At WealthBuilders, we believe the best way to build wealth is to develop a Real Estate Investing Strategy. Our recommended place to start is, buy and hold real estate. Buy it, repair it, hold it for a while (seven to ten years), and move on into other strategies without paying capital gains taxes. As an active investor looking for more property, this can be done an unlimited number of times.
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WealthBuilders recommends flipping houses to generate the necessary cash for buying more properties. Through buying, renovating, and selling for a higher profit, you can use the cash flow for a down payment (or several) on more buy and hold investment properties.
You will learn that some properties will simply serve you better from a financial perspective as fix and flips. You are killing the tree producing the fruit, but you receive cash immediately when flipping houses. Here’s how it works. You buy and hold your first 2-3 houses, because you have enough money for the down payment and the repairs, until you start running low on cash. So on the fourth house you buy and sell it in order to generate the needed cash.
Ask yourself first, “Do I need the cash this house will produce?” And second, “Would this property serve me better as a flipper? Could I make at least $20,000 for every $100,000 invested?”
Keep in mind with a fix and flip, you pay more in taxes than a buy and hold. Rent income is passive income, but flipping houses is earned income. If you buy a property and sell it in less than a year, you must pay earned income taxes. You will be in a higher tax bracket on those earnings than on rental income.
Our real estate investing strategy is to combine buy and hold and flipping houses.This combining strategy enables you to build wealth for the long term (buy and hold), create income streams (through both), raise cash as you need it (flipping houses), and protect your income from unnecessary taxes.
Here are 17 Questions to Ask Yourself when flipping houses.
1. HELOC (Home Equity Line of Credit)
Second Mortgage
Borrowing Against Your IRA
Investing With Your IRA
Local Bank
Private Party Lender
Hard Money Lender
Friends and Family
Fix and Flips: The Secret to Scaling Your Real Estate Business
- Can I make at least $20,000 for every $100,000 invested?
Aim for a minimum of 20% profit. Some markets may be more difficult to reach this amount of profit and some may actually be better.
- Do you know where the real estate market is in the real estate cycle?
The best time for flipping houses is when supply is beginning to decrease, and demand is beginning to increase. Look back on the past five years in your market. You can’t always catch the cycles perfectly, but you can still make money in tighter markets with highly efficient, cost-effective renovation teams.
Have you considered your options for financing?
- How well do you know the area?
Every geographical region has its own housing quirks. Foundation, plumbing, damp, dry, and on and on. If you don’t know the area, be sure you have an experienced real estate agent from the area on your team.
- Does the home conform to mortgage guidelines for lending?
Think ahead to what the buyer will need to purchase your house when it is listed. Time is a factor when flipping houses, you need to be able to sell it fast.
- Will you make money when you buy?
You make money in real estate when you buy, not when you sell. Never buy where the margins are too tight when you are flipping houses.
- Is it a normal neighborhood?
Avoid commercial or industrial areas, crime areas, and areas with apartments. When flipping houses is the goal, you want to choose a ‘golden’ neighborhood, perfect for families, quick sales averages and good economy. Visit at night.
8. Can the renovations be done in 60 days or less?
The idea when flipping houses is getting in and out quickly, because time is money. Ideal scenarios would be 30-day reno, under contract 10 days later, closing 45 days out.
- Is the property being sold in as-is condition?
If so, be sure to get a thorough inspection done to fully understand what needs to be done. Your reno team should also thoroughly inspect the property to help you calculate all the possible costs.
- Can I inspect the home before closing?
Buying foreclosures at auction are often sight unseen. It may work out well for you, but likely will not. Always see the house and get an inspection done.
- Is the average neighborhood sales time less than 90 days?
Again, time is money and flipping houses is about generating quick cash. Don’t buy in neighborhoods with average sales times of over 90 days. It is unnecessary extra interest paid.
- Have you confirmed the as-repaired appraisal amount?
Make sure you can get your repair money folded into the mortgage loan, so you don’t have to come up with cash for the reno. The process for this will depend on your lender.
13. Do you have a good reno team or 2? Don’t buy more properties than you have good teams to handle. Having a property sit and wait on your crew is a waste of time and money.
- Have you found a good lender for your buyers?
As the seller, it is good business to create your own lending relationships to help a buyer get approved for financing. Get to know the best mortgage brokers and bankers to send your buyers to.
Related Post: 5 Practical Steps for Success with Fix and Flips
- Have you attended any open houses in your area?
Visit open houses near your property and listen to what other buyers are asking for. You can learn a lot about what you need to include in your property.
- Are you prepared to stage the property?
Buyers decide yes or no in the first seven seconds of entering a home. If a buyer cannot see themselves living in the home, they will not make an offer. Rooms should be staged so a potential buyer can quickly see the purpose and the space they offer. Have a good professional stager on your house flipping team.
- What is a must to repair or improve?
Pay attention to any obvious problems that need fixing, then focus on cosmetic improvements. Give extra attention to the kitchen and master bedroom, plus add in ‘extra light’ and neutral looks. Don’t make any major changes (adding windows or moving walls) because they are not cost effective.
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For the average investor, real estate offers the best way to develop significant wealth. Over the last two centuries, about 90 percent of the world’s millionaires have been created by investing in real estate. Flipping houses has the potential to make a large amount of money in a short period of time, bringing in cash flow. Take time to consider the pros and cons and do your research BEFORE you invest. WealthBuilders has the resources to help.
For more on developing a Real Estate Investing Strategy check out:
Strategic Real Estate Investing
