First time flipper worried about finances

16 Replies

Hi all -
I am a rookie real estate investor who purcahsed her first two rentals this year. The rentals have been great and the cash flow is awesome. However, I REALLY want to get into fix and flips.
I've had my eye on an up and coming neighborhood for some time and a SF just popped up for sale last week. I have $50K cash available. The asking price is $49K (the house beside this one sold for $133K in 2009 so I think this could be a good buy). I can manage the purchase on my own (as long as I don't get out bid by another investor) but don't know where I will come up with the money to do all the fixes needed (the most pressing is it needs a new roof). It is habitable so I could rent for the short term to give me the opportunity to save up some cash to afford the repairs. Any other suggestions? I am new to all of this so I am unfamiliar with the other financing options out there. Let me know your thoughts. Thank you in advance.

Hi @Account Closed  !

Congrats on pulling the trigger on two rentals! What's the urgency to flip so soon? Why don't you continue to save and then go for the rehab when you have enough funds? No need to over extend yourself. Time is on your side, you're in the driver's seat.

Cheers,

Jordan

2009 is irrelevant. Lots of places still sold then for 2x what they do now. Find some recent comps to make sure you are still in the right ball park. How long are houses in that area taking to sell usually? If you are looking at 10-20k for repairs it might be better to get it done right away. Renting as a second exit strategy is nice to have in your back pocket, but if your goal is to flip and this purchase is going to tap out your nest egg then maybe you could just use a home equity line of credit so you can do another deal when this one sells? Cash flowing rents are good, but they take a while to rebuild the pot. Do the numbers work to rent it if you put the renovation money in at the beginning?

Homes in this area are selling fairly quickly. Especially those in good condition (about a week on the market). A big residential and commerical project is going in across the street from this property (townhomes, fitness and wellness center, grocery store, etc) so investors are coming in a scooping up properties. Recent comps show updated homes selling for 100-150K. I like the idea of fixing and flipping quickly but I also wonder if we hang on to the property for a couple years and let the developments across the street get completed, if the property won't be worth the high 100s or even low 200s.

If its a great deal I would look for someone to partner with. Splitting profits is far more viable than running out of money & having to sell.

Insurance is tough to get if the roof needs obvious repairs & conventional financing is even more difficult unless the repairs are completed or you have the cash in escrow.

We just did a roof on an older home (Insurance requirement) & when we got into it we had 3 layers of shingles & some of the rafters were on 34" centers???. All new sheeting with scabbed in rafters inflated costs significantly.

Hello Vanessa

          I see your in a buffalo suburb I would like to talk to you regarding properties and this one in particular if the numbers make sense I would consider a partnership or give you a fee if you wanted to throw me the deal anyhow send me a message let's talk.

@Account Closed  I would start talking with local hard money lenders.  This would be an ideal setup for them - they take first position on the the title, you definitely have your money on the line/invested in the home already, they are only funding the reno.  It sounds like you have primary income to back-up everything as well.

@Vanessa Fermani  I am a Rehabber and Have Been Buying and Rehabbing over the past 8 years...

MY Suggestion is to know your goal over the next 3-5 years...

I first started in a great real estate market, and I still made a ton of mistakes in my investing career. Thank God I was in a good real estate market because it helped us to recover from those mistakes because the market was appreciating so fast prior to 2007.

In my case if I were to start over again...knowing that I wanted to have a career flipping houses(Fix & Flips)...I would go and find a successful investor that is already doing Fix and Flips and see how to get them to mentor you(or Partner with you)...The value of their Experience will accelerate your learning curve.

In my experience every rehab deal is different and has different challenges that can pop up during the process...enough that in some case just one mistake can cost you a ton of money.

There is no way you can learn all the mistakes you must avoid by reading a book or taking a 3-day training program. That is why I recommend people look at their first 5-10 deals as a part of your training process...and if all your split was from every deal is 10-20% of the profits you'd till be making out because of the experience you will gain.

Generally the experienced investor will have tons of relationships in place that you will be able to leverage that will save you 10,000's in time, money, and trial and error.

Hope that helps...

PS The best thing about a mentor in your local market is a great mentor will know the market well enough to know a deal without having to use guess work, they typically understand the little differences in neighborhood that might cause a radical drop in house values of homes that might look like deals, but  are really "Money Pits".

couple options....

- Buy house with cash and get a HELOC on the house to rehab it.

- get a construction loan for the property. Say $50k purchase price and $30k rehab cost.  Total of $80k loan at 20% down payment is $16k.  (I did this on my first flip property).

Smaller banks will do the above options.....the big banks most likely won't play ball.

As said by others, get updated comps on the area to make sure ARV is good and you meet the 70% rule.

First, make sure you are doing the deal on today's numbers not 2009 and sure as heck not on 2019.  Second, make sure all of your numbers (purchase price, closing costs-purchase, rehab, carrying costs, and closing costs-sale) are included in your analysis.  I think you know both of these, but I don't want to make any assumptions.

To answer your actual question, I wouldn't pay cash for this.  Having a 2 rentals, a rehab project and $0 in the bank is very risky and can lead to short-lived investing careers.  The loss of a water heater or furnace in a rental property can be devastating.  That being said, if the deal is good the right question is "How do I pay for this?"

Several suggestions have been made above.  My favorite is getting a construction loan from a small-local bank.  After that... Private Money, Hard Money, Equity Deal, and partnerships are all viable.    

Good luck!

Honestly, you don't have to sink all of your money into one investment purchase. You could do a lease option with the seller that way you can lock in the price and pay a relative small down payment and use some funds to rehab the property than sell. Don't try to do a full market sell. Do a turn and burn for less than current market and walk away with a quick 30k. Have a updated title search and survey done along with a house a appraisal and inspection to know what needs to be done. All of that is abt 2k and fix only what needs to be fix don't go overboard and overbudget. 

@Derrick H.  

Please dont offer advice to someone to improve a property without title.

Buy it sub2, get title, improve it, resell it.  Own then improve.

@K. 

Kristine Marie Poe undefined

 might want to add to this.

Vanessa - 

Feel free to shoot me an email...my in-laws live one town over (Eden) and I'm happy to help you do some more detailed analysis on the property if you'd like...

@Brian Gibbons 

Are you suggesting NO investor has done or shouldn't do a Lease Option to buy/sell Real Estate?

Originally posted by @Derrick H.:

@Brian Gibbons 

Are you suggesting NO investor has done or shouldn't do a Lease Option to buy/sell Real Estate?

 I think what Brian is saying is that no investor should pay for substantial improvements to a property until they are on title (regardless of how they buy the property).

to improve a property without ownership is foolish.  Talk to a lawyer about your liability.

@Douglas Dowell  is my legal buddy.  What do you think Doug?

I agree with @Brian Gibbons  ...to improve without the ownership rights is a messy messy messy legal situation.    Real estate law professor of mine said something profound that has stuck with me..."don't buy litigation"!

Its possible to JV with the owner with a formal agreement easily or an LLC. No good reason to do otherwise that I can fathom.

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