Why Newbies Should NOT Do FIx-n-Flips...

[Wendell De Guzman]

If you're a newbie and you've watched far too many flip shows on TV, you should NOT do fix-n-flips unless you have the following "5 C's of a Flip" figured out:

1.  You need a COLLATERAL (the house you're going to rehab) and it got to be a good deal, or a house substantially BELOW market value. Here's an example of a good deal:

ARV - $150,000
Repairs - $50,000
Purchase Price - $50,000
Notice I said it's a "good" deal (it's OK, not great). Your profit in the above deal will not be $50,000 because you have selling cost, holding cost and if you use a hard money lender, you will have cost of money as well. You'll be lucky to clear $15K-$20K on a deal like the above.

A few days ago, I wrote a post on a strategy that is MORE PROFITABLE THAN A FIX-N-FLIP.

2. You need access to CASH (even if you're using hard money loan). A $200K project (purchase + repairs) will typically require that you have $60,000 liquid cash. Why do you need so much? Hard money lenders will require you put down 20% of the purchase price + pay for the origination fee (2-4 points) and have 6-9 months in reserves (interest payments).

By the way, if you don't have $60K in your bank account, don't despair. Here's a post I wrote 2 weeks ago to help you REHAB A HOUSE WITH NO CASH OUT.

3. You need to have good enough CREDIT to qualify for hard money and also for conventional financing in case you need to refinance out of the hard money (in case it's taking you too long to sell a house). Credit score has to be 660 or above.

4. You need to have the CAPABILITY to do the renovation (i.e, rehab experience). If you're a newbie, you might need to partner with an experienced rehabber/flipper or the hard money lender will require that you have an experienced General Contractor as part of your team. Part of building your capability is having a good listing agent on your team who has sold lots of houses in the area/town you want to focus in.

and lastly,

5. You need to have the CAPACITY to do the deal. Do you have time overseeing the project? How much time do you have to speak with the GC, go to the job site, check the receipts, monitor the expenses to see if you're still within budget, talk to the listing agent, etc? If you have a full time job and your weekends are limited as well - doing a rehab might be tricky. Rehabs take longer and harder than what you see on TV (flip shows).

Also, if your rehab project is very far from you (2 hours or longer drive) and you don't have someone you trust who is closer to oversee it, maybe you should forego that project because your capacity to do that deal will be limited.

Experienced rehabber or flippers - did I miss anything as to what a newbie investor got to line up first before he/she can rehab a house? 

[Michael Medinger]

When I started with my family's fix-and-flip enterprise, we were the goose that laid golden eggs.  We bought with cash, had a real estate broker in-house, a contractor with 40 years experience, and sterling credit (when we needed it, which was almost never).

And even then it was a hard uphill battle.  We had a lot to learn, and it took years to surround ourselves with a worthy team: an honest and helpful escrow officer, an energized title officer (who was tremendously helpful when we started looking at trust deed sales), and specialty subcontractors who were actually worth a damn.

The beautiful people on HGTV surely went through the school of hard knocks themselves.  Even the proud and mighty Armando M. types work hard for a living.  Contrary to the radio commercials, this is NOT something one can do while binging on Cheetos and Netflix.

Come with imagination, creativity, and a hard work ethic.  Those without these qualities probably won't even gather all of the resources necessary to be in this business anyhow.

Great post, @Wendell De Guzman