Categories
Flipping

5 Signs You Better Walk Away from a Flip

Finding houses that are suitable for flipping is difficult – but that doesn’t mean you should jump on every opportunity that comes around.

Every good flipper knows how to choose properties—and when to walk away from an inevitable flop.

You don’t want to be a rookie who overlooks the basics and ends up with a smaller margin than your time and effort is worth.

So here are five signs to know when a distressed house is better left alone:

1. The location isn’t good.

The most important factor that decides the value of your flip is the location of the house.

  • What kind of city and neighborhood is it in?
  • What kind of residents are in the area? What do they want in a home?
  • How much do similar houses sell for in the immediate area? What features do they have?
  • What are its positive factors (e.g., good schools, shopping centers, etc.)?
  • What are its negative factors (e.g., highways, airports, factories, etc.)?

You need to understand the property in the context of where it’s located to estimate its value, and how fast it’s likely to sell (based on the level of buyer demand in the area). 

Do the same research that your buyers would do, and you’ll see if the location is going to appeal to them.

2. The house is too unique.

While every property will be somewhat different from another, you want to flip a house that’s fundamentally conforming to or better than the standard of the local competition. In other words, they have to be similar to the houses around them, but better somehow.

For example, if the neighborhood is full of single-family homes with 3 bedrooms and 2 bathrooms, you might have a hard time selling a house with 2 bedrooms and 1 bathroom. You will, however, easily sell a 3-bedroom, 2-bathroom home with an attic that can convert to an office area.

Generally, people like lots that are higher than the average size in the neighborhood, so a large lawn is always a good distinguishing feature. Likewise, you might have to be prepared for price adjustments if your lot is smaller than the average locally.

The biggest thing to look out for is a strange floorplan. Awkward layouts will seriously turn off buyers, even if you finish a home to a high standard throughout, and some layouts can’t be changed easily (if at all). Honestly, if you end up with a seriously out-of-date floorplan, you could be better off completely rebuilding a house from scratch in some cases, so this is a definite sign you should walk away if you’re a new flipper.

3. You don’t have enough skills or knowledge.

Unlike professional builders and professionals who’ve been honing their skills for years, you might not have the necessary knowledge to DIY fixes for a higher profit.

  • Do you know your way around basic construction tools?
  • Can you lay carpet, hang drywall, roof a house, and other common but important fixes?

There is money in sweat equity. If you lack knowledge and have to constantly outsource professionals to do the renovations, you’ll deplete the profit you could’ve gotten from your investment. If you lack the skills and still try to fix everything yourself, you might end up making rookie mistakes that’ll be expensive to salvage.

Furthermore, if you don’t have enough knowledge, you could run the risk of hiring a contractor and getting ripped off.

Instead, be realistic and account for your lack of skills when budgeting your flip. If the costs are properly accounted for, you’ll increase your chances of exiting with a good flipping profit.

4. You don’t have enough money.

All real estate investments are expensive.

You need to research your financing options to find which mortgage type will work best for you, and if there’s a lender that can offer you lower interest rates. Cash is possible, however there’s still property holding costs and opportunity costs that you need to consider.

More importantly, there’s the renovation costs. How much will you get after acquiring, holding, and fixing up the house? Novice flippers often underestimate the costs, resulting in net loss instead of gross profit.

To see if your budget is enough to flip-and-sell a house, you need to:

  • Identify how much you need to acquire the property
  • Scan the competition and see how much you can realistically sell and still make a profit
  • Determine how long the renovations will take and budget accordingly
  • Remember to take into account the loan you’ve taken out, taxes, utilities, insurance, and more
  • Be aware of the seasonality that can sometimes affect home prices and the number of days on market (e.g., higher sale prices in late spring compared to winter)

5. You don’t have enough time.

Flipping and selling a house takes a lot of time and dedication—often requiring you to give up a large chunk of your time for a couple of months. 

Not sure if the hours dedicated to flipping will be worth it? Answer these questions:

  • Are you maintaining a separate full-time job? Are you willing to give up weekends and evenings?
  • Do you have the budget to pay someone else to do the work?
  • Will you be available to oversee demolitions, constructions, inspections, and other procedures?
  • How much time will you spend marketing your property? Can you show it to prospective buyers yourself, or do you have the budget to pay for a real estate agent’s commission?

For most people, the time all of this takes isn’t worth it. They’d rather stick to their day job to have a guaranteed income, without the headache of flipping houses, so think carefully about whether or not this commitment is right for you before buying your own investment property. 

Summary

To be a successful flipper, you need to understand the risks involved and how to mitigate them.

