will likely improve over time.

Should I Invest in a Fix & Flip?

Real estate investment can be incredibly profitable, but like any investment, it comes with risk. You might not make a profit on your first fix & flip, or you could even lose money. You’re already headed in the right direction by doing your research – try and learn as much as you can about fix & flips before you decide whether it’s right for you.

Interested in learning more about Direct Portfolio Lending Fix & Flip loans with Directors Mortgage? Visit directorsmortgage.com/direct-portfolio-lending and contact one of our expert Private Lenders to get started!