Here are some important tips for beginner investors interested in fix and flips. Determine if you have what it takes to become a serious fix and flip investor and set realistic expectations about your potential profits in this type of investment in the current market conditions.
What is a fix and flip?
In short, a “fix and flip” scenario means that an investor buys low and sells high. An investor buys a home for less than its market value, usually because it needs significant repairs or renovations. Then, the investor “fixes” the home, making the necessary repairs and renovations. Now, the investor is in a position to try to make a profit by quickly selling the improved home at a higher price, closer to the homes current market value.
What to expect for return on investment?
What is a realistic expectation for “fix and flips”? In the current market, a realistic goal for experienced investors is a return of investment of 10-15% on each property. Remember, you must account for purchase price, closing costs, the cost of holding the property between the time it is purchased and the time it is sold, and of course, the price of repairs and remodeling.
What to expect for how much you need for a down payment?
You should expect to need 25%-30% of the sale price of your home for a down payment. Most lenders require this range for investors that will not be owner-occupants.
How much cash does it take to get started in these types of real estate investments?
Investors will need cash for down payments, closing costs, holding costs and repairs and remodeling. Most lenders require at least 25%-30% for a down payment. Experienced investors suggest that a realistic amount of cash to get started is $75,000 to $100,000. With less cash, you run the risk of being out bid by other investors.
What are the trends in purchase price compared to asking price?
An important part of the fix and flip process is finding a home that is selling for lower than it’s market value. But, this doesn’t necessarily mean buying a home for a significant amount less than its asking price. In fact, our buyer’s agents have compiled data of approximately 21,000 home sales in Boulder county and North Denver metro area that shows just the opposite. The overwhelming majority of homes sell within 5% of the seller’s asking price. There are exceptions. Fewer than 0.5% of homes in this area sold for 20% under asking price and another 2% to 3% sold between 10% and 20% under the asking price. In cases where there is a large difference between asking price and sale price, the buyer generally uncovers some type of serious defect that would require extensive and expensive repairs.
The bottom line is that while it is a possibility to purchase a home for less than 10% of the asking price, it is definitely the exception and not the rule. Most homes sell for within 2-5% of the asking price. It is important for investors that are beginners to have realistic expectations about what can be achieved during negotiating because it will save you time and effort.
What are ways to increase profit?
As described above, a realistic expectation for experienced investors is to make approximately 10% as a return on investment. Some investors are able to increase their returns by doing all repairs themselves, earning them about 20-25%.
For more information for investors, contact us today.