In order to be successful with a fix and flip, an investor must be aware of all the characteristics to consider before diving in. There are both physical factors as well as financial considerations to analyze before choosing to buy property for this purpose.
Here are just a few things to think about in order to ensure you are making a smart financial decision.
The condition of a home is one of the first factors to consider when looking for potential homes to flip. Ideally, a home that has great bones and doesn’t require difficult changes will be the best option.
Finding a home with great potential selling points will help your overall costs, make the buying process faster, and increase your potential profit. Here are some features to consider when looking for a potential home:
- Good bones with a great floor plan
- Large room sizes
- 2-car garages
- Full bathrooms
If a home requires too much labor and expensive upgrades, it may not be the best decision financially. Avoid houses with the following features:
- Outdated layouts
- Small kitchens
- Bedroom to bathroom ratio is off (i.e., 5 bedrooms and 1 bathroom)
- Structural issues and damage
With any real estate, location plays a huge role in the value of a home. A potential flip could be in great condition, but if the location isn’t ideal, it may be more difficult to sell.
If the property is close to any of the following, it indicates that it might be in a high-value area:
- Public transportation
- Good schools
However, if the property is close to anything listed below, you should probably avoid it, as these factors could lower the location’s potential value:
- Near highways
- Near an airport
- On a busy street
- In a high-traffic area
You want to strategically pick homes that are in a good neighborhood or in a neighborhood that is expected to grow and increase in value. Become familiar with any plans for the area, as well. If property is in an up and coming neighborhood—one expected to rise in value—it may be a great location to invest.
The following items can positively influence the property’s future value:
- Working streetlights
- Good upkeep on lawns, porches, front yards
- No litter
- Even pavement and sidewalks
School system quality and home prices tend to be strongly correlated, too. The same applies to things like crime rates.
The housing market, in general, will also affect the cost of the property. Is the supply or demand greater at the moment? Is there a demand for housing in that specific area? Be familiar with overall market trends and how the market will likely change in the future.
Understand Property Value
Visit the property, the neighborhood, and surrounding areas to better understand the overall property value. To determine the value of a property, consider the following:
Past sales price
Be sure to know what price the property has sold for in the past, as this will help you estimate future prices. Don’t forget to factor in any new additions or changes that may have increased the property’s value.
Size and appeal
Obviously, bigger homes sell for more money. Another factor to consider is the layout or style of the home. Traditional and popular layouts will most likely do better, while less common designs will appeal to more niche audiences.
Age and condition
Newer homes tend to be in better condition and thus worth more money, but an older home with a solid foundation, structural integrity, working electrical and plumbing, and original fixtures can also be highly valued.
The Housing Market
Housing market statistics play a key role in finding a flipping opportunity and determining if the property will be able to sell in the current housing market.
Here is a list of things to consider about the market:
These are properties that are similar to the one you are considering. By looking at comparables, investors can better gauge how much similar homes are selling for in their original condition and after upgrades.
You must make sure you are looking at properties that are similar in square feet, number of bedrooms and bathrooms, and lot size. Look at homes that have already sold and not ones that are currently listed on the market, as the listing price is not the guaranteed price a home may sell for.
Number of days on the market
By considering the number of days homes have been on the market, you can better determine how well your property will do to produce the best ROI. Properties that are on the market for the least amount of days have the best ROI with low carrying costs, which is ideal for flips.
Higher property taxes can turn away potential buyers, so consider the property taxes in the area ahead of time.
Once you’ve assessed the value of the property itself, it’s time to look at your budget and determine if the home will give you the best return on investment.
First, determine your budget and compare it to your overall costs, which should include:
- Property purchase price
- Rehab costs (labor, materials, so on)
- Carrying costs (insurance, property taxes, mortgage, utilities, HOA fees)
- Costs related to marketing, listing, and selling the home once it is finished
- Unexpected costs (It’s always important to set money aside for this.)
After properly assessing your budget, you need to calculate your after repair value, or ARV. This is the most crucial step, as it determines how much profit you will make. You don’t want to end up losing money by miscalculating your budget and ARV.
You can also do a comparative market analysis (CMA), which estimates your home value based on the sales prices of similar homes in your area.
The Bottom Line
When done right, house flipping can create huge profits for real estate investors, and it all starts with the right property. Set yourself up for the best return on investment by taking these physical and financial aspects into consideration.
Additional tips to share? Thoughts on the above?
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