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4 Money Missteps to Avoid With Your First Home Flip

May 15, 2019

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So you’re zeroing in on your very first real estate investment purchase: a home with potential that you’re planning on flipping. Congrats! But now it’s time to get to work.

Just be aware: Even if you spend weeks, or months, getting your investment property ready to sell, these efforts don’t necessarily guarantee profits. To give yourself a greater chance of making money off of your flip, you’ll want to avoid the following mistakes.

1. Hanging on for too long

For professional investors, flipping a home should be seen as a short-term process.

“I’d rather take a shorter profit in a shorter period of time than a marginally bigger profit over a longer period of time,” says Joshua Jarvis, CEO of Jarvis Team Realty, in Atlanta. Why? It can interfere with your year-end goals of making more money on flipping other properties. If your money is tied up in a project, you can’t invest in a new one.

“A 10% per annum return on a three-month investment is fantastic, but that same return doesn’t look so hot if it takes three years to come to fruition,’ says Nick Schlekeway, founder of Amherst Madison Legacy, in Boise, ID.

2. Over-renovating

Time is of the essence when flipping a home, and the quicker you can make it look good and sell it, the better. Any additional time spent on over-renovating it or obsessing over minute details can cut into your bottom line.

Patrick Freeze, owner of the Bay Management Group, in Baltimore, advises investors to “make the necessary repairs to your property but don’t over-renovate.”

The longer it’s not getting sold, the more potential revenue you miss out on. Plus, sinking money and labor into additional features can also mean you’ll make less money at the end of the deal.

So to make sure your house will fit in with comparable properties in the neighborhood, look for trends. In your neighborhood, are there McMansions stuffed with high-end appliances, or are most of the houses from the ’70s with modest updates? Figure it out, and play it close to the medium.

3. Not having an emergency fund

Experienced investors will consider this house flipping 101, but we cannot stress enough how important it is to have plenty of cash on hand in case of emergencies. What if your contractor finds asbestos and you have to pay additional money to eradicate it? What if there’s a downpour on the day you’re supposed to paint? Not having an emergency fund set aside can badly derail your project and put you in the red.

“The larger the fund, the better you are and the longer you can handle any risks,” says Jeff Tomasulo, CEO of Vespula Capital, an investment firm in Greenwich, CT.

To figure out how much you need, add together your overhead per month—mortgage, taxes, insurance, your lawyer, leasing agent, accountant, etc.—and multiply that by six for at least a half-year cushion, Tomasulo recommends.

4. Pricing yourself out of the market

Are you holding out for a higher sale price? You’re doing it wrong. The main reason houses sell fast is because they’re priced right for the market they’re in. That’s why it’s important to look at the comps in your neighborhood and speak to local real estate agents when deciding on a price for your investment property.

I’ve seen many new investors try to get $5,000 or $10,000 more than they should on lower-end homes. When it doesn’t happen, they spend the rest of the time chasing the market, Jarvis says.

His bottom line? “Price it right in the beginning, and get it sold.”

The post 4 Money Missteps to Avoid With Your First Home Flip appeared first on Real Estate News & Insights | realtor.com®.

How to Finance a House Flip: 5 Types of ‘Fix-and-Flip’ Loans

August 3, 2018

Finance House Flip

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If you’re wondering how to finance a house flip, you’re not alone. Buying, renovating, then quickly reselling houses for profit can be a highly lucrative endeavor, yet finding a loan to fund such a project isn’t anything like getting a conventional loan for a home you intend to actually live in.

In fact, there are six types of “fix-and-flip loans” you can use to buy and renovate distressed properties, and each comes with its own set of qualification requirements and pros and cons. Here’s a look at five options and how to figure out which one’s best for you.

1. Hard-money loan

Hard-money loans, sometimes called “rehab loans,” are short-term loans intended for real estate investments. Unlike traditional bank loans, these are issued by private lenders. A hard-money lender can be an individual, a group of investors, or a licensed mortgage broker who uses personal funds to extend the cash.

Hard-money loan terms are usually much shorter than traditional mortgages. Six months to one year is most common, but they can go up to five years. Interest rates are considerably higher, typically ranging from 12% to 21%. Most hard-money lenders also charge 3 to 6 points upfront, where 1 point equals 1% of the loan.

