Fixing and flipping is a real estate investment strategy by which a property investor purchases a property, remodels it, and then resells it for a profit.
Fix and flips usually occur within a short period of time—typically 12 months. That’s because quickly reselling the property allows investors to avoid paying additional costs and taxes (property tax, interest rate, and more).
Because the strategy presents a relatively low barrier to entry, fixing and flipping is one of the most popular real estate niches for new investors.
Fix and Flip Value vs. After-Repair Value
The success or failure of your fix and flip strategy hinges on your understanding of the difference between a) fix and flip value and b) after-repair value.
- Fix and flip value — the cost of acquiring the property + the cost of repairs
- After-repair value (ARV) — the approximate market value of the property after repairs are completed
The expected profit of any fix and flip = (ARV) – (fix and flip value).
Financially, it makes zero sense to purchase a house, spend $50,000 on renovations, only to sell it for only $50,000 more than you paid for it.
You’d expend months of time and effort on a real estate venture that generates no profit.
Instead, seasoned investors might spend $10,000 on new plumbing and electric infrastructure in order to add $20,000 to the resale price.
In that scenario, a mere $10,000 worth of renovations would yield $20,000 in ARV.
That’s a $10,000 profit.
Why would new homeowners buy a Fix and Flip?
New homeowners might buy a fix and flip property for various reasons.
They might not be inclined to do the renovation work themselves, or they might not even know-how. Perhaps they don’t know any reputable, experienced contractors.
Additionally, many homeowners want the experience of moving into a home that’s ready to go from the time they make their first down payment.
Fix and Flip Business Plans: How they work?
Fix and flips might seem straightforward in theory, but they can quickly become complicated. That’s why it’s often a good idea to draft out a Fix and Flip Business plan before investing in a property.
It’s especially a good idea if you’re raising money from outside capital sources to fund your purchase or rehabilitation work.
We’ll break down a sample business plan below, but here are 3 things to keep in mind as you create your Fix and Flip strategy:
- Understand how your local real estate market operates (we’ll cover this more in a sample business plan below).
- Learn and understand the types of investment property and what specifically makes certain properties “good” investments.
- Research different lenders and financing options to determine which is best for your fix and flip strategy.
Example of Fix and Flip Business Plan
Below is an example of a fix and flip business plan with 6 separate components.
Not all plans follow this exact rubric, but it’s a useful starting point if you’re thinking of fixing and flipping.
Your executive summary will provide a high-level overview of your entire plan.
It usually ranges from 1-2 pages, and it includes the following:
- Who: Introduce your business, your name, location, and relevant contact information.
- What: Describe the problem you’re solving—what’s your value proposition for potential investors or homeowners?
- Target market: Who is your ideal buyer? What type of home are they looking for? Why? Show a detailed understanding of your target market
- Competition: Who else offers similar services? Why are your services better? How do you differentiate yourself?
- Team: Introduce your management team and provide a brief overview of their skills and experiences—why are you the right team to make this investment?
- Financial Summary: explain your business model, and describe your startup costs, revenues, and liabilities. Mention any funding needs here.
Always keep your executive summary brief and to the point.
Your market analysis should validate your investment thesis.
In this section, you’ll provide an overview of properties in the relevant neighborhood and assess the target value of your specific investment property.
Consult both primary and secondary market sources to get a good idea of the market conditions and your investment opportunity.
Your timeline will provide a month-by-month outline of all the work that will be done on the property.
Specifically, your timeline will cover
- Scope of work
- Project length
- Overall cost
Always budget extra time in your timeline for unforeseen delays.
When it comes to Fix and Flips, nothing ever exactly goes to plan, so expect delays.
Develop contingency plans that will still allow you to reach your goals.
Your financial outline will outline the total amount of financing you’ll need for your Fix and Flip.
It will also help you track your finances so you can make sure you’re on track to actually make a profit from your Fix and Flip.
Generally, most financial outlines include the following elements:
- PnL (Profit and Loss) Statement: explains how you’ll generate a profit from your Fix and Flip. List all revenue and expenses, then document the total amount of net profit or loss.
- Cash flow statement: if you’re operating a Fix and Flip company, document how much cash your business has brought in, how much cash it paid out, and the amount of ending cash balance for each month.
- Balance sheet: a snapshot of how your company or investment is performing at any given moment, which includes how much money you have in the bank, plus accounts payable and accounts receivable.
- Use of funds: include this section if you’re seeking outside investment. It should explain how you’ll use investors’ money,
This section will describe your financing sources, which might come in the form of specific “Fix and Flip loans.”
Fix and Flip loans might be personal loans, hard money loans, or other types of loans. It all depends on which lender you work with.
When deciding how much you need to borrow for your fix and flip strategy, take into account both the purchase of the property itself and the funds necessary to complete the necessary repairs.
In some cases, especially if you’re a first-time fix and flipper, you might need to take out 2 separate loans.
Under your financials, you’ll also need to provide a brief overview of your personal financial information.
Lastly, remember that your credit score should be at least 580-620 in order to secure loans from most lenders.
Exit strategy and backup plan
“Everybody has a plan until they get punched in the mouth.”
Mike Tyson’s famous boxing advice applies to your Fix and Flip strategy.
That’s because things rarely go to plan.
- Maybe the work takes longer than necessary because your contractors discovered a serious structural problem with the house.
- Maybe your contractor simply quits.
- Maybe you can’t secure enough financing to finish the rehab work.
- Maybe you can’t find a buyer for the finished house.
That’s why any good Fix and Flip plan has built-in contingencies and an exit plan clearly defined.
