How quickly you can fix and flip your rehab property will determine how successful you are in this business. Moving through the fix and flip process quickly, however, doesn’t mean blindly rushing through it. It means efficiently putting every piece of the puzzle together in a way that maximizes your profit in the end. In this section, we’ll look at some ways to do just that.
Build Your Startup Fund First
Any type of home construction begins with home construction funds. You already know this, but you also need to know the process of financing home construction as much as, and even more than, you need to know the process of home construction itself. If you aren’t managing your finances efficiently, you aren’t going to make any money on your rehab properties. So start by building up your cash reserves as much as possible. This will allow you to operate more freely when the very common overruns hit you during the rehab process, as well as qualify quickly for fix and flip loans you will want and need along the way. You will be able to efficiently take full advantage of the home construction financing system, allowing you to maximize profit in the end. Buy quick, sell quick.
Start with a Plan
Upon your very first walk-through of potential rehab properties, you need to be able to develop a near-complete home construction plan. This is something that you will get better at with experience. As you put this skill into use, it will allow you to determine whether the property is even worth trying to fix and flip, and if so, what the game plan will be. Your home construction plan will consist of the following: complete list of what work needs to be done on the house; an initial estimate of that work; how that work fits into your — and your subcontractors’’ — schedules; and how those costs fit into your budget. Once you acquire a house, develop a more concrete plan from demolition through to touch-up paint and listing the house.
Know the Paperwork
Knowing how to navigate the maze that is local county and city building codes and permit processes is another core part of being able to fix and flip rehab properties quickly. It is very easy to get bogged down in this bureaucracy, especially for beginners to the home construction process. If your house will require a building permit (remember, as well, that it’s good to know what does and does not require a permit), start by building good relationships with architects and structural engineers. A good contractor and or project manager should be able to competently navigate this process. Saving money and moving quickly with the blueprint process means starting fast on your goal to sell faster with more profit. Be diligent about submitting your drawings and fees to the proper government office, and about checking in with them to make sure they have everything they need to approve your permit.
Structural Integrity of the Rehab Property
Speaking of structural engineering — try to avoid it if at all possible. When you do your initial walkthrough of your potential rehab property, you need to be able to tell whether or not it is structurally sound or not (no cracks in the foundation, no seriously crooked or sinking interior lines, etc.). If you notice any structural issues, pass on the property. If it’s too good to pass up, make sure you get at least 3 bids from structural engineers and build in an extra cushion of profit, which means you will be buying this type of property at a steeper discount. Also keep in mind that structural drawings and permits may be needed — if you want to remove a wall to open up the floor plan. Keep in mind that doing so will be more expensive and timely if it is a load-bearing wall.
Pick Materials Before Breaking Ground
If you talk to general contractors (and you should), the one thing they will tell you slows down their jobs more than anything else is having delays in making decisions on materials. When you learn this key lesson early on, you can buy and store the longer order materials long before you will need them. This may include certain appliances, electrical and plumbing fixtures, doors and windows, flooring, etc. This way you will have them on the job the exact moment they are needed, rather than wasting time waiting around for them. And, of course, be diligent about buying the right materials. Take advantage of deep discounted items by buying in advance and storing them to save money.
The second biggest time-waster general contractors will tell you, if asked, is, their sub-contractors are not completing their portion of the job in a timely manner; or doing so in a shoddy manner. Getting held up on one part of the house or not passing an inspection will kill your schedule and put a related dent in your profit margin. The ability to effectively manage sub-contractors is a topic we covered before, and for good reason. It is key to effectively managing the time (and hence money) it takes to fix and flip your rehab properties. Learn this skill by getting subs you can trust and talking to them before they even get on the job about everything they need, to get in and out as efficiently as possible. Then get them together formulate an operational plan, and execute your schedule — let the plumber know the exact date the carpenter will be ready, the painter when the drywallers will be done, etc. Be the boss and do what it takes to stay on schedule.
Location, Location, Location
Know where to buy. There are the neighborhoods that are trendy and up-and-coming, where you can still buy cheap and watch your investment grow. There are also the neighborhoods that are highly in demand where you can buy at a higher price but still turn a profit. Look for the ugliest house on the nice block. The one underlying criteria for all desirable locations, though, is good schools, and easy proximity to jobs, shopping, etc. Homes on the market that are in sought-after school districts and or close to the stores typically sell faster than homes that aren’t.
