Budding investor from Las Vegas

[Justin Foley]

Hi there, my name is Justin and I am really stoked to have join. I have been reading day in and day out to find out as much as I can about rehabbing properties for the past 5 months. I have been a victim of analysis paralysis, but I am working on taking steps to overcome my fear.

I have already been pre-qualifed for a hard money loan, the one pressing obstacle to overcome is locating a deal that makes sense. As I cannot afford local mentors at the moment, I was blessed to have found a group of successful people willing to give away free advice, it was a no-brainer for me to sign up.

I have not focused on success like this since I was in nursing school. I look forward to absorbing all of the knowledge that I can receive.

[Eric Fernwood]

Hello @Justin Foley ,

I agree with @Robert Adams concerning being very careful with hard money loans. The few that I have seen are very expensive. The terms on the last hard money loan one of my clients did was 5% closing costs, 40% down, 10% interest rate and the life of the loan was 18 months. Hard money loans vary significantly so the numbers you get might be completely different.

I am a Realtor in Las Vegas and the majority of my business is remote investors. I look at the Las Vegas market every day and I see very few properties that can be flipped profitability. Unless you really know what you are doing you can lose a lot of money flipping. But, if you are inclined to try, below is a process that I have used and worked for me and I believe will work for anybody.

Once you find a property that you believe has flip potential, take the time to really think the entire process through with a spread sheet. Start with what you conservatively believe the property will sell for if it is brought to market standards (more on market standards later). Do not be optimistic on the eventual sale price or time to sell; be very conservative. Once you are reasonably confident about the sale price and how long it will take to close once the rehab is complete you are ready to work backwards to the maximum you can offer for the property.

Work Backwards to Make Money

As an example, suppose you find a property that looks like a good flip. You carefully study recent sales comps and decide that, remodeled to market standards, the property should go under contract for $200,000 within 60 days after the rehab is complete and it is placed on the market. And, your trusted contractor conservatively estimates it will cost $40,000 and take 2 months to bring it to market standards. Since profitable flippers are pessimists, estimate the total rehab will cost $50,000. Your hold time will be:

As to profit, suppose you will be happy with a 10% return. So, your goals are:

Also during your due diligence you learned that the real estate tax rate is 1%, property insurance is $450/year, purchase (closing) costs are 3% and cost of sales (commissions, closing costs, etc.) will be 8%. I put these numbers in the table below:

Now that we have an (over simplified) estimate of the total cost, we can work backwards from the probable sales price to determine the maximum price we can offer.

Based on the above, you cannot pay more than about $110,000 for this property if you are going to make money. Yes, you can probably reduce cost of sales and perhaps other numbers but you cannot significantly reduce rehab costs and there will always be surprises which will burn you if you do not have sufficient funds set aside.

Flip Considerations

• Typically, lenders will only finance properties that are already livable so financing damaged properties can be a challenge. Talk to a knowledgable lender about 203k loans. Contact me if you need a recommendation. You need to get this nailed down before you even start looking.

• You may have noticed that I used the phrase "market standard" multiple times. There is a common erroneous belief that if a property is "really improved" it will sell for more than what similar homes have sold for. This is never true. If similar homes are selling for $200,000, even if you put $100,000 of "improvements" into the property, it will not significantly increase the sales price. One of the biggest challenges for new flippers is the tendency to remodel the property to their taste as oppose to rehabbing to market standards. If similar homes are selling for $200,000 with vinyl floors, travertine tile will not significantly increase the sales price. You need to really know what characteristics made similar properties sell and not go much beyond that. Cost control during the rehab is critical. Of course, there are small things that can make the property much more desirable to potential buyers without spending a fortune. For example, ceiling fans in the master bedroom and family room, improving the curb appeal and the front entrance area, fresh paint, etc.

Justin, I hope the above helps. Flipping can be a profitable business but only if you really know what you are doing and you have a well thought out plan. Be careful and good luck.