House flipping can be lucrative for real estate investors and for folks who want extra money. If you are thinking about flipping, four key factors to consider are the various financial aspects, the expected (realistic) profit, the house’s physical characteristics and how the house compares alongside others in the neighborhood. You should know these things when applying with hard money lenders, anyway.
First, are you flipping the property to rent it out or to sell it? In either case, you do not know exactly how much you will rent or sell the house for. However, you should know how much you plan to pay for it and the closing costs. Then there is the timeline. If your renovations take longer than expected, you are on the hook for additional expenses such as taxes, utilities and perhaps interest (to your lender). Unexpected expenses occur, so pad your budget with extra money.
As for how to finance the flip, many people choose private money lenders for residential real estate. These lenders do not operate like traditional banks and credit unions. A traditional loan entails a deep look at your credit history and stricter qualifying criteria. It runs for a much longer period and carries lower interest rates.
Meanwhile, the focus when you get a hard money loan is on the after-repair value of your property. Lenders want to be sure the value is high enough for you to repay the loan. The loan may be for as much as 75% of the after-repair value but not much higher because lenders want you to have a stake in the project. You do pay more in interest but skip the long closing times and red tape associated with traditional loans.
The Expected Profit
When calculating your expected profit, look at things such as the interest you are paying (or expect to pay) on a hard money loan, how much money you put in yourself, closing costs, expenses and labor for the house renovations, and title company fees, among other factors. Keep your after-repair value estimate on the conservative side. It is better to profit more than you expected rather than less.
How the House Stacks Up to Other Houses
You must have an estimated sale price to calculate your expected profit. For this, use comparable properties in the neighborhood and their sale values. Look at age of the house, square footage and number of bedrooms and bathrooms.
The House’s Physical Characteristics
Physical characteristics matter when calculating expected profit, as touched on above. Also, consider physical characteristics when deciding on a specific house to flip. You want a property that is competitive with others in the area. Suppose that the huge majority of houses in the neighborhood have three bedrooms and two bathrooms. If you choose a house with three bedrooms and one bathroom, it might not do well. Ensure the house fits somewhere in the middle range and is not too showy or suboptimal for the neighborhood.
You can apply online with many hard money lenders. To get started, gather information such as the amount of money you are requesting, the house’s purchase price, estimated closing costs, and planned alterations, repairs and improvements.