What you need to know when searching for a profitable flip.
On today’s to-do list (or as my daughter would say, getting your ducks in a row) let’s get everything in order! You’ve been contemplating diving into the investment world and have finally decided to commit. So what’s the first step? Hint, it starts with an “R” (and no it’s not Red Wine). RESEARCH!
Researching the market, contractors, real estate agents, lenders, ideal properties, scope work that may be needed with estimates for repairs… ALL these items are on your now growing to-do list.
When it comes to finding the best markets for flipping houses, few things are more important than identifying a location where demand is urgent. So how do we gauge demand? One easy (and FREE- our favorite “F” word) way to do this is network with your local realtors who will be able to provide you with insight and perspective. Whatever you do, do not get emotional about the property! Market analysis will help you to zero in on best property and location. Focus on the numbers!
For those of you reading this from Denver, where I’m currently based, Denver is an ideal location and a sure hotspot for investors right now. It’s a great city, and demand here is high. Lots of corporate offices are making their home here and we are evolving into a tech hub, much like San Francisco. We’re also the sunshine state, the people (minus the Cowboys fans- just kidding! But not really…) and the weather are fabulous!
That being said, sometimes the Return of Investment (ROI) isn’t always in your local market. You may find out after speaking with your local real estate experts that the community you live in may not give you your ideal or goal ROI. If very few houses are selling in the area, then it might be wise to concentrate on another market for your house flip, as there may not be sufficient demand for your product to make the deal profitable for you.
If you find yourself in this boat, you may have to look to other counties and states. For instance: during real estate school a girlfriend and I, (both property investors) decided to look into Salt Lake City suburbs and do fix and flips there. Salt Lake City was becoming a hot market, so demand was good, lots of decrepit properties with good margins!
In some areas, there is demand, but buyers are very price sensitive. If you know the “magic price point” for the area before you purchase the house, you can plan your purchase and house flip accordingly. This will help to make sure you buy smart and keep your rehab costs under control. If you cannot bring the project in below the desired price, you should not start the project.
It’s also important to note that the more robust the local economy, the higher the average cost of flipping a house will be. On the flip side (no pun intended), real estate prices are going to be higher in the more expensive markets, so in the end, it generally always works itself out. The key is to not pay too much for materials and personnel, regardless of the area you are working in. Which brings me to my next point…
What else is super-duper important during a flip, besides ROI and the market in which you will buy? A good contractor! This is an essential no matter where you decide to invest! Like, the wine-opener to the bottle! Your local real estate agent is a great place to start, you can ask for a vendor or referral list.
When shopping around for a contractor, it’s smart to get at least three itemized bids for your rehab and compare them line by line, item to item, with all materials priced out separately. Make sure you double check EVERYTHING before signing ANYTHING! Most home improvement stores offer discounts to contractors, so they should be able to get your materials at a more competitive price. You should also call around to a few home improvement stores and get your own quotes for materials. If what your contractor is quoting you is the same as what the store quoted you, continue your search! If he wants to make money on the materials, that’s fine but he should make you aware of that. Additionally, the labor costs should be lower than contractors that are just passing through the direct expense of the materials to you at cost.
If you happen to be handy or have a handy man in the family and are buying the materials yourself, shop around and make sure you’re getting the best deal possible. The Big box home improvement stores are less expensive than neighborhood stores. Check for sales – buy what you need at the time you need it, but don’t buy everything at once. Things come up during projects, delays happen, sometimes you run into a problem and might have to dip into your contingency budget and as a result might need to make a few compromises on materials and quality. For example, something might need to be brought up to code like the plumbing or electrical, so to compensate for the unseen cost you may end up subbing out wood floors for pergo laminate flooring that looks like wood and actually provides better durability.
It’s also wise to keep a constant eye on local happenings; economy, government, changes, crime, transportation, legislation, etc. You should research all of these things prior to buying and continue to follow what’s happening during the flip too, as some of these things can change suddenly and unexpectedly.
A savvy house flipper will also look for neighborhoods where good things have been approved and are being built, like a new highway, commuter line expansion, etc. Increased accessibility to highways and public transportation are always draws to a neighborhood.
In addition, investments by third parties such as merchants building food stores, restaurants, recreation centers, day cares, etc. all bring value to a neighborhood. An end buyer of a house is looking for life’s conveniences. If the supermarket, dry cleaner and gasoline station are relatively close, it points towards a better quality of life for the homeowner and a higher after repair value for a house flipper.
The smart house flipper will follow the local news and try to use public information to anticipate where the next hot areas of growth are going to be. These are likely to be some of the best markets for flipping houses. By the time all of the improvements are actually made to a neighborhood, it is probably too late to benefit and maximize the profit potential.
Finally, don’t forget to consider the school district and real estate taxes and the effect they have on the pricing and stability of a neighborhood. Also, remember that you are going to have to pay the real estate and school taxes during your house flip, and that is money out the door that must be accommodated in your pre-purchase financial planning.
Good luck and happy hunting!