Fixing and Flipping Houses For Beginners

On today's podcast episode, I talk about fixing and flipping houses and understanding how fixing and flipping houses works.  When you want to fix and flip a house, before you get started it is important to understand who you are selling the house to. I always teach my students to look at a fix and flip in reverse - meaning understand who you are selling the house to first.  Your biggest pool of buyers are going to be first time FHA buyers. Those first time home buyers are buying a home with just 3.5% down. The demographic of a first time home buyer is a couple looking to move from an apartment to a house. The average age for an FHA buyer according to FHA is 31 or 32 years old.  The next thing you need to look at is affordability. A lot of beginners mess this up because they figure if they are going to be fixing and flipping then they may as well go for a higher priced house with bigger profit potential to make as much money as possible. I don't advise that you do this, because as you go up in price point there is a lot more risk. If you want to make $40,000 or $50,000 on a fix and flip, then fixing and flipping just two houses per year could replace your job. The type of fix and flip you should be focusing on is the entry level bread and butter homes that are affordable. You should understand that these are the types of homes that first time home buyers are looking for. If you are fixing and flipping houses to first time home buyers who your potential buyers are, and what they look like is all about affordability. The median household income in the U.S for a couple is approximately $70,000. Mortgage brokers say you should not spend more than 30% of your gross income on your mortgage so that works out to be around $22,000 per year. Let's round that up to $24,000 per year and that means that the average couple with the median U.S household income can afford a $2,000 per month mortgage payment.  Imagine yourself as that buyer looking to buy a house with a $2,000 monthly payment. Use Google's free Mortgage Calculator, and calculate what the house price would be with today's 30 year fixed rate mortgage rate that would result in your having a mortgage of $2,000 a month. Maybe they can afford $2,100 or $2,200 or even $2,400. This is the price range you should be focusing on.  This affordability issue is very important to understand. That is why you should look at in reverse focusing on your buyer (not you). As you go up in price there are less people that can afford a home. There are way more people that can afford a $500,000 home versus a million dollar home. And there are a lot less people that can afford a $500,000 home than a $300,000 home. Many people simply don't earn enough income to be able to afford a higher priced home. So if you are fixing houses to flip or sell to other people, then consider where your biggest pool of buyers would be. When you look at it this way, you realize how important affordability is.  So the first thing you need to understand if you are looking to fix and flip houses is affordability You need to focus on finding a neighborhood or city or target market where houses are more affordable. Based on current 30 year fixed mortgage rates, A couple earning the median income of $70,000 per year can afford a home that is priced no higher than $250,000. You may live in a big city where prices are quite a bit higher than that amount. But if you move away 30 to 45 minutes, in most cities you will find other neighborhoods that are more affordable that are not as close to downtown.   Imagine you are the buyer and ask yourself this question. If I made $70,000 a year, where could I afford to live? You may have purchased your home years ago, and it may have increased in price substantially so you may view your neighborhood as affordable. But what you need to understand is a new buyer, buying today is looking at today's prices (and today's mortgage rates) not what you paid. So a neighborhood which may have been affordable ten years ago is no longer affordable today. So the key question is where can they afford to buy based on their current income? Affordability goes hand in hand with understanding where people are moving to. You can look at demographic data from the U.S Census Bureau and companies like U-Haul that provide moving data to analyze where people are moving to. You are looking for cities that are growing, that have population growth, and that have job growth. For example, in the State of Florida, according to U-Haul more people are moving to the Melbourne, Palm Bay area of Brevard County than anywhere else in Florida. If you wonder why, look no further than affordability. People will move to places that are affordable where there are jobs. These places are growing. The Space Coast of Florida is a perfect example of this. It's more affordable than South Florida, the population is growing, and there are many jobs being driven by employers in the Aerospace Industry.  So based on household income, the target market audience that can afford to have a monthly mortgage payment of $2,220 a month can afford to buy houses up to $250,000. So the question is where do you find houses like this? That takes us to the discussion on target markets. As I mentioned above, Brevard County is affordable relative to where I live. Unfortunately it's a 3 hour drive from me but that is where I see buyers moving to.  The next thing to focus on is the spread between what you are paying for a house and what you are flipping it for. If you know you want to flip a house to a first time home buyer for $250,000, then a spread of $100,000 would mean you paying no more than $150,000 to buy this house.  If you are buying houses from motivated sellers at a discount, then you can find houses like this. You are looking for vacant, boarded up houses, hoarder houses, and houses that have been inherited and have been neglected. These houses may be completely outdated and vacant for many years. Inherited and Probate Houses are usually our best deals. These houses fixed up nicely could sell to a first time home buyer for $250,000. You should be paying no more than $150,000 to buy these houses from motivated sellers. Another more exact way to calculate your maximum offer price is by using the ARV Formula. ARV stands for After Repair Value, or what a house would be worth fixed up. This is another way of saying what you could sell the house for or what it would appraise for.  