What is ‘flipping’ in the real estate investing world?
There is a type of real estate investing which is called “flipping” that I learned at the enlightened wealth institute. It is funny that other industries don’t use the terms as much but in reality, many stock traders and day traders ‘flip’ stocks and foreign currency positions more often than real estate investors. When a stock trader buys a stock at $100 per share and sells it at $110 a share, he or she has ‘flipped’ the stock….yet we never hear such terminology now do we?
Well just like in making money trading stocks, real estate flipping involves purchasing a residential property in a lowest possible price and then fixing it up in order to achieve profitable gains. The primary goal is to sell that residential property in a manner to earn a nice profit, which must cover your effort, time and cost that is invested for repairing the property. I got a great formula while taking a rehab course from the enlightened wealth institute that basically goes like this:
1. Determine the Value you can sell the house at once fully repaired based on today’s market
2. Determine the costs of fixing it up (e.g. estimate of carpets, paint, and other rehab costs)
3. Add a 10% ‘OOPs’ Factor to your costs as you might go over budget of your estimate
4. Determine your ‘financial holding costs’ and cost of funds. For example, if you are using hard money lending from a private lender, then if it is 3 points in and 12% interest - you must account for this in your expenses (so for every $100,000, that is $3,000 for the 3 points and then $1,000 a month for that 1% per month interest payment)
5. Determine your marketing expenses and realtor fees if you use a realtor to sell the property.
6. Then subtract all those amounts from your ‘retail price or price you will sell it for after fixing it up’ and subtract your profit target amount you want to make for this deal.
7. The number is then the maximum amount you can offer to buy that pre-forclosure property or short sale deal.
You will find that often that dollar amount is at least 65% of market value - and that is why investors get into such trouble when they start out in real estate investing as they think getting a house for 75% of market value is a DEAL…when it very well may be a ‘DISASTER’ deal instead that loses them money for all their effort and risk or just gets them into break even as they didn’t plan out all the costs!
AS you can see, the above formulas can help you to invest in real estate foreclosures and short sales that need fixing up…and then you can roll some of your profits earned into repairing another home. It is very important for the real estate investor to purchase such residential properties in the areas that have an excellent market resell value and the places are in vogue. If those refurbished properties are not sold for a year or for a longer time span, you can definitely face some financial problem.