Evaluate your house flipping opportunities by doing the following:

  • Check the location of the house in relation to the neighborhood.
  • Determine if the house is competitive enough versus other properties in the area.
  • Budget property and never underestimate the possibility of expensive, underlying problems.
  • Calculate the time it’ll take for you to enter and exit the flip profitably.
  • Be realistic with what you can repair and what you’ll need to outsource.

Making profit from flipping houses isn’t as easy as some other real estate investment methods, but it’s definitely possible with the right knowledge, planning, and courage to walk away from bad opportunities. Keep looking and doing your due diligence, and the right one will eventually come along. 

Trust us, it’s worth the wait.

Categories
Landlords

How to Calculate Rental Return: How Much are You Making from Your Rental Property?

How much can you actually expect to make from rental property investments?

This is a great question, and one without a straightforward answer. 

That’s because the amount of rental income you receive from a particular property depends on the financial viability of the deal, as well as how well you manage it. 

In this article, we’ll give you some tips for identifying profitable rental investments, and some rough rules-of-thumb for calculating the potential profitability of a rental property. If you want a better idea of how property management can impact these figures, check out this article. 

Financial Viability

Here are some formulas you can use to help you determine the financial viability of a real estate investment.

Return on Investment (ROI)

ROI is used to measure the performance of an investment by evaluating the expected return relative to a property’s cost.

Add up the cost of acquisition, closing fees, repair costs, and annual expenses. Then, divide your total annual income (from rent) by the sum of your expenses to arrive at your yearly projected ROI. There is no sweeping standard for a “good” ROI, but if we were to aim for a benchmark, you’d want to look for a yearly ROI that’s above 15%. 

Cash-on-Cash Return (CoC)

CoC calculates the yearly returns based on cash income and cash invested. In other words, it measures how much you’ve made on the property in relation to how much you’ve paid for the mortgage.

Get your annual pre-tax cash flow, divide that by the total cash you’ve invested, and you’ll get your CoC return. Expert investors advise to aim for a CoC return that yields around 8% to 12%.

Capitalization Rate (Cap Rate)

Cap rate is the ratio of net income to the property’s acquisition price. There’s no “good” or “bad” cap rate, but it’s great for comparing your return across multiple properties. Here’s a quick guide on how to calculate it:

Get your net operating income (NOI) by taking your gross rental income and deducting every expense you have (excluding financing), like taxes, insurance, water, HOA fees, etc. 

Then, divide your NOI by the current market value, and you’ll get your cap rate. In riskier neighborhoods, 6% probably won’t be worthwhile. But in high-demand, high-quality neighborhoods, 6% could give you an amazing return.

The 1% Rule

Lastly, the 1% Rule is a quick calculation to determine if the monthly rent earned will generate positive cashflow for a property or not. The rule is that the amount grossed through monthly rent should be at least 1% of the final property purchase price (including the cost of any repairs). 

Calculating Profit

Now that you can identify money-making opportunities, the next step is to answer the following questions to calculate the profit you’ll get to keep.

How much rent will I realistically charge?

Start by surveying other rentals in the vicinity to get an estimated rental amount. You can ask a local realtor or property management company for an accurate number, or visit sites like Rentometer.com for a rough estimate.

If you end up with a range, stick to the lower number for a more conservative approach when assessing a deal and making your other calculations.

How do I know what the expenses will be?

When calculating your profit, you must add up all the expenses, including property tax, insurance, property management, and possible vacancies. Assume that these expenses will cost roughly 40% of your rental income. 

While it may sound like a lot, this figure is actually a conservative estimate, and doesn’t cover any serious renovations or overhauls that a property might need.

What about the other 60%? 

If you took out a mortgage on the property, the mortgage payments will be covered by the other 60% of your rent income. This means you should only secure loans with monthly payments which total less than 60% of your estimated revenue from rent.

What happens to the remaining money?

Whatever is left over will be your profit. However, this is also what the government will charge taxes on. The taxes you pay on this income are not included in the property tax you pay annually. 

There are ways to lower your taxes as a real estate investor, but for this article, just remember to budget for paying both income and property taxes when calculating your potential profits.

Conclusion

How much can you earn from rental properties? How do you know if a rental investment is worth it? 

Just answer these two questions:

  • Is the investment you’re eyeing a profitable opportunity?
  • How much can you earn from renting out the property?

If the property passes all these common metrics with flying colors, and earns you the rent income you’re looking for—you’ve just found a profitable rental property to invest in.

Image courtesy of Karolina Grabowska

Categories
Wholesaling

Top 5 Insights for Successfully Wholesaling Real Estate After a Year of COVID-19

Now that the global pandemic has been with us for a year, which trends started in 2020 that will continue to affect the real estate market in 2021? Particularly for wholesalers, what insights should you take away from the situation? How can you adjust and take advantage of new opportunities brought about by the lockdown? 

