This last decade has been something of a rollercoaster for the fix-and-flip business. The go-go market of 2006 gave way to the real estate crash of 2008 and the slow recovery that followed. It’s only been in the last few years that life has returned to the real estate market in general, and house flipping in particular. Yet, whatever the macroeconomic circumstances, deals are always being made. The two biggest deal drivers are location and timing. The first requires knowledge, the second requires money.
Breaking In
A novice might decide to break into the fix-and-flip business for any number of reasons, from entrepreneurial spirit to love of architecture. Naturally, the common thread in all renovation deals is profit, and many a deal has failed because knowledge, money or both were lacking.
Knowledge, in this case, means understanding the numbers that make deals work. Anyone can buy a run-down home, patch it up and put it up for sale. The shock occurs when no one will bid at your asking price. Was it bad luck, bad management, or just a bad deal? Knowledge is key.
Becoming Knowledgeable
Before jumping into your first fix-and-flip, take some steps to educate yourself:
- Read about the real estate business every day
- Join a local real estate club
- Attend high-rated property seminars
- Latch on to a mentor
- Enter into a partnership with an experienced flipper
The skills you will need to pick up will ultimately boil down to math: How little can I spend to flip a house, what will it cost to fix, how much can I sell it for, and how much time will it take? A seasoned pro can probably dissect a deal in five minutes and tell you whether it makes sense, whether the numbers work. If you don’t have confidence that you understand the numbers, you are not ready to make a deal.
Financing
On the other hand, let’s assume you have become comfortable with your knowledge of the flipping business. You have a pretty good idea of what you are willing to spend to buy and flip a single-family house, and the profit you are likely to make. You’re not going anywhere however until you line up financing. And you won’t get far with financing unless you first save up some capital – cash. The reason is that unless you already have a thriving business with a great credit rating, you’re unlikely to qualify for bank financing. Even if you do, it can take so long to line up that opportunities evaporate. As we said, timing is everything. That’s why the hard-money lending business exists.
A typical hard money loan will require about 30 percent down in cash. You finance the remaining 70 percent for six months to a year. The beauty of hard money, or bridge, loans are that you can get one quickly if the deal looks good to the lender, based on the property’s ratio of debt to value, not on your credit score.
Want to know more? Contact Specialty Lending Group to arrange an appointment. We have many years’ experience making bridge loans, experience that you will find very useful if you are new (or not) to the flip industry.