We’ve been sharing advice with new investors about dodging scams and what not to do in their flipping business so, in this article, we’re going to tell you our top 3 tips for what you should be doing to spot your next deal. And, since we handle each step of the process in-house, from pre-qualification to final payment, including payment collection and draws – we’re proud to say we can give you advice tailored to your situation.
Where are you going to look for your next house to flip? First, look for a location with a high population of over 500,000. Not sure where to start? Check out freempatools for a free zip code search tool. Search the population within a 30-50 mile radius. Use Melissa.com for the demographics like population, age, family, housing, and more to tailor the renovations towards the predominant buyers. Choose a town that’s near or accessible to a major city by distance or by public transportation. Consider school ratings as many of your potential customers will be families. At greatschools.org you can easily find highly rated schools for free. Avoid rural areas where population density is low as there will also be fewer comparable sales to drive the value of your property. Fundamentally, you want to go where people want to buy or rent.
How expensive can your property be? Regardless of your loan program, when it comes to the down payment and carrying costs, don’t purchase a property any more than 4 – 5 times what you have in cash. So, if you have $100k, at most look for a home under $400 – $500 total. Keep in mind that total is not only inclusive of the purchase price. You also need to factor in the title closing costs, the rehab component, carrying costs such as lender fees, utilities, insurance, etc, and other unforeseen costs such as budget changes or overages.
To help you estimate your rough rehab cost, we advise our clients to multiply the total square footage of the home by $50 for a good starting point. For example, a 2,000 square foot home could require about a ~$100k rehab budget.
If you are looking at a $100,000 budget and trying to be in your project for $400k total or less, with all expenses considered – that means you should look for properties to buy in the $300k or less price range.
How do you determine what your flip will be worth when the project is completed? There are many reasons to collaborate with local realtors, and one is so they can help you research “comps” or comparable sales. Half of your battle when flipping is the purchase price, but the other half is the end value. It’s important to understand what homes in your area are valued at and what has recently sold so you don’t over-design your home right out of the market value. A $400,000 property does not need $1,000,000 property finishes, but can’t pass by with $100,000 property finishes either.
Once you have determined the end value of your potential project, you can use that number to work back to your offer price. We recommend that our clients follow the 70% rule, which means you want your project costs to be no more than 70% of what the property will be worth when the project is complete. Continuing from the example above, if you are looking at a $400k project then the 70% rule means that the home would need to be worth at least $571k when completed. If it sells for that amount, and your project cost is $400k, then you gross $171k in profit. Your net profit would be after all expenses mentioned in the second section (title closing costs, carrying costs, etc.). Following this rule allows for some wiggle room for surprise costs so you can still be profitable. Combined with the knowledge of what homes around you have sold for, you have everything you need to spot the right property for you.
We know that one article just isn’t enough. That’s why we equip our team with professionals who have done flips themselves. Not only do we keep the entire process in-house, but we personally know what it will take for you to be a success. We’re proud of what our clients have accomplished with funding from Builders Trust Capital, and we’re excited to help more people realize their dreams each day. Give us a call and see how our team can help you spot your next deal, 856-422-3232.