If you want to know how to invest in real estate, it’s important that you know how to determine your finances. Fixing and Flipping homes may not necessarily require much of your own money, and it may be done part time. Nevertheless, if you don’t go into the venture with a good plan, it could really end up costing you. So how do you learn how to invest in real estate and determine your limits and goals without previous experience? First things first, there are two types of residential fix-and-flip investors: Wholesalers and Retail investors.
How to Invest in Real Estate as a Wholesaler
A wholesaler snatches up houses quickly and sells them to other investors. Generally a wholesaler will not put the time or energy into fixing the home up themselves. Wholesalers do not typically make as much profit as the retail investor, but it is considered a safer method of investing and easier for those who have less capital to invest and/or lack the free time necessary for inspecting and researching properties.
How to Invest in Real Estate as a Retail Investor
A retail investor is what most people are thinking of when they hear the term ‘Fix and Flip’. The retail investor buys a home in need of repairs, fixes it up (either themselves or with the help of a professional contractor), and sells the home for profit.
For the purposes of this guide, we will be dealing with the process of fixing and flipping for retail investors.
When it comes to defining your goals, it’s important that you work out the financial details before you begin. You’ll probably want to get pre-approved for a loan beforehand, as this will tell you what you have to work with. Preferably you will have a bit of extra capital with which you can make repairs on the home. Depending on the type of loan you qualify for, your credit, and your lender, you may be able to finance some of the extra repair costs, but you should count on having some extra money in the bank as a comfortable buffer. Many investors choose to work with private lenders. You will have to do some research regarding the options in your specific area. Once you have a figure to work with, you can start breaking down your projected costs.
- Acquisition/ Purchase of home (including down payment)
- Closing costs (if any)
- Holding Costs
Your holding costs are the money you will be spending making mortgage payments, paying taxes, and other charges that will have to be taken care of while you repair the home and then wait for it to sell. It is primarily because of holding costs that you will want the home to sell quickly. It is also the holding costs that many first-time investors forget to average in, ultimately making the project more expensive than they had originally projected and earning them less profit.
TIP: You may find the prospect of finding the right property and calculating your costs a daunting project in the beginning, even if you have a safe buffer of capital you can spend on repairs. However, there are many real estate professionals and investors who may be willing to partner with you and show you the ropes. Don’t be afraid to network and meet up with someone who has more experience. You’ll make less money for your investment initially, but it could save you the hardship of making a bad investment in the long run.
Once you know how to invest in real estate and have a figure to work with, you can move onto researching properties that fit within your financial guidelines. Move on to Step 2: Researching and Defining Your Target.