Weighing The Benefits and Risks of Fix and Flip Investments
Learn about the benefits and risks associated with fix and flip investments to determine if it’s right for you!
Fix and Flips are certainly a popular type of real estate investment, and for good reason. A successful fix and flip has the potential to generate high profits. However, no great reward exists without possible risks.
Consider the benefits and risks below to help you determine if a fix and flip is the right investment for you!
Benefits of Fix and Flips
Potential for high returns
The idea when investing in a fix and flip is to buy low and sell high. If you can purchase a distressed home at a low cost, make renovations and sell it for much higher than the original purchase price, you’ll see high returns. Especially if you’re in a hot market where you’re able to resell at an above market cost.
Quick turnaround
Typically fix and flips are done with a sense of urgency. The loans are generally short term, ranging from 12 to 24 months. The faster you can fix and flip a home, the sooner you can start on your next investment and continue building your portfolio.
Efficient and flexible loan options
Fix and flip loans are commonly referred to as bridge loans or rehab loans and are provided in order to assist in renovation expenses. These loans typically have a very straightforward application process making financing quick and simple. These short term loans also have no prepayment penalty and can be interest only.
Risks of Fix and Flips
Cash reserves
Although loans are surely an option, an investor needs to account for unexpected issues that may arise during the rehab process. Issues that were not addressed during inspection can reveal themselves well into the project, so making sure you have enough cash to cover extra costs and still make your loan payments is essential. Some lenders will include reserves for payments and/or contingencies, ask your lender about these options.
Time
Fix and flip projects require your time and attention. Having a good relationship with your lender and contractors will lead to success, so taking time to develop those relationships will be helpful. Due to unexpected issues that can arise, you’ll want to make sure you’re available and consistently supervising the project. Addressing issues as soon as they arise and keeping the project on track for a quick closing is important if you want to maximize your returns.
Once you’ve determined if a fix and flip investment is right for you, be realistic about the project. Acknowledge the current conditions, the amount of work required for resell, and have a clear vision of what the finished project will look like. Having a solid understanding of your project, the market you’re investing in, and what financing options you have will help promote success in your fix and flip endeavors.