Down payment requirements for hard-money loans are also different. You can expect to receive about 60% to 75% of the property value you intend to purchase. If you’re looking at a $200,000 property, for example, the most you’ll probably be allowed to borrow would be $150,000, meaning you’d have to pay $50,000 upfront.

However, hard-money lenders are generally more willing to accommodate people with lower credit scores (as low as 550). And there’s much less paperwork than a traditional loan, so the process is faster—sometimes as fast as one week. Because the home being purchased is serving as collateral, hard-money loans are best suited for people who have flipped at least two to three homes.

2. Cash-out refinance

If the value of your primary residence has increased, one financing option for your flip is a cash-out refinance. This lets you tap the equity in your home by refinancing your mortgage for more than you currently owe and taking the difference in cash.

As the name suggests, you are in effect “cashing out” some of the equity in your home to pay for something else. Your new loan will be the amount you still owe on your mortgage plus the cash you wanted to take out. So, say you had a $300,000 loan, on which you still owed $200,000. That would mean you had $100,000 in equity in your house. You could cash out $25,000 of that equity, and get a new mortgage for $225,000, to replace your existing $200,000 loan—and then put that $25,000 toward your house flip.

To qualify for most cash-out refinance loans, you need a minimum 640 credit score, a maximum 45% debt-to-income ratio, and at least 30% to 40% of equity in your existing home. But because it’s part of a mortgage, you will typically get a better interest rate than if you were to use a credit card or hard-money loan to fund the same purchase.

There are a couple of caveats. You’ll have to pay closing costs, which average about 3% to 6% of the total loan. And, if you’re refinancing to a higher mortgage rate, you could wind up paying more money in interest on your loan over the long run.

3. Home equity loan or line of credit

If you’ve built equity in your primary residence, you could tap a percentage of it using a home equity loan or home equity line of credit. Both financing options let you borrow money using the equity in your home as collateral. The big difference is a home equity loan provides you with the cash upfront, and you pay monthly installments over the length of the loan (like you do on your first mortgage). With a HELOC, you access the money in small chunks over the life of the loan.

Since you’re getting all the cash upfront, a home equity loan is generally a better financing option when buying and flipping a house. Plus, the interest rate is fixed and fairly low compared with hard-money loans or credit cards, hoveringly currently around 6%—and any interest you pay on the loan is tax-deductible within certain limits.

Most mortgage lenders will allow you to borrow up to 80% of your home’s equity on a second mortgage.

4. Investment line of credit

An investment line of credit, also called an “acquisition line of credit,” is similar to an HELOC—except it’s issued solely for buying investment properties. This short-term financing option—with loans generally lasting from about 18 to 24 months—lets you borrow cash as needed, up to a predetermined loan limit.

These loans are best suited for people who have experience flipping houses, since borrowers are underwritten and approved based on their demonstrated record of owning or flipping investment properties, and their financial wherewithal. (Read: If you’re a high net worth investor, or own a portfolio of properties totaling over $1 million in value, an investment line of credit might be your best financing option for a single-home or multihome flip.)

Generally, you can obtain an investment line of credit in as few as three weeks, in amounts ranging from $1 million to $50 million. Interest rates on these loans typically run from 5% to 8%.

5. Crowdfunding

Another source of capital for house flippers is crowdfunding, or “peer-to-peer lending,” where the funds are raised through the contributions of a large number of people, usually through the internet.

“The biggest benefit we offer is flexibility and a national focus,” says Nav Athwal, chief executive officer of RealtyShares, a San Francisco–based company that finances investment properties in 35 states. With RealtyShares, funds come from more than 38,000 high net worth individuals who invest in a specific transaction for as little as $5,000.

There’s not a ton of data about crowdfunded investment loans, but RealtyShares funds up to 70% of the estimated after-repair value of a property in as little as 10 days. Interest rates vary from 8% to 11%, with the average loan term on luxury flips being 12 months. The company also does preferred-equity deals, where it takes a partnership interest in the property and benefits from both the interest paid and the potential upside of the transaction.

The post How to Finance a House Flip: 5 Types of ‘Fix-and-Flip’ Loans appeared first on Real Estate News & Insights | realtor.com®.