The View from the Curb
Throughout each step of your fix and flip, you should be making decisions based on your potential buyers’ desires. And the first thing that they are going to see when they pull up is the exterior of your house. If it is clean and welcoming, they will want to explore further. If not, you’ve stacked the deck against yourself for no reason. Also, don’t forget the landscaping. I see far too many times where an investor does all the right things except skimp on the landscaping and then wonder why their house is taking the long to sell. Finding beautiful yet cost-effective landscaping measures will go a long way to quickly endear buyers and drive up that sale price.
Like any business, working to fix and flip rehab properties has its pitfalls. But you can learn to navigate these pitfalls in a successful way; if you’re resilient, learn from mistakes (yours and others), you’ll be able to effectively accomplish your goals. In this section, we’ll look at some of the top mistakes people make when trying to flip houses, and what you can do to avoid them.
1) Starting with An Unbalanced Sheet
The home construction process is much easier if you’re not starting in a financial hole. Real estate investors get in trouble with get-rich-quick schemes, not having enough startup funds, and over-leveraging themselves. In short, they find trouble when they do not have the money to get started, including the access to financing. Avoid this trap by getting your finances together before you start buying. You certainly don’t need to be a millionaire, not even close, but you do need to be ready to incur costs. Don’t invest your life savings in any one project. The best fix and flippers leverage their funds by spreading it out over several properties, using financing to cover the bulk of their purchase price and to cover their rehab/construction funds.
2) Not Knowing Costs
Most people have no clue what it actually costs to fix and flip rehab properties. If you’ve done it a few times, you should have a grasp on what your budget for everything — from landscaping to finish paint, both materials and labor — might be. But even then, prices are constantly changing depending on the market as a whole. If you’re just starting out, avoid cost overruns by doing your research first. Actually get bids from subcontractors and price materials from wholesalers. One “I can’t believe this is that expensive” moment, and you’re already starting to chip away at your profit margin.
Also it is imperative that you protect your investment in your mini business called fix and flipping with certain precautions: 1) Have the right insurance in place, including insurance against theft/vandalism. I’ve seen too many times where investor’s profits have been completely erased because someone took off with their materials they had on site or stole the appliances, or ripped the copper plumbing right out of the walls, causing much collateral damage in the process, or stole the water heater. I could go on and on. Don’t be penny wise and pound foolish; make sure you have the right insurance. Also protect your investments as they are being worked on from the very start to the very end until you close escrow with the new buyer as it is your responsibility until escrow closes. Many investor developers will put in an alarm system once the place is secured and can be locked up. Today this is a very inexpensive option. Some have one of their subs stay at the house while it’s being worked on. Some pay the neighbors a small token to watch and call them on their cell phone if anything looks suspicious.
It is also worth reminding you that this fix and flip game is all about getting the work completely finished and sold as fast as possible. The quicker you can do this, the more profit you will make. If you drag your feet you will make less and your lender will make more money in interest. The goal is to put more money in your pocket so efficiency is the name of the game from to start to finish.
3) Doing Too Much of the Work Yourself
On that note, know your limits when it comes to your own labor. You should find out what you can do yourself to save costs, and learn to do those tasks efficiently and well. But, it is just as important to know when it makes sense to have a sub-contractor do the work. If they can do it faster and better than you, find someone you trust to do so. People get bogged down when they think they can save money, but then lose time (and then more money later on).
4) Design Overboard
Don’t put too much into your rehab properties. They are not rehabbed to win design awards (say no to those crystal wall sconces). Home construction isn’t always a contest. In fact, the less you put into it can be directly correlated to the most you can get out of it. If you are efficient with the materials and processes you use, you can do the exact minimum to get the most profit from a rehab property. Remember the standard of rehab is dictated by your immediate competition in your immediate neighborhood. You don’t want to deviate too much from that, either positively or negatively.
5) Not Properly Reinvesting Profit
Only a small number of real estate investors will turn good profits consistently day in and day out, regardless of the market. You can become one of those investors if you are diligent, and keep learning and improving your process. If you seek to continue your business of working with rehab properties, learn from the smaller successes and failures that underpinned your last project. Then, apply those lessons – and the profits you made – on your next project. This can include everything from buying in a different neighborhood to using a different kind of paint on the interior trim. You will soon develop a rhythm and your own personal style and you’ll have your own personal recipe for success.