Real Estate Flipping
By Preston Ames
Flipping a real estate property can be a profitable investment but there are some critical factors to consider before going all in. A major step is being able to qualify for a loan with a credit agency. How much you put down on the property will be a major factor to consider. If you get a mortgage then you need to consider what kind of mortgage and the length of the mortgage. A Financial advisor can let you know how much interest you will pay in the life of the mortgage. Putting a larger amount on the down payment on a house will adjust the total interest paid during the life of the mortgage.
A rule of thumb in a real estate flip is called the 70% rule. This is rule states that an investor shouldn’t pay more than 70% of the after value repairs on a home. If the property costs $400,000 and the repairs cost $45,000 then an investor shouldn’t pay more than $235,000.
An investor needs to be aware of their required rate of return. Each deal will have a different return on investment (ROI). This is measure on the amount of money invested with the total cash flows and the final sale price. It is important to consider if this deal will be structed as a deal that is bought to add value or just sell immediately. A property can also be bought to invest in and then charge higher rents while tenants live in it. The cash flow that goes into a deal is a major component to the required rate of return. This is affected by cash flows in and out of the deal. It is important to talk to a professional on how this will affect the overall return on a real estate flip.
Understanding the current economy is important when purchasing a home. It is important to consider the current interest rates and how that will affect the mortgage. Considering the cost of labor and the cost of materials is another variable that will be valuable in your research. If you are buying a foreclosure it is important to know where to go to auction and the local market around those types of sales.
It can be beneficial to consult multiple professionals before buying a property. A realtor can help you understand the local area where you are considering a purchase. A realtor can tell you about the local market and economy. A realtor can also explain recent sales that are similar and what they sold for. Talking to a financial advisor can be helpful to understand the consequences of the investment. They can explain property taxes and how this relates to your personal financial situation as well as mortgage deductions. The advisor can also explain the tax consequences of the real estate purchase. A financial advisor can also recommend other professionals who may help each individual situation.
It will be important to prepare a proforma statement once the property is purchased. This will allow you to keep an eye on cash flows, costs, labor, debts, and fees related to construction. This statement will also show you the return on investment and give you insight to why this deal was profitable or not. It is also beneficial to have this statement available if the bank wants to because they loaned you money for construction or the mortgage.
Once the property is finished it is important to consider what you are going to do with it. Will you live in it, rent it, or sell it. It is also beneficial to consider a 1031 exchange and defer capital gains for a like kind property. A financial advisor can help explain the consequences both on taxes and net invested when doing a 1031 exchange. It can always be wise to consider the advice of a lawyer too. If somebody is going to do this often then having a good lawyer will help around many aspects related to finances, deeds and title, tenants, and or general real estate questions.
Preston Ames has an MBA from Cal Lutheran. He has worked as an auctioneer for 6 years and worked as a marketing agent under a real estate broker. He has a certificate in Financial Planning from UCLA and also graduated from the Yale school of management CIMA certification program. His main areas of expertise are marketing, Finance, and Business.