More and more are getting into the flipping business. Look at the statistics. In 2017, 207,888 single family homes and condos were flipped, the highest number of homes flipped since the pre-recession heyday of 2006. The average profit made per flip last year was $68,143. That’s serious money. The recent rise in flips indicates that many new people are getting into the business and its likely most of them are making use of fix and flip loans to do so. Learn some mistakes you want to avoid when it comes to financing flips.
Financing flips is in no way similar to financing a primary residence. These loans are for the short term, as no one in the flipping business plans to hold onto their property for the standard 15-30 year period. They are also expensive, and interest charged usually amounts to the double digits.
Considering the expense and the short-term nature of these loans you want to ensure that:
1. Your property can sell quickly
2. That you take out the smallest loan possible.
Consider the following as examples of what not to do in the case of fix and flip loans
• The HGTV’er: This flipper purchases a property that is pretty much livable. With just a fresh paint job and some new carpets, it would be a quick-and-easy sale, but she decides to go big on the renovations instead. She takes out a rather large loan to reconfigure the home’s entire layout. After the walls come down and the dust settles, our flipper discovers that her extensive demolition didn’t add much to the value after all. All that unnecessary work took time, a time during which she was paying those double-digit interest rates and this cost her several thousand dollars.
• The Designer: Our next flipper is obsessed with clean, minimal interiors and slick German appliances. Her vision for her flip is taken straight out of a Mies Van Der Rohe picture book, and again she takes out a rather large loan to bring her vision into reality. In the end, the sparse, minimal interior, Italian concrete countertops, and full picture windows didn’t contribute much to the home’s final sale price. Her property sits idly on the listings for many months because her vision didn’t match the expectations of most buyers. While her house sits on the market, she continues to make those hefty interest payments on her larger-than-necessary loan.
Risk less in the case of fix and flip loans by using these simple strategies:
• Consider the minimum amount of renovation needed to bring the property to a marketable standard. The HGTV’er didn’t do this, and thus she took out a loan that was larger than necessary.
• Only add features that add real value. The designer might have remodeled the home in a way that was aesthetically pleasing, but not only was her vision expensive, but it also didn’t mesh with the expectations of most buyers. She took out a larger-than-necessary loan but also the features she added hindered her ability to resell and therefore pay off that loan.
If you don’t employ these tactics, you could end up taking out an unnecessarily large and expensive loan to finance your next flipping project.
Level 4 Funding LLC
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About: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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