rental property house at dusk

How to Scale a Rental Property Portfolio Quickly

Flipping houses, otherwise known as wholesale real estate investing, can be big business. On the other hand, it can also lead to financial ruin if not done properly. Whether an investor wants a stream of side income or is going into house flipping full time, they will do themselves a disservice by not treating their real estate investment portfolio like a true business. So for the first-time real estate investor, here is a simple guide to the business side of flipping houses so that the next fixer upper doesn’t break the budget.

Buying a property

When it comes to the initial home buying, investors shouldn’t just snap up the first home that they see. Not all fixer upper homes will be worth the expense in the long term. Investors should take stock of current market conditions and their own ability to perform or contract out the necessary repairs. It’s a business consideration that factors in one’s skill, time and financial resources.

Hour-long home makeover shows remain popular and make the flipping process look fairly straightforward. There might be some hiccups along the way for the sake of drama, but by the end, there’s always a perfect home and happy family. But it’s important to remember it’s mostly the work of television magic. 

In reality, there will be unexpected bumps in the road, complications with planned repairs or other obstacles. And it’s unlikely that a new investor will have a similar budget to a popular TV show. Investors should follow the old advice of “hope for the best, prepare for the worst” when making a plan for their next fixer upper. Don’t make the mistake of buying a house for too much and spending even more on renovations only to sell it at a loss.

Is there a trick to making a good offer?

When it comes to financing and making an initial offer, a general 70-percent rule is advised. This rule means that one should offer no more than 70-percent of a property’s ARV (after-repair value) less the cost of repairs. So if a property should sell for $150,000 after repairs, and an investor plans to spend $25,000 on those repairs, the initial offer should be for no more than $80,000. Coming up with the figures for the ARV and cost of repairs is where the investor’s knowledge and research come in.

Fixing a property

Most fixer-uppers won’t be improved by a few well-placed nails and a fresh coat of paint. Often they will call for major renovations before the investor can expect to see any returns. This means the investor will either need to harness their own skills to get the repairs done or hire skilled labor to do it for them.

Which option is best? There’s no simple answer here, and it will depend on the individual investor. Both have their advantages and drawbacks.

Should an investor opt to make the repairs, they can’t be rushed or done in half measures. Remember that the property should be able to pass inspection and reflect the new asking price when it hits the market again. Worse, overestimating one’s skills can be a fast track to the ambitious investor getting hurt on the job.

If the investor chooses to hire skilled labor to finish the repairs, that’s another expense to deduct from the profits of the final sale. They may also need to hire many tradesmen depending on which repairs are needed: plumbers, electricians, roofers and so on. In either case, there is still a time investment at this stage whether the investor performs the repairs or supervises others.

Selling a property

While patience is often a virtue at the start of the house flipping process, at this stage it’s best to get your property on the market and sold as soon as possible. The clock is ticking now. The longer an investment property sits unsold, the more an investor is on the hook for finance charges, property taxes and other expenses. A successful investor should know how to market and sell a property in their portfolio.

Conclusion

Buying a fixer upper and flipping it for a profit might sound like a good investment strategy at the start. But to grow your real estate business, there is a lot of planning and research necessary to be successful. First-time investors should be aware of the upfront requirements of time, money and skill. Flipping houses is by no means a get-rich-quick scheme, but an investor who plays their cards right can do well.

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The above is provided as a convenience and for informational purposes only; it does not constitute an endorsement or an approval by Kiavi of any of the products, services or opinions of the corporation or organization or individual. The information provided does not, and is not intended to, constitute legal, tax, or investment advice. Kiavi bears no responsibility for the accuracy, legality, or content of any external content sources.