For instance, if you can’t find a buyer for the finished house, consider renting it out for the short-term. Make sure you raise more than enough capital to pay your contractors, in case they find problems that need extra time and attention.
The more you ideate potential problems—and generate solutions—the more ready you’ll be when things go sideways.
Common Fix and Flip Pitfalls
Here are 3 major pitfalls to avoid as a Fix and Flip business owner:
- Inability to identify quality property investments
This is the core of any successful Fix and Flip business—your ability to accurately assess quality real estate.
In other words, you need to understand both the cycles of the housing market and know what buyers are looking for.
Every property for sale won’t make a good fix and flip. That’s why you need to develop, through education and experience, your sense of what’s a “good” property investment.
One of the best ways to get this knowledge is to hire experts.
They’ll be able to tell you what types of houses in your neighborhood actually sell, for how much, and what makes them attractive investments.
- Falling behind schedule
Fix and Flips are all about timing. You want to get your property remodeled and back on the market as quickly as possible.
The longer you wait, the more money you’ll lose.
Unfortunately, you’ll probably run into scheduling issues—that’s why you need a contingency plan. Can you use alternate materials? Hire another contractor to work faster?
- Inability to raise enough capital
Money is one of the most significant limiting factors when it comes to fixing and flipping properties.
The amount of money you’re able to raise will determine which properties you can invest in.
Remember that you’ll need to budget for both the cost of the property itself and the cost of the renovations. Both of these expenditures can add up quickly.
Pros of Fix and Flips
- Immediate equity
Purchasing a fixer-upper immediately gives you equity in the property (also known as “forced appreciation.”)
Both your equity and capital investment in the property can increase in value because real estate historically appreciates in value and the more the property appreciates, the faster your equity will grow.
- Profit potential
Fix and Flips are attractive to many investors because of the potential for profit.
The cash flow you can generate from flipping homes can far exceed what you’ll ever make in a traditional 9-5 office job.
- Lack of Competition
Depending on your target market, you’ll face significantly less competition in the Fix and Flip market than you will in the retail market (for move-in ready homes).
Cons of Fix and Flips
- Risky and Daunting for newcomers
Entering any new investing space can feel daunting. There’s a lot to learn—and that comes mainly through experience.
Additionally, if you make a poor purchase choice or fail to create a back-up plan, you might actually lose a significant amount of money.
- Volatile Markets
Understanding market trends will help you decide when to move on a property, and when to wait.
Unfortunately, markets often shift with minimal forewarning.
If the market tanks, you might find yourself unable to sell the property you rehabbed.
Fix and Flip FAQs
Is it hard to Fix and Flip?
It depends on your experience level and your ability to secure financing.
Like most property investments, you’ll need to rely on a loan of some sort to complete your Fix and Flip.
If you have a high enough credit score to secure a loan, then you’re all set in terms of financing.
In terms of experience, it takes time to develop a good real estate sense and hone your ability to read the market.
That said, remember that there’s a learning curve when it comes to executing a successful Fix and Flip.
What financing options are there for a Fix and Flip?
Fixing and Flipping houses is expensive. You’ll not only need money to buy the house itself, but you’ll also need renovation funds, the ability to cover property taxes, utilities, and homeowners’ insurance until you eventually sell the property.
Some of the best financing options for a Fix and Flip include:
- Hard money loans
These loans typically come with terms of less than 1 year and interest rates of 12-18%, plus 2-5 “points.” A point equals 1% of the loan amount.
If you borrow $200,000, and the lender charges 2 points, then you’d pay 2% of $200,000, or $4,000.
Hard money lenders let you borrow a certain amount based on your property’s after repair value (ARV).
For example, say your property costs $150,000, but the ARV is $300,000. Assuming you can borrow up to 70% of ARV, you’ll be able to borrow 70% of $300,000, or $210,000. After paying your $150,000 purchase price, you’ll have $60,000 left over to finance rehab work, lender fees, carrying costs, closing costs, marketing expenses, and more.
- Private lenders
Private lenders are individuals with a significant amount of capital that they want to loan you in order to finance a Fix and Flip. Typically, these investors will operate like a hard money lender, except with better rates and terms.
Additionally, private money lenders tend to be more open to negotiating payment terms. In fact, some might even be willing to act as a partner on the deal and share in the profits in exchange for not charging you interest.
Get in touch with private lenders through your own personal network or through local real estate networking events. Private lenders may charge you up to 8-12% interest, plus 0-2 points. Compare that with the 12-15% and 2-5 basis points that hard money lenders will usually charge you.
Just like a bank or a hard money lender, private lenders take first position lien on the property.
Are Fix and Flips a risky business model?
The biggest risk associated with a Fix and Flip is financial loss.
In other words, there’s always the risk that you won’t be able to make a profit on your initial property investment.
Multiple factors can contribute to this financial loss, including:
- Unanticipated expenses: this includes building permits, contractor delays, extra materials, and more. All these unanticipated expenses will add up and take away from your profit potential.
- Tax increases: after you complete your renovations, depending on where your property is located, the city or municipality might require you to pay property taxes. Either you’ll pay the taxes yourself, or you’ll require a potential buyer to pay them.
- Capital gains tax: Any profit that you make on your investment property will be subject to capital gains taxes. Your capital gains tax rate will vary, depending on whether you’ve owned the property for less or more than a year.
The Fix and Flip business model is a great property investment strategy.
If executed property, it can be an effective way to generate profit. Additionally, if you’re a neophyte real estate investor, it can be a great way to familiarize yourself with the real estate markets.
One of the most important parts of executing a successful Fix and Flip is finding the right lender.