How to Break Down the 70% Rule in Home Flipping

How to Break Down the 70% Rule in Home Flipping

How do you know if a house is a smart investment or a good property to flip? You may be looking to acquire properties for your portfolio. The problem is it can be a struggle to identify good deals quickly. Read on to learn how the 70% rule will help you.

The 70% Rule is a Simple Rule of Thumb.

Investors and flippers should use the 70% rule to determine whether to buy a property. The rule states that you should only pay 70% of the after repair value of a home.

An example would be a $175,000 home that needs $10,000 in repairs. After repair, it would be worth roughly $200,000. A flipper or investor should only pay 70% of that. The total they should pay is $140,000 for the home.

This protects them from overestimating the value of the home. It also protects against downturns in the market.

Speculating that a property will increase in value can be very dangerous. Seasoned investors prefer to make money when they buy to minimize their risks. This also protects them in case they missed something.

Other Factors To Consider For the 70% Rule.

You should also consider a few other factors. Settlement costs, financing costs, and carrying costs take a large chunk out of the deal too.

Closing costs on a $200,000 property could easily be 2 to 5% of the property. This means it would be up to $10,000. Financing costs would likely be around $5,000.

You should subtract $15,000 from your offer price to account for these factors. Some sellers may not discount the whole amount. It is better to get some of these off the cost to protect your margins.

Exceptions to the 70% Rule

The 70% Rule is a simple rule of thumb for finding rentals and flips. It is only a starting point. There are other circumstances where you might want to ignore it.

One of these cases will be if you’re holding the property long-term. Then, you would not spend as much on renovations.

You would be more concerned about the cash flow. Getting a good deal would still be necessary. A better price will still allow you to get lower monthly payments. Lower payments will help you with cash flow.

Next Steps:

Take the time to determine your situation and goals. Are you looking to get quick cash? Other times you’ll be looking for steady returns over the long-term.

The 70% rule is a good rule of thumb. You should always be cautious with your repair and closing costs. It is a good starting place to protect your profits.            

 

How to Determine if a Home is Worth Flipping

How to Determine if a Home is Worth Flipping

An essential skill in making a house flipping profit in the real estate business is knowing how to value a house properly. For individuals who are in the industry to make profits from low purchases. Here are ways to determine worthy homes to flip.

Average Value Determination: The house post-rehab value is determined by considering the cost of the houses in the general vicinity and the price of recently sold homes similar to the post-rehab vision. The final worth after repairs is the value you use for determining the worth of the house.

Standard cosmetic rehab: A general rule to estimate repair costs is $20 for every square foot. Based on this assumption, adjustments can be made upwards or downwards depending on the individual house’s specifications. This value will help determine whether to select the house for flipping.

Transactional expenses: Purchase closing costs are usually paid by the seller and account for 0.5 percent of the purchase price. The selling closing costs range between 1-6 percent, with an additional 1 percent as attorney fees. Holding costs such as property taxes, insurance, utilities, and maintenance costs should also be considered.

Offer price-setting- There are formulas to determine what offer price will be stated. One way is to get 70 percent of the average repair value deducting the repair costs. Another way is to subtract the repair costs, closing and holding expenses, and desired profit from the ARV to get the right offer price.

Geographical setting: Proximity to facilities such as shopping malls, transportation services, and school increases the property’s value while highways and airports decrease it. Different locales may have various school taxes, municipal and private trash collection companies with different days.

Physical attributes: As much as the seller wants the house to stand out, it shouldn’t be so significantly marked up in features that it overshadows the neighboring houses. It will only lead to a scenario where it will be too costly for that neighborhood. The most successful house flips are those that have the most work. However, if structural issues are suspected, it would be wiser to buy a house in better condition.

Lenders- Rehab lenders give between 65-70 percent of the ARV. This factor is because an investment is made with the anticipation of making money in the end. If the lender advises otherwise, then there will not be enough equity for the investing party to make money in the end.

Saving For An Investment Property

Saving For An Investment Property

For many people, real estate can provide financial freedom for a lifetime. Owning property is a wise investment, but not everyone has the money needed to make this a reality. Student debt, a mortgage of your own and a vehicle loan is enough to prevent you from getting started. If you’re looking to save up some money quickly to take care of the 20 percent down payment, let’s take a look at some methods you can use.

Think About How Much You Can Save Monthly

You’ll need to assess where your money is currently going. You can use a budgeting app to see where there are areas that can be improved upon. You may be able to reduce your monthly spending by eating out less, choosing a different cell plan, or budgeting on groceries. Fifty percent of your take-home pay should go towards your necessities. Another thirty percent goes towards non-necessities but things that you want. The last twenty percent should be for savings. A lot of people choose not to keep a paper trail of what they’re spending. It’s ideal to hold yourself accountable with your spending.