The ARV Formula for purchasing is  ARV x 65% Less Repairs = Your Maximum Offer Price For example let's look at a $200,000 ARV house that could sell for $200,000 (or that would appraise for $200,000). That's the ARV. So you take that ARV of $200,000 and multiply it by 65% and that would be $130,000. If it cost $30,000 to fix up this house, then $130,000 less $30,000 would give you a maximum offer price of $100,000. This is exactly $100,000 less than the ARV of $200,000. The sweet spot that I like to buy at (and teach my students to buy at) is these lower priced houses that you can flip for $200,000 to $250,000. So these houses you are paying around $100,000 to $130,000 to buy them. And you have a spread of about $100,000 from your purchase price and what you could sell them for. If you are buying these types of houses at a discount, you are not buying them with a mortgage. Since these houses need work, you would not be able to get approved for buying a house like this with a mortgage. It's doubtful that a motivated seller would wait that long to see if you could get approved for a mortgage. And if the house needs any repairs then you can definitely not get a mortgage. Also, your postcard that you mailed to the seller says something like "We Buy Houses For Cash" or "Cash Offer For Your House" so they are anticipating a cash offer and they know it will be lower than a regular conventional mortgage offer. That is why they called you and not a real estate agent. So your offer needs to be all cash.   To buy these houses, you would need to use your own cash, or you would be borrowing money from a private lender like me who is using their own private funds as a private lender. Typically these private lenders are going to want you to have some form of a down payment (at least $10,000). If the amount of repairs is $30,000 then that would be a total of $40,000 out of pocket, but keep in mind that these are not the only costs that you will have. You will have closing costs, points, fees, insurance, which may add up to $10,000 so that would put your out of pocket cash at $50,000.  Also when you own the property while you are repairing it and before you sell it, you will have to pay monthly costs for mowing the lawn, paying the water, and paying the electric bill. You will also have a monthly interest payment to the lender which may be $1,000 per month. So you need to budget for, and factor all of these costs in to the equation. A house with no damage that just requires cosmetic cleaning will cost less out of pocket. If repairs are $10,000 instead of $30,000, then in the above example you would only need to come out of pocket $30,000 instead of $50,000. Conversely, if the house needed a new roof, new air conditioner, plumbing or electrical, the repairs could be substantially higher. For this reason, if you are a beginner, I recommend you stick with cosmetic fix and flips only. Look for houses that have a good roof with no leaks, no plumbing or electrical issues and houses that already have central air conditioning. That way you only need to focus on repairing the interior (cosmetic repair).  One self limiting belief that stops new investors is them reading this and saying to themselves "Well I don't have $30,000 to $50,000 so I can't fix and flip houses". I like to get my students to think creatively and I review their entire financial situation. When I meet with a new coaching student, I look at them like I would look at a company. I do this for all of my coaching students. I want to get a snapshot of their income statement, their balance sheet and their cash flow. I need to see how much they are making versus how much they are spending. Are they making more than what they are spending, or spending more than they are making? Do they have credit card debt? Do they have other debts? What kind of debt and why? Do they have assets and if so what are they. What kind of liabilities and debts do they have including credit cards and student loans. By analyzing their situation, I can help them tap into resources that they may not realize that they have. For example many of my students have equity in their homes and 401k's but they never consider tapping into that equity or borrowing from that 401k. Many of my students have decent credit and have tens of thousands available on their credit cards. I point out to them that they could be purchasing materials at Home Depot using a Home Depot Credit Card. And they could be paying their contractor or handyman with a credit card too. They could borrow against their 401k, and they could borrow the equity in their home with a Home Line of Equity or HELOC. I also see many students that have stock and mutual fund accounts, and even significant amounts of crypto and Bitcoin. Many people do have options and ways of coming up with enough money to do a fix and flip. Learn how to be creative with your finances to make this happen. If you stubbornly say to yourself that you can't touch this and you can't touch that then you are limiting yourself.   The majority of the people that I talk to have some credit card debt, spend most of what they make, and don't save much. But after further analysis and discussion we start uncovering that there is equity in their home, that they have a 401k at work, that they have an emergency savings account, they have a stock account and they have some crypto. Learn how to be creative with your finances. Tap into your equity in your home and your 401k and use a combination of this money and some savings and credit cards and Home Depot Cards to get your cash stake together. Learn how to think creatively. If you are reading this and you have no assets and you are spending all of your income and living paycheck to paycheck then focus on learning how to increase your skills so that you can make more money. One great skill set to learn is how to wholesale and flip houses for a profit to other investors. You could wholesale and flip houses for $10,000 or $20,000 profit per house. Learn how to do this, and you will start marking more money. Use that additional money to pay down your credit cards and to start saving. Once you have saved $30,000 to $50,000 you will be ready for your first fix and flip.   