Real estate investors are like anyone else attempting to start their own business. With research, planning, and dedication, success is well within reach. Much of the real estate empire was built by starting small.
Known in real estate investing market as the “buy ’em, fix ’em, sell ’em method”, investors can buy a very cheap property with little to no cash flow, fix it up either by themselves and sell the property for profit.
Investors can get started while still maintaining their full-time job, as their real estate work can be done from home and on their own schedule and free time. While cash is being generated from your regular job, that cash can be spent on the home renovation projects of your flip.
Rehabbing properties is the ideal way to enter the real estate investing market as common mistakes can be made that don’t come with a huge price tag, providing new investors a great opportunity to learn.
Each property you flip will carry with it lessons learned and knowledge gained. In time, you will be able to apply this ingenuity to larger projects, gradually increasing your investments and returns. Below are five pieces of advice to help get you on your way.
1. Do Your Research
As with most things in life, research is a major starting point, as well as the key to success. Just jumping into anything headfirst, without doing the research, rarely pays off. However, taking the initial time and effort to delve deep into all potential scenarios will pay off in the long run. When it comes to buying real estate, this could not be more true. Start with your area.
Research which neighborhoods are popular choices for homeowners, and also consider that one close to your home will cut down on travel time and gas money getting back and forth while you are working on it.
Once you have chosen your area, look for houses on the market that are underpriced relative to the neighborhood; usually, this is due to a home needing a significant cosmetic work or updating. Often, it will be referred to in the listing as a ‘handyman’s special.’
Also, older homes described by realtors as needing TLC means that they could be holding more value than the average person would assume. Either of these choices represents good investment options.
2. Secure a Low Down Payment
Once you have your property in sight, now you get into the nitty-gritty of financing real estate. Try and purchase the home with the lowest possible down payment you can make. Sellers highly motivated and eager to sell might even allow you to purchase their home with no money down; this is often the case with a person desperate to get out from under their mortgage or in the case of a divorce.
However, if this is not possible, try and get the seller to carry back a trust deed or second mortgage on the home. This can be done for the amount that most accurately represents the amount of equity the seller has in the house.
3. Start the Renovations
Once you have possession of the house, get started. If you have a day job, nights and weekends will be your renovation time. Make sure you are able to do most or all of the work yourself. If you have areas of weakness, it might be beneficial to take a class or two beforehand to minimize your mistakes.
Also, invest in your own tools. Renting will get expensive over time, especially if you plan on continuing on your flipping real estate journey. Don’t be afraid to pick the brains of people you know who have had success doing what you’re doing.
If you need outside help, consider asking your friends and family to give you their time, rather than paying large amounts in labor costs. Also, remember to include the house’s exterior and yard in your renovation budget. When it comes to selling real estate, don’t underestimate the power of curb appeal.
4. Maximize your Investment
Once your home is completed, you will need to consider what will give you the best return. There are three main paths you can take at this point:
Sell the House
Quite simply, you can sell the house for more than what you paid for it. You can then take that profit and reinvest it by buying real estate and repeating what you did with the first.
Rent out the House
If you are considering renting out the house, check what similar houses are being rented out for in your neighborhood. Be sure the rent amount carries your mortgage payments and then some. You will want to have extra cash flow to cover any repair or maintenance costs on the rental property.
Rent and Refinance
An additional option is while you are renting out the house, you go to the bank and refinance it. When you refinance a house that you are renting, it’s earning potential will also increase. With your rent amounts included in the bank’s calculation, the home will likely get a higher appraisal.
Based on the appraisal, you can either get a higher loan from the bank or take out a new mortgage on your investment property.
Progress to Larger Properties
Once you have successfully flipped one or more homes, apply that knowledge and experience to projects on a larger scale. Every profit you make should increase as you move up the property ladder, investing those more substantial returns in larger properties each time.
From your first small home, you can progress to larger homes, duplexes, triplexes, and apartment buildings.
When it comes to real estate investing, there are significant payoffs to be made. If you have an eye for property and are practical with home renovations, buying and selling real estate could be a great business for you.
Not only do you get that adrenalin rush of seeing what you can turn a fixer-upper into, you can reap the financial rewards and secure a brighter, more certain financial future.