Figure Out Your Budget

You should determine what type of property you can actually invest in. You will need to run some numbers that reflect the property you’re buying, attorney fees, closing costs and your repair budget for once you’ve closed. You can tweak these numbers to make your investment dream a reality. You might have to buy something a little smaller than what you originally set out for, or you can wait a little longer to get something closer to what you want.

It’s important to keep in mind that you’ll have to come up with twenty percent of the property price as a down payment. This is because investment properties don’t carry mortgage insurance typically. The more you put down, the lower your payments are going to be. You can also look into using a home equity line of credit on your own home to use towards a down payment. You’ll need to be strategic with your planning, but there’s plenty of ways to quickly save for an investment property.

                                                    

 

Breaking Down Different Property Investment Finance Strategies

Breaking Down Different Property Investment Finance Strategies

When one has a low credit score or does not have enough money to pay for a downpayment, banks will not be willing to lend money. For an individual in real estate looking for finances, there is a need for creativity in such a broke situation. Luckily, there are these modes of financing property.

Private Money

Private money refers to a loan a person can get from a family member, co-worker, friend, neighbor, or anyone else they have a relationship. The relationship between these two parties is built on trust, and as such, a person seeking funding will have an easier time negotiating flexible terms. As good as it is, the agreement should be finalized carefully to avoid nasty consequences should the business fail.

Crowdfunding

This mode is a strategy used to seek funding from public forums. An investor creates an account in such platforms and appeals to the public to fund their businesses. Some sites for real estate include Feather the Nest and Hatch My House.

Owner Financing

Also called seller financing, this is an arrangement made between the seller and buyer, whereas the seller gives a loan to a buyer who can’t afford one from the bank. The buyer then pays the loan with interest agreed upon over the agreed time.

Cash-out Refinance

This option allows buyers to apply for a new home loan for more than they owe on another property they own. They thus refinance their mortgage, and at the same time, get extra money to finance a new property.

Home equity loan

This loan applies when an individual has another property they can use as collateral. Many lenders offer as much as 90% of the property’s value, and the money can finance another property.

Conventional fixed-rate Loans

When a person is looking to finance a property in good condition, they can apply for a loan in which the said property is used as collateral for the loan. It usually comes with lower monthly payments, higher down payment, and a fixed interest rate.

Hard Money

This is a loan offered to an individual from a private entity to invest in real estate. They are short term loans with a high-interest rate. The lender does not conform to stringent measures such as income or credit scores. It is, however, a risky move if one is not sure of the property’s success.

Refinancing Your Investment Property

Refinancing Your Investment Property

Refinancing of a rental property is the most honorable thing for a person to engage in at this time. He or she can seek to refinance a rental property as an investment since it increases the cash flow and lowers the payments. The concerned party will thus establish low rates, and a constant flow of income is guaranteed.

Advantages of Refinancing Property

Lower Interest Rates

The interest rate that one is likely to face in the real estate business is high. The high rates charged can be attributed to the risk present in the real estate business. Lenders will charge highly to mitigate the risk of defaulting that can be present in the business. Refinancing seeks to lower the rates incurred when investing in real estate.

Change of Mortgage Term

Refinancing provides one with an opportunity to renegotiate the mortgage terms. Thus, enabling one to secure an agreement that will allow for lesser interests accruing and shorter payment durations. As an investor, it is easier to enter into an agreement that pays a fixed amount monthly other than the one whose rates change every month.

Cash-Out Equity

Refinancing allows a person to own the property when the mortgage balance is zero. Lender will be lien to the property until the mortgage is paid back. The lien will be entitled to seize property following failure to make the payments borrowed on the stipulated time.

The Right Time to Refinance

The right time to seek refinancing is when the interest rates are low, and the value of properties is high. During this time, the refinancing party is at liberty to borrow larger amounts at lower interest rates.

Obstacles to Refinancing

  • Low credit score and unclear sources of finances.
  • How to Avoid Issues and Delays with Refinancing
  • Prepare and organize necessary documents to avoid issues and delays.
  • Places to Seek Refinancing

Refinancing entities include; banks, credit unions, private lenders, hard money lenders, among many other sources.

Refinancing is the best option for lowering the rates changed in the real estate business. Other advantages of engaging in refinancing entail changing the mortgage terms to one’s convenience and increasing the cash out equity options. The best time to seek refinancing is when the interest rate is low, and the property value is high. To avoid delays in refinancing, the preparation of necessary documents is key.