If you have a job, and you have decent credit, a 401k, and you have some equity in your home then you have options. You are simply not availing yourself of thinking of these options. You must watch out for this because this becomes a self limiting belief where you say to yourself "I want to fix and flip houses but I don't have $50,000" and then you just shut off all possibilities in your mind. This is bad. It is very self limiting. It holds you back. We spoke about the ARV formula, and the spread of how much you should offer, and your maximum offer price relative to the ARV. We spoke about target markets, and how to focus on affordable markets where first time home buyers could afford to buy a home. Let's talk now about repairs. The typical 3 bedroom 2 bathroom home is around 1,200 square feet under air. So what would it cost you to renovate the interior of a house like this?  Most rehabbers are paying between $25 to $35 per square foot. I would prefer to see you paying closer to $25 per square foot.  On a 1,200 square foot house, $25 per square foot would be $30,000. That should cover all of the flooring, interior paint, new kitchen and new bathrooms. You should have a brand new interior and the house should look brand new. You can get a stainless steel package delivered and installed for $3,000.  So on a 1,200 square foot, 3 bedroom 2 bathroom house your repairs including appliances would be $33,000.  Many of the houses that you are going to be looking at are going to be cosmetic repairs. For example, a seller who calls you from a postcard that you mailed to an inherited property list or probate list. They may have recently inherited a property from their parent who had passed away. Their parent may have lived in that home for 50 years, and it may be very outdated and faded and worn. It may have old linoleum flooring in the kitchen and bathrooms, cabinets that look really old and old tile in the bathrooms. But structurally, other than cosmetics it may be in great condition.  On a house like this, you could replace the linoleum and carpet. You could put laminate flooring in the family room, living room, hall ways and bedrooms. In the kitchen, you can replace the cabinets, put a new granite or quartz countertop, add a new backsplash and put new stainless steel appliances.  In the bathrooms, you are going to put new tile on the floor, new toilets, new vanities, reglaze the tubs and retile the walls in the shower and around the tub. The key thing is to look for in a cosmetic repair is houses where the roof is okay, where the house already has central air, and where there are no plumbing or electrical issues and all you need to do is cosmetic repair. That is the type of house that I would like to see you do as your first fix and flip. This makes your rehab much easier. You don't need to put a new roof, you don't need to add central air. All you need to do is update the interior. And you can do that for $30,000. Add the $3,000 for the stainless steel appliance package and you are at $33,000 in total repairs. And it won't take long to do this type of rehab. You can do it in as little as 6 or 8 weeks. So let's assume you purchased this house from a motivated seller for $100,000, and your repairs were $33,000. Let's say that closing costs, points and fees cost you $7,000. So your total cost is $140,000. And let's say your goal is to try and sell this house for $229,000. If you have 5 percent in commission and closing costs, you would net $218,000. If you deduct the purchase cost of $140,000, that is a total profit of $78,000. Deduct from that the holding costs including interest to the private lender. If you borrowed $100,000 you have a monthly payment of $1,000 so if it took you six months to flip the house, then you need to deduct almost $6,000. Then you have to consider other holding costs including property taxes, insurance, paying the water bill and electric bill and mowing the lawn. Maybe when you are done the net profit is now $65,000.   Buying a house for 100k and netting 65k is a great profit spread. Maybe you bought it for $120,000 and only made $45,000 instead of $65,000  So on a 200k house, looking to buy at 65% is 130k less 30k in repairs. So my offer would be 130k but maybe the seller rejects that, and the lowest they are willing to go is 120k. And I calculate that I could probably make 45k (if I can sell it for $229k).  Once you understand the above, you need to make sure that you understand that one of your critical key components is the cost of the repairs which is made up of material and labor costs. So that $30,000 repair estimate, you need to understand how much of that is for materials and how much of it is for labor. It could be $12,000 in materials and $18,000 in labor. I teach this in detail at my Fixing and Flipping Houses Boot Camp where we take my students to Home Depot. I go aisle by aisle with them, explaining to them the material costs of cabinets, tile, counter tops, laminate flooring, paint, backsplashes, drywall, toilets and vanities. Your material costs are fixed. Once you understand material costs you can estimate exactly what your materials will cost you. The critical component is labor. How long will this job take them to complete? How much are they making per hour? What is their profit on the job? What if the job takes longer? If you don't understand this, then what will happen is you will want to pay $30,000 for a rehab and your contractor will tell you it will be $55,000. This will present a problem for you since that is cutting into a lot of your profit. So the first thing you need to do is build a crew. That is one of the biggest challenges for you when you are starting out and also why many of my coaching students ask to use one of my crews for their rehab. This is one of the biggest benefits of my coaching program. They are looking for someone to lend them the money to buy the house, they are looking for guidance on which house to buy, and whether or not they should move forward, and they need expertise and advice on how to rehab the house and how to get a crew to rehab the house. That is where I step in and help them as a coaching student.  