One of the hardest steps for a new investor is to find funding! Here’s how to get the money you need to complete deals.
So you’re interested in real estate investing but don’t know where to start? Fix & flips may be an excellent option for you! House flipping is one of the easiest ways to break into the industry as they don’t require a lot of forethought: Buy a house, rehab it, sell it for a profit. But that “buy a house” part often trips new investors up, so I wanted to break down how to get money for your first fix & flip property through a loan.
I will lay out the whole process step by step in this article and include a few tips for getting your loans approved faster. If you follow what I write here, you will get fix & flip loans, guaranteed.
The first step in finding a fix & flip property is to find one that meets the proper criteria for funding. This step trips up 95% of fix & flippers because it’s easier said than done. There are always the big boys out there, looking for dozens of flips with money to burn per year.
Then you’ve got tons of others, just like you, looking to break in. How do you find deals when there’s so much competition? Here are two ways to get your spot in the marketplace.
Sure, every person who puts their house on the MLS is motivated, but that’s not helpful. I mean to look for people going through a significant life event or change. Things that give someone a reason to want to sell their property fast.
Here are a few examples:
And seriously, like a million more. Liens, bankruptcies, home improvement projects that have gone wrong, divorce; the list never ends. My point is to stop looking at the MLS for your deals and instead focus your search on situations where people need their house gone and gone fast.
Next, you’ll want to find properties that have equity. This is the difference between the property’s value and how much is owed on the loan. In other words, if the owner sold the property right now, how much will they walk away with?
This is critical to your fix & flip project (and subsequently securing a loan) because an owner won’t sell you their house unless they’re going to be able to walk away with at least something—or, worst-case scenario, break even. So if someone owes $200,000 on their property and sold it to you for $180,000, they would be moving out of their house and still owe $20,000 on it! They’re not going to agree to that.
So, my rule of thumb is to look for properties with at least $100k in equity. You might be able to turn a profit in certain deals if the owner has $50k in equity, but it’s certainly less likely.
Look up an amortization schedule. This gives the schedule of payments that the owner pays on their property over 30 years. You’ll have to estimate their interest rate, but you can Google average interest rates. There’s also software you can use, such as Investor’s Edge. This is an extra step that will help your marketing.
Calculating your After Repair Value (ARV) will be the next step to tackle before getting your loan secured.
The ARV is the estimated market value of the property minus any debts and liens on the property. This is a significant number to know because it will give you an idea of how much money you would be putting at risk if you were to take out a loan to buy the property.
You can use a few different methods to calculate ARV, but the most common is comparative analyses. This involves looking at similar properties in the area and calculating their ARV. Here’s how to do it:
Not all comps are equal, and when you’re estimating based on subjective data like this, you need to have a few guidelines in place. Prices fluctuate more the farther away you get from your property. Here are my standbys:
If you can’t find 3-6 exact comps, it is possible to do some price adjusting. The price adjusting isn’t to get you a better price out of thin air but rather to hopefully verify other more accurate comps. You can do some research in the area and see how much an extra bed or bath usually adds to the price or see what the average price per square foot is in the area. If those slight adjustments corroborate your values from more exact comps, you’re in good shape.
When you walk through the property for the first time, you’ll want to do a quick assessment of the rehab. After you’ve done enough of these, you’ll be able to estimate the cost accurately. Until then, though, I’ve got a quick and dirty way to do the calculations:
As I said, it’s not an exact science, but it will get you close enough for now.
Since you’re working directly with the owner, you’ll likely negotiate and place verbal offers while you’re with them. Here are a few pointers to help with this step:
After you’ve negotiated a price and the seller has accepted your offer, it’s time to nail down the rehab costs as close as possible!
Since you’ve done your estimates before this, you should have a rough idea of what your bids will run. However, your calculations will never be so good that you can skip this step, especially if you plan to get a loan. That’s not to insult your incredible powers of deduction; far from it. It’s actually because of one reason: The Itemized List.
The Itemized List is a document contractors will use to submit bids for your project. It’ll list down all of the materials and services they’ll need to complete the project, including the cost of each one. It’s essential to have this document so you can be sure you’re getting a good deal on everything and so that you’ll have a backup plan should something go wrong.
Your itemized list ends up being more like a to-do list that gets crossed off as you go. If one contractor ghosts you or screws something up, it’ll be much easier to get back on track with an itemized proposal than a general bid.
This brings me to my next point: You must get two different contractors to bid on your property. This is because you want to make sure you’re getting the best possible price for your rehab. If you only have one bid, there’s a good chance the contractor who submitted the lower bid will do the work, regardless of their quality. This is especially true if the contractor who submitted the higher bid isn’t the best option for the job.
Once you have two contractors bidding on your project, you can compare the bids to see who offers you the best deal. And if one contractor ends up doing a lousy job, you can get them replaced without any trouble since you’ll have your Plan B on standby.
Now for the funding! You’re likely going to start with a hard money lender. Sometimes it can be hard to get a fix & flip loan if you’re a beginner, but some lenders (like us) have removed many of the barriers for new investors to get started.
However, most deals will require some money—it just doesn’t have to come from your bank account:
There are plenty more ways to get the funds for your fix & flip. You can read my Complete Guide to Getting Loans for Investment Properties here for a deeper dive.
Now that you’ve got the loan secured and the property transferred to you, it’s time to begin the rehab work.
This is where the hard work really starts! You’ll need to assess the damage, make repairs, and upgrade any critical systems. Make sure you work with an experienced contractor to fix & flip properties, as this is a very skillful process.
Follow the instructions in your homeowner’s insurance policy to make sure you’re repairing what’s required by law. You may also want to consult with a home inspector to ensure you’re fixing things properly and keeping your property in top condition before listing it for sale.
You’re so close to the end! Now that your property is ready to be shown, there are a few pieces of advice I have that can make this as smooth a transition as possible:
Onto the next one! Use the lessons you’ve learned from the last sale to make the next one even better. Don’t get complacent with staying up to date on your market. Some investors think they’ll just move from one property to the next without looking at market trends and quickly get stuck in a bad situation.
This beginners guide is an excellent primer for anyone looking to get into the fix & flip business, but nothing beats experience. Take your time and do the work, learn the market, and build your network so that every flip gets a little bit easier and more profitable.
To learn more about real estate investing, sign up for our free webinar!