This is not to say you need wealth to start flipping properties for profit, but it does not hurt. However, you can flip homes for healthy returns without great wealth, and this guide will give you the basics you need to properly flip houses if you have limited funds to start.
What Exactly is “Fixing and Flipping Properties?”
When you fix then flip a property, you are buying a home in need of repairs for less than its market value and trying to sell it quickly once renovations are complete. The goal is to find homes for sale at significantly reduced prices. If you buy a home to flip at its appraised or market value, you put yourself at a big disadvantage. There is little room to make any profit. Obviously, you are not trying to flip a property to break even.
Financing Your Fix and Flip Property
Most new real estate investors have little working capital when they start. So, they are going to need some form of financing to flip their first property. You might think finding loans to flip properties is difficult. The truth is you have several financing options, and some of them are at your fingertips. Here is a short list of financing options:
• Hard Money Loans- This type of financing is used for real estate investment purposes only. The funds come from private investors or companies that specialize in hard money financing. Lenders determine loan amounts based on the after-repair-value (ARV) of your flip. Whether or not you qualify also hinges on the value of your flip after you fix the property.
• Personal Loans- Yes, you can use an unsecured personal loan to financing your flip. In fact, if you qualify for the loan, you can use the financing for anything you want. Keep in mind that personal loans are best for smaller transactions (usually $50,000 or less).
• Home Equity Loans- You can take out a loan against the equity in your primary residence to finance a flip. The rule of thumb here is to have at least 20 percent equity in your home. Your equity is how much your home is worth versus the principal balance of your mortgage.
*Determining Equity- You can calculate your equity by first finding your home’s current value. Then you subtract your mortgage balance from the value. The remaining figure is how much equity you have in your home in dollars. If your home is worth $70,000 and your principal balance is $50,000, you have $20,000 in home equity. To calculate equity as a percentage, divide your home equity in dollars by the properties current value. In this scenario, you have 28 percent equity in your home ($20,000/$70,000 = 28.5 percent).
Find a Property You Want to Flip
Now that you know some basics about fixing and flipping properties and where to find financing, you need to actually find a home to flip. A good deal is not going to walk up to your house and ring your doorbell. Finding the right property is a topic unto itself, but you can still learn some basics.
You have to ask yourself if your comfortable flipping single-family homes, condos or multi-unit properties with tenants. If you are new, you may want to start with a small single-family home or condo. A bargain basement deal on one of these property types probably does not include dealing with current residents. Many of these homes are in default or foreclosure.
However, multi-family properties will probably require you to deal with tenants. Once you buy the property, you are the landlord, and you must address tenant issues until you sell the property. See how finding the right property can determine whether or not a deal is right for you. Some food for thought as you begin your fix and flip journey in New Mexico.