Not all properties are profitable to flip. In some cases, you won’t know the true profit until you go through the process of fixing up the property and selling it. However, there are things to look for when determining how profitable a property might be.
If you’re ready to start flipping houses like a pro, here are a few questions to ask yourself. The answers will lead you to the right decision.
What is the After Repaired Value (ARV)?
ARV is an acronym that is used among real estate investors to explain how much the property will be worth once all the repairs have been made. This number is important to determine because you need to know what buyers will be willing to pay.
The best way to determine this number is by looking at other properties in the neighborhood that have recently sold. If similar homes are going for $250k, then the property you’re considering will be comparable.
Once you have a figure in place, you can determine your other expenses. If the property is listed at $150k and you plan to sell it for $250k, you have less than $100k to work with. If the property needs extensive work that will cost more than $100k, it’s probably best to skip it.
What will the repairs cost?
The next step is to estimate how much it will cost to make the necessary repairs on the home. Many real estate investors use the “$20 per square foot” rule to make a quick and accurate determination of what a property will cost to fix up. So, if you’re buying a house that is 1,500 sq feet, you can expect to spend $30,000 in repairs.
At $20 per sq ft, you can pay for a standard cosmetic rehab, which includes:
● Electrical and plumbing fixtures
● New kitchens/bathrooms
● Window treatments
Can you hire contractors to do the work at a fair price?
As wonderful as the math might look, it’s equally important that you have contractors who are willing to do the work at a reasonable cost. Things may look simple on the outside, but the work may be much more involved than what meets the eye.
Before you sign on the dotted line, have your ducks in a row. Talk to contractors to get a better understanding of whether they can do the work, what their timeline looks like and how much they will charge.
Can you get money to finance your purchase?
Unless you have the cash to buy the property, you’ll have to finance your purchase. The options aren’t abundant, however, as conventional lenders generally won’t borrow money to fix up homes. You can either borrow money from someone in your networking circle or get a hard money loan.
Hard money lenders finance flips and approve deals quickly. Not all hard money lenders are the same, though, so do your homework before working with one. First Equity Funding provides streamlined financing, fast approvals and even a team of construction consultants. We enjoy working with the same investors and watching their business grow!
The more you get comfortable selecting the right properties to flip, the faster you can make decisions that will generate the cash flow you need to continue in this industry.