How much money do you REALLY need to flip your first property?

[Elise Bickel Tauber]

I have seen so many posts and scam programs from people who can help you "get rich quick" by flipping homes talking about using "other peoples money" to flip homes. Well, as an investor and agent of almost 20 years let me tell you what I've seen from first hand experience myself (between deals I've personally done and deals my client has done) and what you need to know before taking the leap!

First, risky investments, like flips, aren't cheap. So if you aren't using your own cash, you are going to pay....out of your nose! And especially your first couple of deals, your rates and fees will be higher than someone who has done a dozen deals. You are a risky investment and someone who is loaning you $100-$200k or more is going to make sure they make it worth their while. We have worked with standard lending, rehab investment, and hard money lenders all with different requirements. I personally like rehab investment strategies because you can get in for as little as 10% down on the purchase and finance up to 110% of the rehab costs. Which means, if you are buying a home for $100k and the rehab is $100k you would need $10k (plus closing costs if applicable) for the financing. That is a very low investment to make for a $200k rehab. 

Once you decide on the lending, where are you going to get that money? Well, I am not a fan of using other people's money for this. I have seen so many of those programs where you convince others to basically loan you money for your flip. What happens when things go wrong? You will already be struggling to keep everything together your first couple deals, do you want to have the pressure of the bank, the market, struggles with the renovation, and then another person breathing down your neck to return their money? Now I'm not against having a partner, but it does get difficult when you have someone you don't know well loaning you money and they are worried about their return.

What type of property is good for your first flip? No matter how tantalizing a large reno with big project margins look for your first deal. Don't do it! Just don't do it my friends! The bigger the project, the bigger the chance that things will go wrong. Do your first flip or two with basic paint, flooring, light fixtures, and maybe a kitchen update. Maybe the margin is only $10-$15k profit when it's done. It's better to take the chance on that than to take on a big renovation with a $60,000 profit margin and next thing you know you are significantly over budget and you have unexpected costs that eliminate the profit anyway. For your first 3 deals, expect to make nothing. Just hope to get your money back and not loose anything. Deal 4 is when you should have the experience and teams in place to be ready to make some money. Everything before then is a learning experience.

The biggest piece of advice I can give is that flipping properties is NOT for the weak of heart. If it was guaranteed, everyone would do it. It is stressful, a calculated risk...but a risk none-the-less. I know investors who flip 5-7 houses a year and can easily live well off of that income. I know others who are struggling with every deal they put together. 

Have you stuck around this long? 

Want to see a real world example?

116 Ravilla Ave in Carrick PA
I recently anazlyed this for an investor who was thinking about using this for a brrr. 
The property is a 2 bed 1 bath in Carrick and is listed at $70,000. Carrick (where I have personally flipped before and love this area) is currently considered a B+ area. Not sure how to find this info? Of course I recommend a local agent as part of your team to do this research for you but if you want to search on your own, I had another post where I shared links including niche.com that can help with area ratings.

At first look from photos, the expected reno is $20-$30k for a mid-grade flip. Paint, flooring, bathroom, lighting. Nothing major. 
When I look at ARV numbers, I only use sold properties from the last 6 months. Don't go back 3 years. Don't use z-estimates from neighboring properties. Don't ask your Uncle Bob his thoughts. You need sold data. In addition, be mindful that if a property sold last week for $220k and used conventional, or better yet, FHA financing for the purchase, that bank had to appraise the property and was able to find that value before lending. This is all good when you are looking to re-sell. The comps for this property are showing $130-$150k. I always plan for the lower end.

$70,000 purchase (if you purchase at full price which hopefully, in today's market you don't have to).
Down payment : $7,000
Closing costs (assuming seller will agree to sellers assist) : $2100
Out of pocket cost : $9100

Resale price : $130,000
Closing costs when you sell : $12,000 (there is 2.5% transfer tax in the city in addition to standard closing costs and commissions)
Renovations : $30,000 (use the high end of course)
Purchase : $70,000
Closing costs when you bought : $2100

Potential Profit : $15,900
Estimated time for renovation is 1-2 weeks. Days on market in this area is under 30 days. Average time from signed contract to closing is 30 days. So in 3 months you could turn $9100 into $22,900. I think thats pretty good! But of course, for your first few, Just be happy if you walk away with the $9100 you put in additionally.

I hope that helps anyone looking to invest!