Is FIX and FLIP the way to go in real estate investing?
So here you are ready to be a real estate investor because you have been watching HGTV shows on rehabbing. It got you super excited. You see all the great things they are doing. You get so excited with the money they say you will be able to make. You then decide to attend some seminars that come through your town that pretty much just give you a “taste” of what you could make without really going into the whole picture. You are ready!
There is nothing wrong whatsoever with the FIX and FLIP model. So many real estate investors have made a ton of money doing this. Can you? Sure you can. There are of course many factors that have to be met so that you can definitely make a lot of money. I won’t go into much detail on those things but what I want to do is point out the reality of the FIX and FLIP model.
My goal is to open your eyes to what really goes on as opposed to concentrating on the dollars you could make once you sell the property.
Let’s get started. What really goes on with a rehab? Once you have purchased the property, that is when all the craziness begins. The utilities must be turned on, hopefully you have already lined up your contractor, demo day, connecting with your vendors (unless your contractor will do all that for you), etc. Now in real life nothing goes perfectly. You will encounter issues. It is just a part of the rehab process. More than likely you will be over budget. Hopefully you didn’t go over that much (that eats up your bottom line). Many times (I have heard this a lot from many investors) the majority of your issues will come from your contractor(s). They are late, they did a pretty bad job that you have to redo the work, the list goes on and on. This eats up your bottom line.
Fast forward to say 2 months and you are done with the rehab and it looks great. Let’s pretend you are just slightly over budget which is good. You are now ready to sell. You have decided to stage the property. This is generally a good idea. It does help sell but not a guarantee. Now if you are in a hot market like Dallas it will sell quickly. A friend of mine who does FIX and FLIP in Dallas told me that if his property is on the market (ready to sell) for two weeks that is way too long (this statement is true at the time of the writing of this article). That is awesome. You can pretty much make a great living with that kind of turnaround right? How about let’s say you are in a market that is not so hot.
Let’s now put some numbers to this. So you have 2 months of rehab time. You staged it. You have utilities on. It is now listed in the MLS.IF the property sells quickly and you did your numbers well then you will make a great profit. HOWEVER in the not so hot market your property sold in 3 months. That is a total of 5 months BEFORE realizing a profit (assuming you sold it at asking price and you did well with your numbers). So 5 months have gone by, you had to pay for holding costs (utilities, mortgage:assuming you borrowed from a bank, insurance, staging, etc) and you sold it at full price. At closing you came away with $20,000 (you paid for closing costs which includes your real estate agent’s commission). Did you really make what you thought you should make? How much did you make PER MONTH on that deal? The $20,000 is what you walked away with from the closing table. That is not your REAL profit. You have to deduct the HOLDING expenses from that. All your expenses while you are waiting for it to sell has taken some out of your profit UNLESS you did account for that (most who start with FIX and FLIP don’t account for holding costs). For ease of calculation let’s pretend ZERO is your holding costs. $20,000 divided by 5 months, you made $4,000 per month. In reality it is $4,000 MINUS your holding expenses is your monthly bottom line. How would you like to wait say 2 more months before it sells? You will be 7 months in by the time is sells. As you can calculate, you just reduced your profit because of the 2 extra months.
Here is the reality of this, BEFORE you jump in doing FIX and FLIPS truly understand the whole process. Understand all the factors that can affect your bottom line. One HUGE factor is your market. Is your market hot that you can really make some dollars in a short amount of time? If you are relying on the profit from your FIX and FLIP to feed your family and your market is not a hot one, you might want to rethink that strategy. Maybe add another or maybe two more strategies to generate more income.
Many do fail at FIX an FLIP because they are not real about what really happens, the process. Understand all factors that are involved in a FIX and FLIP if you want to have any chance of becoming hugely successful. I must mention this, you make money during the buy. Buy right. Do your numbers correctly and be conservative. You will make money when you buy right.
I hope this article has shed some light as to the real nature of a FIX and FLIP. It is fun to do a rehab but it can easily drain your bottom line if you do not understand the whole process of this strategy.
Feel free to reach out or comment below. I urge you to place constructive and helpful comments to assist others.
John Morey (Author) is a real estate investor in the Huntsville Alabama area.