Important Financial Topics to Know When Flipping a House
When flipping a house, there are many financial decisions to be made – will you take out a loan? If not, how will you finance the renovations?
When you enter an old house, you don’t see an aging house that appears inhabitable. You see a home rich with endless possibilities.
Flipping a house is an exciting experience. You have the opportunity to transform an empty shell of a house into a home. You get to decide everything from redesigning the layout to the final finishes.
When you finish, you’ll find it to be one of the most rewarding projects you’ve ever completed.
Before you get started, there are several aspects to flipping a house you need to know about. One such aspect is the financial side of it. Here are the important financial topics you need to know when flipping a house.
How Flipping a House Works
Flipping a house is a real estate strategy. When you buy a house to flip, you’re not a homeowner, but rather an investor. House flipping is like a business and requires knowledge, planning, and skill for it to be successful.
The end goal of flipping a house is to sell it and make a profit. With house flipping, this profit comes in the form of the capital improvements you make to the property. By buying a fix and flip home in a desirable neighborhood, the hot real estate market can help boost your profit.
When flipping a house, investors will pick one of two options. Beginner house flippers will choose to purchase, fix, and sell one property at a time. Savvy house flippers looking to generate a continuous stream of income may invest in several properties at once.
This decision depends on your experience, skills, and money you have to invest.
How does one flip a house?
You start by purchasing a cheap house and sell it at a higher price. During this time, you want to complete your house flipping project as fast as possible to decrease the amount of time your capital is at risk. During the flip, you’ll still have to pay the mortgage, utilities, insurance, property taxes, and more.
Depending on the house you’re planning to flip, you might be able to cut costs by moving into the house. You will need to check with your municipality, as there are some restrictions to moving into a house during renovation.
Set a Budget
Every facet of real estate can be expensive. That said, you need to carefully plan out the financial costs of acquiring, renovating, and selling the property.
Start by setting a budget and sticking to it. A common mistake many flip and fix investors make is paying more to purchase the property. Paying too much to purchase a flip and fix house will give you less room for error later and rarely results in a profit.
To find the ideal cost of a flip and fix a house, start by determining the market or exit price for the house and finding 70% of that price. From there, subtract your estimate for the renovations to find your offer price.
For example, if a houses cost around $200,000 in the neighborhood, 70% of that cost would be $140,000. Subtract around $40,000 for renovation costs to find your offering price of $100,000.
Following this tip will help you save money in the beginning and enjoy a greater return on investment (ROI) when it’s time to sell.
Budgeting for the initial acquisition cost is only one part of the equation. You’ll need to budget for your renovations. This includes costs for:
- Housing materials
- Interior trimming
- Personal time
Overestimate the budget for your renovations. You may discover major problems during the flip, such as a cracked foundation, which will cost you extra time and money to fix.
Pay Attention to Location
As you look for flip and fix houses, search in desirable areas. Yes, there’s a chance the location will increase the initial cost. You will, however, be able to sell at a higher cost and find more buyers.
To put it simply, no one wants to pay a lot for a house in an undesirable neighborhood.
You’ll also need to consider the cost of the houses in the particular neighborhood. You can’t expect to repair a house and sell it for $300,000 if the average cost of the homes in that area is around $200,000. Being conscious of your selling price will help you select a location that allows you to gain the greatest profit.
Investing in a good location won’t only draw in more buyers, it will strengthen the profitability of your investment. Strong investment opportunities will make it easier for you to borrow money to finance your project.
Flip and Fix Loan Options
When it’s time to buy the house, you can choose a hard money lender or opt for a traditional loan. Each one has its set of advantages and disadvantages.
Hard money lenders have fewer loan requirements regarding the shape of the property. Most conventional mortgage lenders won’t approve a loan for any properties in poor shape. Banks believe investing in houses in poor condition aren’t a reliable or safe investment.
Securing a conventional mortgage with a bank is almost impossible for anyone flipping a house.
As a house flipper, what can you do?
Look for a reputable hard money lender instead. Unlike banks, lenders don’t evaluate the condition of the property. Instead, they base their decisions on the reliability of the person flipping the house and the strength of the investment.
Money lenders will focus on the borrower’s tax returns and bank statements to get an idea of their reliability. If the borrower defaults, the lender can take ownership of the house and sell it for a profit themselves.
How Do Money Lenders Work?
The first step is to apply with the money lender. As mentioned, they’ll look at several of your financial documents to determine your trustworthiness and the strength of your investment. If everything checks out, they’ll approve you.
Your credit score will impact the amount of money you can borrow and your interest rates. Those with credit scores below 680 can borrow less money at a higher interest rate. Some lenders may require a down payment and set loan repayment terms.
If approved, the lender will hold a lien on the house. A lien is a type of collateral used against debt to ensure the borrower repays the loan. If they fail to repay the loan, the lender can seize the asset (the house in this case) as per the lien.
A benefit of working with a hard money lender is you, the borrower, will be the owner of the property. You’ll also have the property deed in your position.
House flippers with more experience can further benefit by working with a money lender. Those with more experience can enjoy lower loan fees and interest rates.
Fees and interest rates will vary between money lenders. In general, you may receive the following rates based on your experience.
If you have little to no experience flipping houses, expect to pay an origination fee of around 3.5%-4%. Your interest rate will be closer to 12% or more.
If you have completed two to four housing flips, your origination fee will drop down to around 3%. Interest rates will also drop closer to 11%.
Have five or more housing flips under your belt? You can enjoy an origination fee of around 2% and an interest rate under 10%.
What Money Lenders Cover
Depending on the hard money lender you choose, they may cover most of the purchasing price and the renovation costs. Some lenders will cover up to 90% of the buying price and 100% of the renovation costs. Again, your house flipping experience and reliability will influence what the money lenders will cover.
Most money lenders will require the borrower to pay the down payment on the property along with additional fees. Possible fees you may receive include:
- Appraisal fees
- Underwriting costs
- Escrow fees
- Origination fees
- Application fees
You’ll need to take the time to research and find the right money lender to fit your needs.
DIY or Hire Skilled Specialists?
Do you have the skills to flip and fix a house yourself? If yes, you can save a lot of money by renovating the property yourself.
Some skilled professionals, such as carpenters, will flip a house as a side project to earn a little extra income. They have the skills, experience, and knowledge to repair a house without having to hire a contractor.
If you don’t have the skills, you can always learn. Learning these skills and trades will take longer and may lead to problems later on.
Another option is to hire a contractor to assist with the renovation. The benefit of this is they’ll be able to complete the project in less time and do it right.
The drawback of hiring a contracting is it will cost you money for labor. This will likely lower your final profit.
Start Your Fix and Flip Adventure Today!
Are you looking for an exciting and creative way to earn extra income? Flipping a house is fun, exciting, and both financially and personally rewarding. Knowing about flip and fix financial options will help you make the most of our house flipping journey.
Have questions or a project in mind? Let’s get in touch! We have the experience and resources to help your house-flipping dream become a reality.