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Flipping is another way of adding equity either by:
1. Buying the property cheap enough so after you will fix the property - you will have enough equity to sell it for a profit (fix and flip) or
2.Buying the property cheap enough and then sell it immediately because no work is needed. I like this method more then the previous one because it entails less work, unforeseen repairs that are needed and less risk and headache. I call this method "sleep and flip" lol, some also call this method wholetail.
In order to have these flips successfully generating you profit- you first will need to have a realtor that will give you a CMA (comparison market analysis ), which will give you an estimate based on comparable sold properties which will estimate for you how much you can sell the property for once its in a repaired condition.
Then you will need to create a "flip- performa" which is usually a spread sheet of factoring all the costs together with the estimated resale price to see if the flip will be profitable enough to be worth your while.
In the flip- performa make sure to to factor 5-7% for closing costs expenses as well of the
estimated repairs costs as well of the
Holding costs which are the interest /loan costs (if you purchasing it with a debt or a mortgage) , the insurance cost, property tax cost and make these proportional to the time you estimate it will take to sell it. Example : if the annual interest is $10,000 and you estimate to only hold it for three months so factor in $2,500 which is a quarter of $10,000. Same goes with insurance and property tax: If the costs for these two is $1,000 divide it by a quarter.
It's also important to have a plan b to rent the property out in case you will not be able to sell it for a profit or for a break- even. Make a cash flow performa and find out if you estimate to be able to at least have some cash flow once you rent it to a tenant.
How to create a performa (projection of income /expenses) for a buy and hold properties:
How to create a performa (projection of income /expenses) for a buy and hold properties:
INCOME:
How much your income will be before and after you increase all the rents.
Do you estimate other revenues like late fees, pet fees and other fees? If so -How much?
EXPENSES:
1) Factor in and Find out how much the last property tax was. You can google the name of the city you are buying the property and the find out what county it belongs to. Then google "the county property tax search". Over there you will see the last property tax owed or at least you will be told what is the assessed value (assesed value is not the market value and it used to determine how much property tax will be assessed to the property ) and the tax rate which you will have to multiply these two factors together to come up with the answer. Below you will find a link for property search/ tax websites:
2) Ask an insurance agent a quote. I work with Patrick Collins from GOOSEHEAD insurance. feel free to email him for a quote at patrick.collins@goosehead.com. I usually pay $1,300-$1,400 annual insurance on 4plexes in Killeen and about $600 for a single family so you can estimate this cost based on my figures as well
3)give an estimate of monthly cost of repairs deducting the estimated reimbursements from Tenants . This amount can vary based on many factors like amount of work needed, age of the property, is there a tenant in the unit or units etc..
4)Are you going to self manage and pay for leasing fees or will you be hiring a property management company will cost you 8-10% of the collected rent so factor that in
5)Factor in principal + interest expense if you will get a mortgage.
6)Factor in vacancy rate which is also known as loss of rent factor. For Killeen area for example I use 5% of the collection.
Below you will see a link for a performa for a 4plex I own at 3202 Hereford Killeen so you can learn how to create one yourself:
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