If you are considering fix-and-flip projects, you are probably looking to add a new stream of income to your life. Having multiple streams of income is a great way to build financial security. Examples of multiple streams of income might include: w-2 income, self-employment income, passive investment income, active investment income, etc.
Active investment income could include rental income on properties you manage and fix and flip income. The former is to build long term wealth, the latter is for short term cash flow. In this article, we will discuss building fix and flip income.
They say a little knowledge is a dangerous thing. That is very true when it comes to real estate investing and buying your first fixer upper. It’s important to accumulate knowledge in various aspects of the fix and flip process. Lack of knowledge will teach you valuable, but often expensive lessons.
Gaining knowledge and experience in the following six topics should be a top priority.
- Knowing real estate values and the health of your target market.
- Knowing how to find good deals.
- Knowing how to quickly estimate repairs.
- Knowing how to negotiate with a seller.
- Knowing how to manage the rehab project / contractor.
- Knowing how to finance your deals.
In this article we will discuss topic #1. Subsequent articles will look at the other 5 topics.
Knowing real estate values and the health of your target market:
First, what do I mean by target market? This is the geographic area you plan to do business in. The tighter the area, the quicker you can become an expert in the area. When you are starting out, I recommend your target market be close to where you live for the following reasons:
- You probably already have a basic understanding of home values in your area that you can build on.
- If your projects are near where you live, you will be more inclined to frequently visit the property during the rehab project so you can keep an eye on things.
Knowing the current retail values of properties in your area will allow you to quickly estimate the value of the property after the renovation is completed. The after repaired value (ARV) of properties is the staring point for all offer calculations. For example, a 3 bedroom, 2 bath brick house may be worth $400,000 in one area and only $300,000 a few miles (and sometimes a few blocks) away. If you don’t know the difference, you may pay too much.
When I started flipping houses in 2002, I made over 30 offers before one was accepted. Knowing the real estate values will save you a great deal of time when making offers and hopefully, prevent you from making an offer that is too high or too low.
When I talk about the health of your target market, I am referring to the inventory of properties in your retail price range that are for sale and more importantly, the average time on market. If houses in your target range have a 5-day average time on market, your holding costs, including interest and taxes, will be much less than if there is a 120-day average time on market. This is a very dynamic factor and changes from month to month and will be a factor in your offer.
How to gain this knowledge:
Studying recent sales in your target market is probably the best way to gain this knowledge. There are many real estate websites where you can find this information. The “Just sold” section of www.realtor.com is a good place to start. You can see selling price, date, features, and photos so you can see how they compare to your expected finished product.
Future issues of this blog will talk about the other 5 areas of knowledge.
If you would like to get preapproved for a loan and one or more proof of funds letters, please follow this link. https://www.hardmoneypgh.com/loan-request/
Please contact me if you would like to discuss a project by clicking here: https://g.page/r/CTcMtkHdqQHYEBA