With interest rates at an all-time low and houses flying off the market at record rates, is it a good time to get into real estate investing? A fix-and-flip property can be a good foray for first-time investors who don’t want to deal with property management or being a landlord.
While real estate investing (or REI, as the pros call it) may be less risky than, say, day-trading meme stocks, it could be a challenging time for first-time investors to enter the market.
is actually a very risky time for a first-time real estate investor to flip,” says Daria Kelly Uhlig, a Realtor in Maryland. “Flips are selling for more now, but substantially fewer homes are being flipped because the market is so tight and bargains are extremely difficult to find.”
Robert Taylor, The Real Estate Solutions Guy, a rehabber in Sacramento, Calif., agrees. “In my opinion, it’s an incredibly dangerous time for home flippers. The market is crazy hot, and the opportunities to buy homes at a price that makes financial sense is limited.”
However, now could be a good time to do your research, start building a network in the real estate community and keep your eyes open for a good investment property. “It’s definitely a good time to lay groundwork, learn the market and assemble a team,” Uhlig says. “That way, you’ll understand a good opportunity when you see it and can be ready to jump. Since you’re competing with seasoned investors, having the support you need lined up can be critical.”
If you do come across the right deal at the right time, it might even be worth the risk to make the investment. Real estate investor Kyle McCorkel at Safe Home Offer in Hummelstown, Pa., says, “With the current market heavily leaning towards being a sellers’ market, it can be a great time to sell a flip…Home staging is usually worth the extra cost, as it can help you sell quicker and for more money.”
What steps can you take to improve your chances of success as a beginning fix-and-flip investor?
Understand a Comparative Market Analysis
A comparative market analysis, or CMA, is the key to knowing if you’ve found a good deal on an investment property. However, calculating a CMA is a complicated formula and requires expert knowledge. “Pair up with an agent who knows the homes in the market really well and can be very precise with CMAs,” Uhlig says.
Know Exactly How Much Money You Need
Another key to determining whether an investment property is a bargain or a money pit is figuring out exactly how much money you’ll need for the project. “Don’t forget to factor in miscellaneous costs such as holding costs (property taxes, insurance, interest) and closing costs on both the purchase and the sale (transfer taxes, title fees, commissions). These can add up to thousands or tens of thousands,” McCorkel says.
Uhlig adds, “Find a contractor who can accompany you on showings and give reasonable estimates on the spot.”
She shares a formula used to determine how much you should pay for an investment property. “As a general rule, a good flip would require a total investment of 70% or less of the home’s current after-repair value (ARV). Say, for instance, you buy a house for $200,000 that needs $25,000 worth of work. Add 10% to that to cover unexpected expenses, plus closing costs, and you’re up to around $235,000. You’ll also have closing costs and broker commission when you sell the house. This brings your total investment to $250,000. Staying within 70% of ARV means you’d need to sell the home for about $357,000. To put that in context, you’d need to purchase that $357,000 (ARV) home at a 44% discount.”
Purchasing conservatively — and sticking to your investment budget — can help mitigate some of the risk. “There will always be those who make money because they’re willing to bet on rising prices. We’re riding the roller coaster up in terms of prices, but if some black swan event pushes us unexpectedly over the top, it will be a quick downhill ride,” Taylor says.
Consider a Duplex or Vacation Rental as Your First Property
If you don’t want to risk getting stuck with a property that doesn’t sell or will create a capital loss if you do sell, consider a duplex that you can live in and rent, or even a vacation rental property, Daria suggests.
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This article originally appeared on GOBankingRates.com: Interest Rates Are Super Low – Is Now the Perfect Time to ‘Flip’ a House?