As an investor you need to understand what your labor and material costs are. If you don't, then you will pay $55,000 instead of $30,000 to do a rehab. And you need to learn how to build a crew. So in order to be successful at fixing and flipping houses, you need to be able to estimate what you could sell the house for (ARV), what it would cost to repair the house (repair estimate), and the maximum amount you would be willing to pay (maximum offer price). Those three numbers, ARV, Repair Estimate, and Maximum Offer Price are really drilled into my students heads at every single real estate training event that I teach at. I want to make sure they understand them.  Also understand that your initial estimate for repairs may end up being low since things may come up which you did not anticipate. There may be termites or other things that you did not factor into your original estimate. So be conservative with your repair estimate and factor in an extra $5,000 for repairs that are not anticipated. Also be conservative with your ARV. Maybe the house sells for less than originally anticipated. Budget for this and factor that into your offer price. Don't take short cuts when fixing and flipping houses. Remember you are selling this house to a first time home buyer who may be living in that house for many years. Make sure you do the work right. If you find termites, then stop and tent the house and treat the termites before putting up the drywall. It costs you more money and it cuts into your profits but it is the right thing to do. And my father always taught me to do the right thing. Make sure you pull permits for all roofing, electrical, AC, Plumbing or anything else that requires permits.  Sticking to your maximum offer price is very important. If you don't then your profits will suffer and your fix and flip may even turn into a breakeven scenario where you do all this work for nothing. If your maximum offer price is $120,000 then you need to stick to that price and walk away if the seller will not sell that low. Many times the seller will initially take a higher offer from a wholesaler whose offer is higher than yours. But then the wholesalers will end up cancelling on them. I tell the seller, if someone will give you $130,000 or $140,000 then take it. But if something falls through, and you need me to buy your house I will pay $120,000 and I will close in 21 days. Many times these sellers will come back to me after a few weeks and I will end up buying their house after the wholesaler cancelled on them.  What about a house that needs more repairs than just cosmetics? What if the house needs a new roof, new roof trusses, new electrical, new plumbing? I recommend that you do not start with houses like this because they have more risk, will take more time, and will cost way more money out of pocket.  Stick to bread and butter fix and flips that require cosmetic repair only. And stick with the target markets in the price point that I am talking about. As your experience level increases, you can move up in price but I recommend that you don't. I have been rehabbing houses for 21 years and I still focus on the entry level houses like I am telling you to buy.  Cosmetic repair houses are easy to do. You can fix a house in 8 to 12 weeks. Get the house listed on the MLS and sell it. Get your license that will help you if you can list the house yourself instead of paying a listing agent to list it for you. The process of understanding fixing and flipping is not rocket science. It is something that you can learn. If you can do two fix and flips a year with a $45,000 net profit you can make $90,000 per year. This may or may not be as much or more than you are making on your job. Imagine if you could save $90,000 a year. That's only two fix and flips (one every six months). You can find two houses a year. Anyone can. If you are marketing to motivated sellers you will find these houses.  If you want to learn how to fix and flip houses I recommend that you attend my Fixing and Flipping Houses Boot Camp. Understand that there are motivated sellers out there who would sell their house for way below market because they are motivated to sell. When you market to these sellers you will come across many different sellers and many different types of leads. some houses will be houses that you want to close on for fix and flips. Other houses you may want to keep as a rental. And other houses you may just want to wholesale and flip for a quick profit. That is why I recommend to my students that they learn how to be a "Complete Real Estate Investor". You want to monetize the cost of the leads that are coming in. Each lead can cost you $200 or more. Make sure you are getting a return on this investment by wholesaling some of these houses. You can make very good money fixing and flipping houses. My student Ansar made $110,000 on his first fix and flip. This profit for him was equivalent to two years of his take home salary. That type of profit is pretty rare. It's not every day that you see spreads like this on a fix and flip. But I have made $120,000 on a fix and flip and $110,000 on another. My student Chris made $90,000 on one of his fix and flips so you can make these types of profits but not every day. But $45,000 you can do easily on a fix and flip if you buy it right.  if you want to learn how to fix and flip, make sure you come to my Fixing and Flipping Houses Boot Camp. Also consider attending my other real estate training events.  Click on https://www.lexlevinrad.com/events to see the dates of our upcoming real estate training events. To learn more about the Lex Levinrad Real Estate Training Program call (561) 948-2127 and speak to one of our Student Support Managers.  To apply for our real estate training program complete the application at https://www.lexlevinrad.com/application