The goal of the fix-and-flip strategy is to generate near-term cash by fixing issues with property, thereby maximizing the price. The typical time to flip is two to six months.
The advantages of the fix-and-flip strategy include:
- Quick profit. You get your money back in months rather than years.
- No management/tenant hassles. Fix and flip is more like a date than a marriage. No long-term commitment or involvement.
- Staying liquid. Getting your cash, and a nice profit, out of the property in a few months keeps you nimble for the next opportunity.
These advantages are offset by the ongoing need to find properties and the pressure to maximize your profit on each deal. This is a treadmill that requires constantly doing new deals to make a long-term living. Which may not be a downside if you live for the thrill of the hunt.
What are you fixing?
The term fix and flip immediately brings to mind repairs. But fix and flip goes beyond just repairs – it means fixing any issue that prevents potential homeowners from buying the property. A distressed property in mint condition may still be inaccessible to the majority of buyers due to other issues.
Most foreclosures need some degree of repair and renovation and many buyers can’t or don’t want to deal with the hassle of doing it themselves or managing contractors to do the work for them. If you’re doing repairs or upgrades, be sure you focus on the areas that give you the best return on investment, such as kitchen and bathroom renovations or adding additional rooms.
See Managing Properties for more information on which areas to concentrate on when renovating.
A property bought at auction doesn’t come with title insurance. Most homebuyers aren’t willing to take that risk. When you buy the property you are fixing a title issue and making it accessible to a wider range of buyers.
Auction investing is a cash-only game and most buyers aren’t in the position to pay cash for a home. By acquiring the property, you are making it possible for a buyer with financing to buy it.
Very few buyers are interested in a home that comes with the built-in stress of evicting the current occupants. It kind of takes the edge off the excitement of getting your dream home when your first step after closing will be to contact the sheriff to kick someone out.
When you sell a property within a year of purchase, the profit is classified as a short-term capital gain, which means it is taxed at a higher rate than if you keep it for a year. See Buy and Hold to learn more.
The quick flip is a flipping strategy that bypasses repairs to sell a property as-is. This allows the possibility of turning the property in weeks rather than months, getting your money back into circulation sooner for another deal. http://www.propertyradar.com/foreclosure-guides/investor-guide/fix-flip. However, it also means lower margins, as you don’t get the returns on strategic repairs, upgrades, or renovation.
It’s a balance between faster turns or larger returns. But that doesn’t have to mean a lower return on your capital. Even though you have lower margins, you have the possibility of higher volume. By turning your inventory, you can reuse the capital quicker than in a fix-and-flip approach.
Consider two investors with $200K, Joe who does fix and flip, and Joan, who does quick flips.
- Joe buys a house for $180K, spends $20K on repairs and upgrades, and sells it for $230K for a $30K profit. He does this 3 times a year, making $90K for the year.
- Joan buys a house for $200K and flips it immediately for $215K. She only makes $15K profit. But she can do this 6 times a year, making $90K for the year.
As you can see from the example below, the choice between these two strategies may have more to do with personal preference then the bottom line.
|Fix and Flip vs Quick Flip||Joe Fixit||Quick Joan|
|Flips per year||3||6|
|Rate of return||45%||45%|
Fix for Curb Appeal
Any repairs done should be targeted to maximize appeal, both inside and outside, for the least cost. That doesn’t mean going cheap, but it does mean being discerning.
Outside. Keep the lawn cut and the landscaping trimmed and weeded and watered. Repair or replace loose or damaged roof shingles. Check for peeling paint and loose gutters. Keep the garage door closed and store vehicles elsewhere. Give the front door a fresh coat of paint.
Inside. Clean all rooms, address all cracks or holes in the walls and paint them, replace worn or damaged flooring, fixtures and appliances. Be careful though about putting new appliances into vacant homes in bad areas. If you are in a highly competitive mid to upscale market, consider painting accent walls, adding crown molding, or staging the home with quality furnishings. Use popular, safe color and material choices.
Most importantly be competitive with nearby listings and compatible with the neighborhood. There is no reason to put in a granite kitchen if the other listings all have Formica, but you may have to if you are the only one that doesn’t. If every other house on the block has weeds in the yard don’t bother with expensive landscaping. At the end of the day the goal is to present prospective buyers with the best balance of price and quality (value) on the market.