If you watch cable television, you’ve probably seen countless real estate “flipper” shows. If you haven’t, you must be living under a rock because they’re everywhere, and everyone seems to want in on the game. In a strong housing market, the right property can be an amazing investment. But before you go planning how you’ll spend your profits, you need to…well…find, fix and flip. So, how do you find properties that make financial sense to invest in? Here are five tips on how you can locate distressed properties that can be renovated and resold for profits.
If you are a real estate investor and you don’t have a strategy for exiting your fix-and-flip projects, you could be moving your properties quicker – oh yeah, and making more money. Real estate investing is only successful when a marketing campaign is implemented. So, you need a strategic plan to generate leads to buyers or at least allow you to find more deals. If you approach real estate investing as a business, then your real estate business should have an impactful and cohesive brand identity. This identity will be the background of the marketing approach you’ll need to cultivate meaningful relationships with past, present and potential clients. As with any business, it’s crucial that your marketing campaign be comprised of valuable and factual information. And, if you don’t have a marketing strategy…well then you don’t have much of a business, do you?
Keeping costs in line with your budget is vital to the financial success of any fix-and-flip investment property. A major threat to the profitability of your project is theft. Even if you have an insurance policy that protects against these types of occurrences, the process to recoup your losses will still take time, significantly adding to your holding period and whittling away at your profitability. If you want to keep your investment safe and secure, here are some tips to deter criminals from targeting your property:
If you have experience with fix-and-flip real estate projects, you’re probably well familiar with hard money loans. In fact, they’re the preferred method of project financing for many real estate investors for short-term projects. If you’re not familiar with hard money loans, you should keep reading. Their popularity is due to the fact that they are easy to get, they don’t rely solely on your credit score or assets, and they are a much quicker alternative to traditional methods for financing the purchase of a home.
When it comes to fixing and flipping real estate, there is no shortage of mistakes that can be made along the way. Compared to other types of real estate deals, fix-and-flip properties offer some of the largest returns but also come with some of the biggest risks. Too often, investors make errors in judgment that cost them thousands or even tens of thousands of dollars. Here are some common pitfalls to avoid if you want to improve your return.
It’s a fact that many new real estate investors purchase properties solely with cash. Commonly, this is because they have the money available and don’t want to deal with banks or other lenders. But, this is a sign that their investment kung fu is weak. They think that getting a loan to purchase real estate comes with extra costs and restrictions, and while they’re kind of right, that doesn’t mean that using a loan is necessarily a bad thing. There are costs involved with using loans for your real estate investments, but they are often greatly outweighed by other benefits – specifically, that of utilizing leverage.
It’s not always easy to get investment real estate financed. This is especially true for investors looking to purchase properties that aren’t in the best condition, or for people who have trouble borrowing from traditional lenders. Luckily, conventional mortgages aren’t the only options – there are a number of other great financing sources that wise investors use every single day to purchase real estate.
The Importance of Planning In Real Estate Investing
Texas enjoys a robust real estate market at present as well as a seller’s market. But the market’s health is never guaranteed and things are constantly changing. The market can stall or drop at any time and it’s those who use long-term strategy to plan ahead, preparing themselves for potential hurdles and preserving cash flow and equity stake, who manage to weather complications and market volatility. What are the cornerstones of planning for real estate investment? We go over the important elements of planning ahead for success in real estate investing.
Plan your financial goals — Do you want to completely replace your earned income with real estate investing? Do you want to keep your job and real estate invest to earn extra cash? What is the monthly income you would like to see now or in retirement? How much money do you have to invest? How much money do you have in the rainy day fund? How much money can you lose if you never make it up?
Answering these questions serves two purposes: directing your investment strategy and avoiding financial pitfalls. Regarding the former, if you are not prepared to leave your current job to pursue real estate investing full time and want to guarantee retirement income – owning multiple rental properties might be your strategy. If you are looking to start a real estate investment business, you will likely want a longer-term property or two for stability, but primarily look for properties that can be turned for a profit which can then be reinvested or used as backup funding.
Regarding the latter, if you overspend with the assumption that you’ll make it up on the next deal, you can be left with unmanageable expenses and/or no income. You must ensure that you have sufficient reserves to float potential vaccines or ride out turbulent markets. Use the following analysis to generate a realistic plan that makes financial sense based on previous tax returns, property tax bills, maintenance records, etc. Additional important figures for analyzing a viable and/or good real estate investment are:
- Net income (income/expenses)
- Cash flow (net income/debt financing payments)
- Return on investment (cash flow/investment)
- Cap rate (net income/property price)
- Cash-on-cash return (cash flow/investment)
- Total ROI (total return/investment)
Identify the worst case scenario/Plan an exit strategy — It’s imperative to plan for the worst and create a backup plan in real estate investing. Ask yourself what is the worst case scenario? What can derail your timeline, plan and ultimately success along the way? Real estate projects and sales are both apt to run less smoothly than anticipated. If you anticipate obstacles and setbacks and have a mitigation plan in place, when things go awry you won’t be caught off guard scrambling in a position of weakness
Research your purchase — Several factors impact the success of your investment. Proper planning means conducting relevant research into the property and the potential purchase. What factors are these? Look for the following:
- Property taxes differ across residential districts. Exorbitantly high property taxes might dissuade buyers from paying a premium for your finished property.
- School district zoning is a critical deciding factor for families looking to relocate. Understand the pros and cons of the school district your property is zoned for.
- Demographic trends strongly indicate real estate appreciation/depreciation trends.
- Cost of living considerations should be made both when purchasing the project and listing the renovated home. Home value can be viewed as a correlative of cost of living and average income in the region.
- Sales and rental rates in the area can help potential landlords determine a positive or negative investment. Review the area comps carefully and touch base with property managers in the area to get an idea what rental rates are feasible if you intend to be a landlord.
- Public transportation increasingly becomes a factor in home sales. Millennials are demanding alternative transportation options, whereas families might want to budget miles and commute time. What options are available in the area?
Plan your marketing approach to real estate investing — For career real estate investors, a strategic amplification of your marketing efforts can greatly impact your real estate business. We recently outlined ideal strategies in our Marketing Strategies for Real Estate Investors blog. These include targeting motivated sellers, online adverting, using direct mail campaigns and looking for off-market properties. It’s equally important to strategize for marketing and selling a finished property – plan ahead for the additional costs incurred by staging, photography, advertising, etc.
Punch list the project — Though you might go over on time and money, having a set timeline, punch list and cost spreadsheet for your project’s expenses will keep you on track, give you the opportunity to addresses issues as they arise and give you an idea of any overage costs for which you will be responsible.
Though nothing in life is permanent or promised, planning properly can alleviate headaches and preserve your financial freedom as a real estate investor.
Specs: $479,000 Acquisition & Renovation Residential Investment
The Acquisition and Renovation at 6901 Ligustrum in Austin, TX by Real Estate Investor David McKenzie of Texas Oil Unlimited, LLC is an exciting project to feature. Check out these revealing photos, read about the specs and work done, and hear David’s input on working with Streamline Funding as well as advice to the new Real Estate Investor.
Check out our very own Regional Production Manager Chris Marroquin of Streamline Funding on San Antonio’s Fox New station.
He joins Victor Maas of San Antonio Real Estate Investors Association – SAREIA to discuss how you can make some serious cash in Real Estate. It’s easier than you think!