Are you thinking about investing in real estate? This can be a very profitable business if you know how to get started, if you need a loan or not, and what questions to ask. Do your research on what it all entails by asking yourself…
- How much is the down payment and/or mortgage payments?
- What’s the local real estate markets looking like?
- How much are the property taxes, closing costs, remodeling costs, inspections and permits costs?
- How much can I afford to flip this investment property?
1- Evaluating Your Finances
This is the starting point, the very first thing you need to look into when trying to flip an investment property. Consider all of the costs involved with a house in these beginning stages. You want to make sure you cover all your costs, while also thinking about the unexpected costs.
- What will you do if the property does not sell right away?
- Would it be a possibility to use it as a rental property?
- What is my back up plan if something were to go wrong during any point of the sale?
Knowing your credit score can help you in figuring out how much of a flip loan you may potentially receive, as well as what interest rate that may put you at. If your score may be low, you may want to take some time to build your score up. This can help you in the long run in many ways. Here are some tips on how to improve your credit score:
- Paying off the accumulated debts in a timely manner. Creditors look at this when giving out loans, making sure they can trust that they will be receiving their money on time.
- Keeping debts to a minimum if you can. Try to keep utilization of credit cards below 30% on any one line.
- Taking the precautions of protecting your identity. Monitor your credit card transactions and your credit rating to make sure that your identity has not been stolen and only log into your bank information on a secured website from a protected network.
Making a business plan ensures yourself and your lender that you are right on track for making a wise investment. Banks and lenders will want to see a proven plan in place before moving forward with the loan. The business plan for flipping a house should include:
- The maximum purchase price of the investment home.
- The neighborhood school districts, safety, and public amenities nearby.
- The maximum cost of remodeling repairs you can afford.
- A list of dependable trusted contractors who can undertake any repairs.
- An estimated value of the house after the remodel and repairs. The initial sale price cannot exceed 70% of the homes After Repair Value (ARV).
- A sense of who the potential buyer of the home will be and what they might expect from the house or neighborhood. If it is a family home, you will probably want to remodel with young children in mind.
- If your purchase is for a specific person, you may want to consider a more versatile house to buy. Keeping in mind that it will be more difficult to sell and spend a longer time on the market.
- Have extra money set aside to be prepared in case anything goes unexpected throughout the process.
2- Finding a Team of Partners
Collaborating with an investment partner is the most common way to enter the property investing market. The investment partner is one who will supply some or all of the startup cost, in exchange for some of the profits. It is important to have an investment partner if you do not have the money for the down payment or repair costs of the house.
Actively Network and Advertise your Property by staying connected with all people in your community. Spread the word that you are about to undertake an investment property. This may lead you to your next partner, investor, or potential buyer.
A plan for repaying the flip loan if something were to go wrong, such as a buyer falling through on the sale or a problem with an inspection of the house. Thinking of all possible complications that may happen is only going to prepare you in being ready for those worst-case scenarios.
Consult with an Attorney when entering into any legally binding partnership. Having your attorney prepare written contracts with signatures will protect your rights and the rights of any involved in the partnership. Some key items and questions you will want the contract to include will be:
- Who covers which costs?
- How the profits will be split?
- Who will cover potential debts and liabilities?
- Who will undertake particular tasks (such as hiring contractors)?
- Note security laws that regulate promotion of investments as well as the possibility of investor lawsuits if events don’t occur as planned.
Start with one property at a time with your business partner. Looking long-term, you may want to take one deal at a time. You may not know how well you work together as a team yet, so take it slow and work up to multiple deals as you get more comfortable with the idea.
3- Securing a Hard Money Loan
Do your research on hard money lenders. What do they have to offer you? What are their interest rates? There are many investors that specialize in real estate investing, so taking the time to find an experienced, knowledgeable lender who will to work with you on a low interest rate is an important factor.
Recognizing the added costs of hard money loans. A hard money loan can be the easiest kind of loan for a first time real estate investor to obtain when they do not have much liquid cash. Be careful however, because it can be one of the more risky options because of the higher interest rate included. These can be anywhere from 8-15% higher than a mortgage bank loan. Hard money loans come with an initial fee, or “points”. Most initial fees are between 2-10% of the mortgage cost of the property.
Collecting the financial documents. Before a lender is going to hand you the loan for your investment property, they will want to check your financial stability. They will likely examine your bank statements, possibly your tax records, and credit rating. Having these documents ready for them to view will show your lender that you are prepared and ready for this investment opportunity.
Plan on getting the property fixed up and sold as soon as possible. Hard money loans are not meant for long-term investments, because of their high fees and limited terms. Most hard money loans are set up for a 12-month period with a minimum of 3-6 months payments. They may allow you to renew the loan for another 12 months, but it will come at a premium. That is why it is imperative to find a house to flip quickly to avoid these higher rates.
4- Use Your Own Assets
Evaluating your current assets can help you get lines of credit to purchase a low-cost home to flip. Review your own home loan, your retirement accounts, and your credit lines for the possibility of receiving extra money that will help toward the down payment.
Tapping into your IRA / 401K retirement funds can be used for a first-time home buyer. Exceptions of up to $10,000 can be made only if you are a first-time homebuyer. There are serious tax penalties for withdrawing money before the age of 59.5 on retirement accounts like IRAs, 401Ks, 403Bs, etc. If you are starting a business like flipping properties there are ways to tap into these accounts without these penalties. However, you will have to consult with a specialist who can set this up correctly to appease current tax code. Do not try to do this on your own.
Considering a Home Equity Line of Credit is an option if you already own a property. The HELOC provides you with the cash and you only have to pay interest on the money that you borrow. Potential risks of this option includes:
- Risk of losing your home if you do not repay the loan in a timely manner.
- Interest rates might be higher than loans from private lenders.
Consider using credit cards for the quick cash, as long as you can pay them off quickly. Interest rates on credit cards can be as high as 18-20%. However, there are ways to receive lines that will be 0% for 12-24 months. Consult a business financial expert on these programs.
5- Planning & Research
When planning on investing in the real estate market, there are many options to consider when taking out a loan through a lending company. Before they offer you a loan, your lender will want to see that you have done your research and are prepared in all aspects of the business you are about to start up.
So first, know the benefits, the potential risks involved, and all the options to consider. Then second, when deciding to move forward and get a business plan in place to present to your lender.
Taking these necessary steps will prepare your for investing successfully and maintaining a profitable, long-term business. If you need help with a hard money loan, or fix and flip financing, or any of these other forms of funding Aggressive Lending Company can help with our network of over 50 lenders and 30 years of underwriting experience.