Are Fix And Flip Deals Right For You?
Posted by JD Esajian // July 6, 2018
There is more to real estate investing than quick flips and rehabs. While these types of deals are currently the norm, they are far from the only way to dabble in real estate. You can still build a long-term portfolio through rental properties, pass along wholesale deals or form a capital partnership. There are literally a half dozen, or more, ways to get started or build a real estate business besides flipping and rehabbing. What many investors fail to grasp is that these types of deals are difficult. For as much potential upside available in rehab deals, if a few things go wrong you will battle just to scratch out a small profit. Rehabs and flips are great in the right situation, but you need to make sure they align with your investing goals. Here are four important items to consider with quick flip and rehab deals.
- Access to capital. One of the key elements to any successful house flip is access to capital. Most of the best rehab properties come from distressed sales. Whether it is a foreclosure, short sale, tax auction or probate most sellers do not accept any type of financing. Without access to capital you will have a hard time finding good deals. What makes real estate investing so great in 2018 is that you don’t need to have your own personal funds to get started. Between hard and private money there are multiple outlets to find the cash you are looking for. If you do go with one of these routes your profit margins will not be as robust as you anticipated. With interest repayments and additional partners to satisfy your slice of the profit pie will be greatly reduced. This is all ok, because you wouldn’t have any profit to spilt if you didn’t have the capital to close the deal in the first place. Finding money to fund your rehab deals can be a challenge, but there are more options out there than ever before.
- Leadership skills. There is no such thing as an easy rehab. One of the reasons you can find a real estate show on TV almost every night is because of the challenges presented. Even the flips that appear to be cut and dry always have some kind of issue associated with them. If you are not ready to deal with these challenges, you need to reconsider if flips and rehabs are for you. As a rehabber you have a handful of people you need to lead. Even if you have a contractor to handle the nuts and bolts of the property, you are still the lead decision maker. You control the budget, the work you want done, the timeframe and who you want working on the property. You need to have the ability to make quick decisions often between two poor options. You will have to answer to everyone on the site as well as any business partners you have. Everyone will take your lead and your actions go a long way in determining your profit. If you are not ready to take this responsibility you should think twice about rehabbing.
- Time is money. It is not just a catchy saying, but time really does equal money in the world of rehabs. Every day you own the property you are on the clock to get it sold. The interest payments don’t stop just because you need to get an inspection done with the town. The longer the property goes unsold the more interest payments, and the lower your bottom line. This creates a necessary sense of urgency with the property. If you have never worked a rehab before it is not easy organizing all the work you need to get done. You have several people to schedule each with different demands for when and how they want to work. A delay with one person can have a trickle-down effect to everything else in the project. A few days can turn into a week and the next thing you know something is pushed back a month. A lot can change in a market in just a few weeks. The best rehabbers know and understand that they need to constantly keep the process moving forward, even if it makes them look and feel like a bad guy.
- The property must sell. It is not enough to do great work with the property. As obvious as it may be the goal of a rehab is to make improvements that ultimately push the sales price higher. By blindly dumping money into the property without thinking of the market and who the end buyers are you may be throwing money away. You also need to consider the market and how you price the property. Buyers don’t care about all the great work you did or what the condition was when you bought it. All they care about is the end product and how it stacks up to what else is on the market. Listing too high and shooting for the moon can tack on additional weeks, even months, to your transaction. All the while your business is stuck in neutral until you can cash and get the property sold.
Rehabbing is a great way to make a profit in real estate, but only if you know exactly what you are doing. You don’t need to be an expert house flipper to be a successful real estate investor. If flipping isn’t for you there are many other ways to build your portfolio.