Being in a dynamic industry, where the only thing constant is change, the key to wholesaling success is to spot market trends early, extract relevant insights, and adjust the way you conduct your business.

In this article, you’ll find five important real estate trends for you to keep an eye on if you want to pivot with the landscape and remain successful in wholesaling real estate in 2021 and beyond.

5 Real Estate Trends and How it Affects Wholesalers

While the list below is by no means comprehensive, we see five important changes that happened in response to the global pandemic. Let’s discuss what they mean for wholesalers and the real estate industry as a whole.

1. Work-from-home is now mainstream.

With stay-at-home orders and social distancing rules, many office workers have been working remotely for nearly a year now, and most have settled into this new normal. What does this mean for wholesalers?

  • Many office leases are not being renewed.
  • People living in expensive homes close to offices are excited to relocate to the more affordable suburbs.
  • Vacation towns are now becoming an option for permanent residency. People are tired of big, populated cities and are seeking new places with more freedom and space on offer. 

Wholesaler Action: you may want  to pay more attention to rural areas, where there is an increased demand from buyers—these are the areas that most office workers couldn’t consider prior to the pandemic, but now can. 

Don’t wait until competition becomes fierce! Take the lead and meet the high demand before other investors swoop in.

2. People want an upgrade from their current home.

Working from home and having less social interaction with the outside world also means that people are investing more in their homes now. They want larger houses and backyards, more rooms and privacy, and bigger patios and storage spaces—especially if they have children. 

Families (and people of all ages) are now willing to invest serious money into creating a comfortable home, more than they ever were prior to COVID.

Wholesaler Action: This means that wholesalers need to pay heightened attention to the features of a home and think about whether or not they will be attractive to remote workers, homeschooled children, and folks who want plenty of leisure space when stuck on the property.

Think of the homeowner’s needs and preferences, many of which have evolved with the times. 

3. More people want to purchase homes.

After the record-breaking low interest rates in 2020, the forecast for this year is still a relatively stable and low interest rate. It doesn’t take a genius to see that we still have a long way to go before the economy improves, which means that interest rates are unlikely to move much higher within the year. Additionally, the Federal Reserve has declared that rates won’t be raised through 2023 to support economic recovery efforts.

For the real estate industry, lower rates mean lower payments, which means buyers can afford higher purchase prices. So, it’s an attractive time for people to buy a house (or two). Think about it this way: a $300k loan at 3% is almost the same mortgage payment as a $200k loan at 6%.

Wholesaler Action: For wholesalers, this means it’ll be harder to find and secure properties that are below market value. However, this also means that the properties you do acquire will sell quickly and for a higher price.

4. Housing inventory is low.

Due to COVID being easily transmitted, many people have put off selling their houses simply because they don’t want to have strangers in their homes. This increased competition within the housing market, with people snatching up the few available houses at lightning speed—even if they’re priced at top dollar.

Wholesaler Action: This makes it harder for wholesalers to secure deals at a discount, but it makes it easier to exit deals with a much higher profit due to larger spreads. In other words, it’s a good time to put in the extra time and energy in securing good deals and making up for it multiple times more at exit.

5. The housing market likely won’t crash.

Contrary to what others might predict, due to the housing shortage and skyrocketing home prices, the possibility of a market crash is quite low for the moment. 

Unlike the infamous 2008 crash, this time around lenders did not allow homeowners to extract their equity via home equity loans or other methods. At the same time, appreciation and lenders doing smart loans have created incredible equity for homeowners. This means that, even with a struggling economy and high unemployment, it’s highly unlikely that we’ll see a wave of foreclosures.

For example, let’s say someone loses their job and can’t afford to pay their current mortgage payment anymore. However, they do have $200k in equity in their home. Will they walk away from their property and let it go to foreclosure? Or will they sell it and try to get as much of the equity out as they can? The obvious answer is to sell, of course!

Conclusion

When a door closes, a window opens—and early adopters will reap the most rewards.

As long as there are people who want to buy their own homes, there will always be wholesaling opportunities to assist the buying and selling process.

Choosing to not capitalize on the current situation out of fear is a losing strategy. As the famous saying by hockey Hall of Famer Wayne Gretzky goes, “You miss 100% of the shots you don’t take!”

So, keep searching for the right opportunities, and you’ll continue to be successful in any circumstances. Besides, real estate constantly fluctuates, even without a pandemic – so think of this as just another one of the industry’s lovely challenges. 

Any important wholesaling opportunities we missed?

Image courtesy of Marcello Chagas

Categories
Flipping

How to Market your Rentals Online: Screen Appeal and Listing on Digital Platform

From digital walk-throughs to Zoom tenant interviews, real estate marketing has officially transitioned to digital in light of the COVID-19 pandemic.

