Learn how to make a big profit in a short time.
I talk a lot of cash flow – especially for beginners. There’s good reason for that: the best foundation for a real estate investing business is a solid base of passive income coming in every month like clockwork.
You just can’t beat it – every month, whether you’re on vacation in France, out fishing on your boat, or out pounding the pavement looking for new deals, that money is coming in.
That’s why I discourage beginners from getting into flips. Buying a single family house, fixing it up and selling it is just the opposite of passive income – to maintain a steady cash flow, you have to keep doing flip after flip after flip. You’ve got to be there, either swinging the hammer or at least keeping an eye on the guy swinging the hammer.
But once you get your passive cash flow established, flips can be a great addition to your real estate investing business. If you play your cards right, a flip can make you a lot of money in a short period of time – money that you can then use to buy more properties.
Here’s how to do it:
Rule #1: Know the neighborhood – The only way a flip makes sense is if you can buy it significantly below market value. That means you have to know what the market value is. I’m not talking about betting on the next “up and coming” neighborhood. You don’t have time to wait for that dream to become a reality. I’m talking about buying a house for $30,000, 40,000k or $50,000 less than all the other homes in the neighborhood are selling for right now. A Realtor can help you figure that out – or use one of the many Internet sites to check recent sales prices.
Rule #2: Set a renovation budget – and stick to it. When you find a house that’s priced $40,000 below market value, chances are there’s a story. Maybe it’s a divorce or an estate sale, but most likely the property needs some work. It’s only a good flip prospect if you can do the work quickly and for relatively little money. I’m talking painting, cleaning, maybe new carpet and some landscaping. Nothing structural, nothing major – inevitably, there are delays and cost overruns in construction projects. Don’t get emotionally attached to the house and think what you’d like if you were living there – you’re not. Do the minimum work to bring it up to par with the neighborhood and get it on the market – and to the closing table. As a general rule, you want to be able to get the property back on the market within a month or two, so be realistic.
Rule #3: Do the math – As I’ve said before, all of real estate investing is a numbers game. So, before you close a flip deal, run the numbers. Estimate what your mortgage payment will be, what you’ll have to pay for renovations, how long they will take, and how much you can sell it for in the end. As a rule of thumb, I’d pass on any deal that wouldn’t net you at least $10,000.
The key here is to low-ball the potential sales price. For example, if comps in the neighborhood run between $150,000 and $175,000, base your calculations on a sales price of $140,000. I call this the fire sale price – what’s the price point where you know you can sell this property in a few weeks? You may get more – but by basing your calculations on a fire sale price, you’ll know whether the deal is worth your time and money. Since you’d be paying the mortgage each month it doesn’t sell, it makes more sense to sell it for below market value in two months rather than to hold out for a higher price four months down the road.
Rule #4: Flipping isn’t right for everyone – it takes time, and you either need to know something about construction or have some good people on your power team that do. But if you’re comfortable with that and you’ve already got passive cash flow coming in from rentals, flipping can be a great way to turn a quick profit – and grow your business even more.