Flipping Houses for Profit – 3 Tips to Picking the Right Property
The distressed property investing business can be extremely profitable. And, guess what?
It can be extremely frustrating for the real estate investor who jumps in, purchases a property and accidentally ends up owning a “bad” property.
To avoid the inherent problems that can plague real estate investors who lack the education they need to make great decisions, here are 3 tips you can use to maximize your success as a real estate investor and pick good investment deals. After many years of helping real estate investors locate and purchase good investment properties in Colorado, the MyH-O-M-E.com team offers these tips to both, new and seasoned real estate investors.
Select Your Target Investing Area Carefully
One of the keys to choosing your target investment area lies in knowing current market activity. You should must know at a minimum (1) the average days on market (DOM) for different types of properties, (2) the price to rent ratio in a variety of neighborhoods and (3) the desired BBBG in potential investment neighborhoods (that is, what do people want to buy/rent Bedrooms, Bathrooms, Basements & Garage).
For example: If 3 bedroom 1 bath houses with no basement and a 1 car garage have an average days on market of 197 days but 4 bedroom 2 bath houses with a partial basement and no garage have an average days on market of only 57 days you would be wise to target buying the larger property type.
In this example, you should notice that the garage is not the critical feature. The key here is that you want to choose desirable properties with the right “standard” size and features to help maximize your profits.
Then, plan for a ‘Plan B’. It is important that you don’t overlook the significance of the price to rent ratio. If the investment property you buy doesn’t quickly sell, it may be necessary to fall back on a plan B exit strategy and hold the property longer term. In this case, the stronger the price/rent ration, i.e. the lower your purchase price and the higher the rents, the more likely you are to end up with a positive cash flow.
Determine Your ARV (After Repaired Value) Accurately
Many times when real estate investors plan to fix and flip only to end up at their plan B because the property doesn’t sell. This is usually the result of one of two things.
Real estate investors dropping to a plan B usually (1) miscalculated the ARV at the beginning and just plain paid too much going in, or (2) didn’t fix the property to the appropriate level of fix-up to conform and sell to the neighborhood standards.
To estimate the ARV, let’s first define it. The ARV of your potential real estate investment deal is defined as the true and actual price the property will sell for in 30 to 60 days after the completion of your rehab. (this number is included on my daily property worksheets)
To accomplish this you must use recent comparable property sales. Do not use “listed” properties nor “under contract” properties to determine the ARV.
Recent sales prove what your future exit values really are. In a distressed property market with declining real estate values, this can be confusing to the novice or even mid-level experienced real estate investor. In time, you will become more and more efficient at determining your ARV.
Evaluate Property Condition Levels
It is important to realize that when it comes to selecting profitable real estate investment properties and choosing the level of rehab that you will budget, there are three distinct levels of property condition in nearly every different neighborhood.
The differing levels of property condition that reflect large ranges in property values are (1) distressed properties that are usually vacant with significant improvements required (2) properties that are being lived in and may have some level of improvement done by a homeowner hoping to sell their property and (3) properties that have been recently and totally renovated by local real estate investors.
Understanding the affect on value of these three distinct real estate property conditions can be extremely helpful as you evaluate the maximum price you can pay for any given property. Considering these condition variations is also helpful as you select the level of fix-up appropriate to maximize your profits.
Fix It with Price
The old adage that ‘price cures all’ can not be more true than in real estate investing. When in doubt, buy cheaper. If you buy low enough, it is almost always possible to profit by fixing and then selling low.
The first three tips really are designed to help you buy right. They essentially point you in the right direction so that you maximize your opportunity to exit and quickly as you choose with profits in hand.
Real estate investing is about making profits, getting in and getting out or getting in for the long haul and staying the course. Buy right, don’t be greedy and your real estate investing business will succeed.
Summary Thoughts & Additional Training Tips
If you consider these three tips as you evaluate your potential real estate investment deals, you will be armed with the information you need to make an informed decision. As I started this article, the distressed property investing business can be extremely profitable for the real estate investor equipped with the right tools.