Virtual showing techniques aren’t new, but COVID-19 has certainly pushed the industry to adapt as a necessity. Landlords that didn’t have videos of their properties pre-COVID are now rushing to create virtual tours and trying virtual staging methods.

At this pace, digital marketing will fast become an integral and permanent part of real estate marketing before we realize it!

What does this mean for landlords? 

Prospective renters are now viewing and shortlisting properties from their screens, making “screen appeal” a crucial factor to promote your rental property. You want your offer to stand out where the prospective tenants are: online.

In this article, we’ll go through the ways to increase your property’s screen appeal, write an effective ad online, and list your properties where tenants are most likely to find them.

Increase screen appeal with noticeable features

First, you need to make your rental look impressive in photos. To do this, invest in features that will stand out in photos—even if the prospect browses on their tiny phone screens. 

These are the things that will make a huge difference in digital listings:

  1. Sparkling kitchens with shiny appliances, glossy countertops, and newly-painted walls and cupboards
  2. Spotless bathrooms with new showerheads, clean mirrors, and re-grouted tiles
  3. Fresh blinds and curtains without any mold or grime that are updated to fit the aesthetic of the property
  4. Blemish-free walls freshly painted with a color that makes the room look bigger, brighter, and homier
  5. Brand-new fixtures everywhere—from light switches to faucets to doorknobs and fly screens
  6. Clean carpets that even look like they smell great
  7. Bright lights in every room to make the rental property feel new, and more importantly, show that you’re confident enough to put everything in the spotlight

Make sure that you use a camera that does your rental justice! None of the spectacular features you updated and cleaned will be seen if you use the front camera of your beat-up phone. If you need to hire a photographer for decent equipment, it’s worth the one-time payment to get a lifetime of great photos for your listing. 

Write an effective ad that highlights relevant details

Once you’ve updated your rentals with photogenic features, you need to post them on digital platforms. But what do you say? How do you write an effective ad that attracts your tenant pool? 

Here are the important factors to focus on:

  1. Write a great headline. Rentalutions’ formula suggests including the key information tenants look for (e.g., number of rooms or location) plus one feature that makes your rental unique.
  2. Use professional word choices that add value to your listing, as long as they’re an accurate description of your property. You want to avoid generic words such as “great” and “nice”, instead, choose words like: upgraded, spacious, tasteful, landscaped, modern, luxurious, and charming.
  3. Add more information on the key features. Knowing what tenants want (as you should), make sure to highlight these features in your ad. Are you expecting to attract tenants who put importance on parking spaces, walkability, nearby supermarkets, or proximity to a great school? Your copy should indicate that.
  4. Add detailed property descriptions. Similarly, also indicate what the tenants will want from the property itself. How many rooms, floors, and bathrooms? Will they be attracted to a lush backyard or extra storage areas? Flesh out all of the important details to attract tenants.

Lastly, prove what you said with great photos! When you use great photos to compliment everything that you verbally promoted on your listing, your screen appeal will skyrocket. This is where the prospective tenants should go “Wow! They weren’t kidding!”

List your rental on industry-popular websites

Armed with your impressive photos and well-written ad content, it’s time to post your listing where it matters. Most people are baffled by how many options there are to list online, especially since there isn’t a one-stop-shop solution that posts to all the rental listing sites. 

Zillow—the favorite of most landlords—allows you to create detailed listings that they’ll syndicate out to 26 partner sites (including Trulia, Hotpads, and MSN Real Estate), but it still doesn’t cover all of the sites available.

To get started, check these sites that are known to be effective and user-friendly:

  1. Zillow
  2. Trulia
  3. Hotpads
  4. Craigslist
  5. Facebook

Apart from those, you can also consider these lesser-known platforms:

  1. Apartments.com
  2. Apartment Finder
  3. Apartment Guide
  4. Apartment Home Living
  5. Apartment List
  6. Backpage
  7. Byowner.com
  8. Cozy
  9. Doorsteps
  10. Move
  11. My New Place
  12. Nextdoor.com
  13. Oodle
  14. Realrentals.com
  15. Realtor.com
  16. Rent.com
  17. Rentals.com
  18. Rentdigs.com
  19. Rentlinx
  20. Saletraderent.com
  21. Sublet.com
  22. Walk Score
  23. Zumper

All of these websites allow you to post for free. You just need to do some research and decide which platform enables you to attract the tenants that you want. For more details on the sites we mentioned above, check Smart Move and Landlordology.

Conclusion

Technological development waits for no one. In order to keep up and remain competitive in the rental property business, it’s time to level up with online marketing!

The steps are easy enough—simply increase your property’s screen appeal, write an effective ad describing the best parts of your property, and list them on websites where tenants are likely to browse for new homes.

Any other tips on how to market rentals online? Where are your rentals listed so far?

Image courtesy of Rene Asmussen