let’s talk : first FLIP preparation
True life : I want to FLIP a house. We have spent the majority of the last 6 months working to acquire rental properties. I am not going to lie it has taken WAY longer and has been more discouraging than I had ever anticipated and I am itching to try and take on a new project. I have been bugging everyone I know about attempting a flip, and I am working to “prepare” myself the best I can. Let me walk you through what I am doing to prepare and PLEASE tell me if I need to do anything else/ I am totally off/if you did the same thing/ if you have any suggestions. Let us ALL know what YOU think!
So, as we do, let’s talk Real Estate, let’s talk FIRST FLIP PREPARATION…
This is where I started. I have spent quite some time researching & taking notes on the following…
General rehab construction costs
Principles of real estate finance
Real estate marketing
Interior design trends
Watching TLC / HGTV flipping shows (I know this is so not helpful I just like them and use this as an excuse to watch more of them)…
DEVELOP A BUSINESS PLAN
Our plan roughly outlines the following…
Executive Summary / Mission Statement
A one page description of what we are doing and why
An overview of the economic environment for any neighborhoods we may be interested in – we collected our data from sources like our agents, contractors, Zillow, Trulia
Goals & Project Strategy
Define the project scope and end goal
Based on what I have read everything seems to cost more than you anticipate. I am working to develop a budget for rehab costs, monthly mortgage, insurance and tax payments. We have brainstormed a few different methods of how we are going to keep up with these payments throughout the project – will keep you posted on what we end up doing! Meanwhile, please let the group know if you have any suggestions on how to go about this!
Just like everyone says the project always costs more than projected, the project also always takes longer. I plan to develop a timeline with our contractors and I have been told to align financial incentives / consequences with the timeline to ensure everyone is on the same page.
Exit Strategy / Back-up Plan
I have read about the importance of exit strategies- aka how to get out of the deal whether or not it goes to plan. So in every deal we look at, we are making sure we can at least rent the places out and breakeven in the event we are unable to sell the newly completed rehab.
CHOOSE A NEIGHBORHOOD
Do your research on both the local environment and properties (i.e. economy, city plans, market values & rental rates). I walked you all through how we chose our target neighborhood last week! If you haven’t had a chance yet and you’re interested, you can check out last week’s note here : PHILADELPHIA.
BUILD A TEAM
Real estate salesperson
We searched high and low (on Google & Biggerpockets) to find a real estate agent with investor experience
The TRICKY PART- investors are continuously saying to …
Get references from people you trust (Attempted to do this),
Obtain at least 3 bids (I have been trying to do this, seems to be easier said than done),
Have the contractors provide references (I have not had to formally request any yet),
Ensure the contractor is licensed and insured (Check),
Know the time frame of the project (Our agent was able to work on this for us for minor fixes),
Know the payment parameters (TBD – will keep you posted!),
Check if permit is required
References can be helpful here too! The attorney we currently work with was active on Biggerpockets.com and I have to say is SUPER responsive when I send a million questions his way!
Many traditional banks prefer not to lend against rehab projects forcing flippers to use private and hard money lenders. I have chosen to network with lenders of all types (i.e. traditional, private and hard) just to play it safe and hopefully keep our options open!
FINACNING – COME UP WITH A GENERAL GAME PLAN
It is a hard balance between making sure you have financing somewhat lined up before you even going looking for a deal AND not getting ahead of yourself if you don’t even have a deal to finance yet. I guess my biggest take away here is – make sure you can afford the deal via some sort of pre-approval / pre-qualification. re: my note above on lenders – Many traditional banks prefer not to lend against rehab projects forcing flippers to use private and hard money lenders. I have chosen to network with lenders of all types (i.e. traditional, private and hard) just to play it safe and hopefully keep our options open!
FIND A PROPERTY
via Real Estate Salespersons, Wholesalers, Craigslist, Foreclosure Sales, Biggerpockets.com, etc. There are SO many different ways to find these deals!
ANALZYE THE PROPERTY
We have a couple of different calculators we use here to keep checks in place and make sure the numbers work! Please feel free to email me if you want to see a copy!
PURCHASE THE HOME
If the numbers work, and you know you can get the financing – pull the trigger on the home!
Based on the countless number of blogs, podcasts and books I have researched…
Do…develop a general scope of work for / with the contractors to review
Do…be present at the project
Don’t ….forget about building permits – make sure all updates are up to code
Don’t….go overboard with fancy finishes – this is an investment not your personal home (this will be hard for me – I can already tell)
Don’t…neglect easy fixes – buyers will notice
Don’t…forget to take advice from the pros – I am already trying to do this!
Don’t….prioritize speed over doing the job correctly
Don’t…start a million different projects at once- especially on your first flip
Don’t…ignore the 70% rule – rule of thumb says initial Purchase Price = (After repair value * .70) – Repair Costs
Don’t….forget to rehab the outside of the home – I personally have seen SO many flips recently where the inside is immaculate and the outside looks as run down as it was originally WHY?! I am ALL about curb appeal
Don’t…try & do everything yourself- hire out what you cannot do yourself
FINAL STEP : SELL / BRRR
Once a rehab is complete the owners will either sell or rent and refinance under the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat). While I would LOVE to BRRRR one day, we have run the numbers and realized the Philadelphia market rental rates and the properties we are looking at do not really support this strategy. If we do take on a project there, it will be in our best financial interest to rehab and sell.
SO, QUICK OVERVIEW OF – WHAT EXACTLY HAVE I DONE SO FAR?!
Due diligence on the market and construction costs
Worked with an agent
Set up a new operating group outside of the rentals (LLC)
Received pre-approval for financing
Toured SEVERAL properties and reviewed the numbers and comps on our final 3
MY NEXT STEPS?
– Put an offer on a property
– Find a contractor
– GET STARTED
What do YOU guys think? Have we checked all the “pre-flip” boxes? What are we missing here?!
Feel free to comment on the blog post and let us know what YOU think!
OH, and DON’T FORGET – I added two new features to the blog recently. Check them out…
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Book Store : Summer is just around the corner, THANK GOODNESS, which means it’s time to sit yourself down on the beach and catch up on some reading. I have reviewed a few of my favorite business reads! In case of interest, I have linked them on the Book Store tab for you!
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Data Sources for today’s content:
The Book on Flipping Houses : How to Buy, Rehab, and Resell Residential Properties by J. Scott