Simple Formula for Fix & Flip Profits

One of the most common ways to make money in real estate as a real estate investor is to buy a rundown house, repair it, and profit. There are 2 basic strategies here: fix and flip properties, or rehab and rent them. While on the surface this seems pretty simple, many beginning investors make the mistake of buying retail and then hoping for a profit once they fix it up.

I was talking to some other investors over the weekend and one of them put it in a very simple way:
1) Buy a cheap property.
2) Finance through a hard money lender.
3) Rehab it.
4) Tenant it.
5) Refinance it.

So now for a little more detail:

1) Buy a cheap property - this could be a foreclosure, pre-foreclosure, auctioned property, REO (bank-owned) or FSBO. Remember that in real estate, you make your money when you buy, not when you sell, so buy as low as you reasonably can.

2) Finance the purchase through a hard money lender. This is going to be a higher interest rate than a traditional loan, but 2 key advantages are that 1) you can often get the funds in a matter of days, not weeks or a month, and 2) lending decisions are made more on the merits of the property deal than your personal credit score (although having good personal credit makes it much easier to refi out - more on that later). Arrange for no payments for 6 months if you can, to give you time to rehab the property and cover any holding costs while your property is on the market. You may pay more in interest this way, but will likely have fewer headaches caused by banks deciding not to approve the loan at the last minute because the property needs too much work, needs a roof, or any number of other reasons why they won't approve a loan on the property as is.

3) Fix up the property. One thing to consider is that you don't want to over-remodel for the neighborhood. There's no sense in being the only house in the neighborhood with Italian marble floors if all the others are linoleum or tile. Sure, it looks great, but you're likely not going to be able to charge enough of a premium rent to cover the additional rehab expense. Simple things that add nice touches and don't cost much extra are great to do, but going overboard won't do much good for your pocket.

4) Tenant it. I'm a firm believer in having a good property manager handle all this. It's important to buy low so that you've got enough room for profit after mortgage payments, maintenance, taxes, insurance, and property management. And property managers are in the business of doing this, so a good property manager will likely tenant and manage a property better than you would, with far less time & frustration on your part.

5) Refinance into a traditional loan. Now that the house is in great condition, and you've got a tenant in it, you're going to be more likely to get a more favorable loan.
Plus, during the months of rehabbing and finding a tenant, you've gotten some extra time to do those things to raise your credit score, so you can hopefully get a better interest rate on your new mortgage.
Or if you haven't, especially in the current climate, you will hopefully have had time to find a partner to qualify for you. Traditional loans are harder and harder to get these days, especially if you've got a score below the bank's requirements. And those requirements are often strict - if the bank says they need a 700 score to do a loan and you've got a 689, you're not going to get that loan from that bank. So keep that credit score high and shop around multiple banks - there is no global standard, so different banks will have different requirements.
Also try smaller banks too - some of them will be more 'hungry' for your business than the huge banks like Wachovia and Bank of America.

New Tools Available on Trulia

A couple of months ago I wrote a post here about some of the various sites that allow anyone to come up with estimates of the value of a property.

Trulia has now added a few new things to their site to make it more useful, more interactive, and more convenient.
Here's an exceprt from an article on Inman News:
The latest batch of new features at real estate site Trulia.com includes a simplified blogging platform, mobile tools for property searches that use your phone as a divining rod for for-sale homes in the area, and information feeds that provides customized property listings and other area-specific information -- including blog posts and other user-generated site content -- within the locations that visitors are searching at the site.

Read the rest of the article here.

Play the Millionaire Maker Game

For those of you in Atlanta, there is a free game-playing event this Saturday evening.


From three-time, bestselling author and Millionaire Maker, Loral Langemeier, comes The Millionaire Maker Game. This game teaches people real world application wealth building skills as they live the life of an entrepreneur- where big deals are done daily.

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Ready to get into the game?

Join Live Out Loud and a Millionaire Game Facilitator as we help teach you how to become a millionaire in 3-5 years.


Come play The Millionaire Maker Board Game, on this Saturday evening, August 9th in downtown Atlanta. There is no cost for admission; this is a great wealth building and networking opportunity.

Visit www.liveoutloud.com/atlantagame to register, and enter "26625" (without quotes) in the "Referred by" field.