4 things to remember when financing and flipping property
There’s no perfect recipe for a good property flip. Success will result mainly from efficiently allocating the time and money available to you. The best approach to allocating these is to plan the project according to your skills and to the characteristics of the property and its location. However, even though sound planning is critical, experienced investors know they’ll have to adapt the plan along the way. What might have seemed like a good idea on paper may end up being too costly or time-consuming for the return it would bring.
I myself have participated in dozens of real estate flips and I’ve made every mistake possible. Here are 4 things I wish I’d known when I started my flipping career.
Time is the largest opportunity cost in a property flip
Even though time and effort don’t always involve making an outlay of cash, they are an investment and should be included when calculating profits. As they say, time is money!
This is extremely relevant to real estate flips, but too many investors forget to take it into account. For instance, if you make a profit of $50,000 on a three-month project that requires you to invest 150 hours of your free time, it’s probably more profitable than another project that makes $100,000 but drags on for months and puts constant pressure on you.
It’s important to understand that there are two types of time to consider during a flip.
First, there’s the project’s timeline, or duration, from the financing and purchase of the property until the sale. As the name suggests, a flip is the opposite of a “buy and hold” strategy. While staying focussed on quality, the goal with a flip is to move it as fast as possible.
Second, you have to estimate the actual amount of time you will need to invest in the project. Aside from the work you will take on, you should also count hours spent shopping for materials, negotiating with subcontractors and even travel time. For example, renovating a cottage in a location that’s in high demand might seem financially profitable, but if it’s a two-hour drive from your home, the time you’ll spend in your car could represent a sizeable opportunity cost.
Note however that the many hours you spend looking for a property are part of the sunk costs. In theory, this time should be subtracted from the project’s profits. Working with a real estate broker can considerably optimize this part of the project.
The work depends on the specifics of the project
Should you re-do the floors throughout or add light in the living room by installing new windows? Update the bathroom or redesign the kitchen? There are many “experts” out there who will tell you that one thing or another “absolutely” has to be done.
But I’ll say it again, there’s no perfect recipe. To make the best decisions—meaning those that minimize costs and maximize the value added—you have to establish who your target clientele is.
For instance, in a Montréal neighbourhood like Rosemont–La Petite-Patrie, which is highly sought out by young families, adding a floor to a shoebox-type home is much more complex than renovating a bathroom, but the value it adds can be enormous.
Understanding the trends of the market across Quebec is important, but it’s even more valuable to study the local market, and even the hyperlocal market. This involves determining who the typical buyers are in an area (demand) and what types of properties are available there (offer).
For example, transforming a duplex in the Plateau Mont-Royal into a single-family home could be profitable if you determine that your ideal potential buyer has no interest in managing a tenant.
The best way to get an idea of all this is to work with a real estate broker.
Choosing experts and selecting the tasks to do yourself
Let’s be clear: the more tasks you take on, the more you’ll reduce your costs and increase your profit. However, qualified experts are needed for things like electrical work. You can’t learn to be a drywall finisher or real estate broker in a couple of days.
So, it’s extremely important to be honest with yourself. If it will take you two weeks to paint a house, it will probably be more cost-effective to hire a professional painter who can do the whole job in a day.
When I did my first flip, I was dead set on selling it myself to save the broker’s commission. But in the three months after I put the property up for sale, the only potential buyers I met were bargain hunters with a million questions. Showings were exhausting and discouraging because they didn’t lead anywhere.
I finally decided to work with a broker. The house sold two weeks later.
The lesson here is to take on the jobs you can do efficiently and let the pros do the rest. Obviously, your job is to take the time to choose your experts carefully. The way to do this is to request three quotes and not choose only based on price. It’s just as important to work with people you trust completely.
Mortgage financing is about more than the interest rate
Finding the right type of financing for a property flip is extremely important. You should shop around. See what’s available for your financial situation and your project. The terms of mortgage loans from large banks and credit unions aren’t always appropriate for financing a flip. In some cases, the criteria may be too restrictive. But this shouldn’t stop you from going forward with your project.
A private lender can offer an advantageous financing solution. For instance, Quebec private lender Victoria Financial bases its financing decisions on three main criteria:
- The property is a single-family home, a condo, a commercial or income building, or a lot.
- The property is located in a serviced urban area.
- The financing is less than or equal to 75% of the property value.
Plus, you can save time because processing your request is often much faster with a private lender than a conventional one. And, it’s possible for you to pay only the interest on the loan for the duration of the project. This can reduce your liquidity needs until you sell.
It will always be possible to make money through a property flip. It’s just a matter of careful time management, allocating your resources effectively and doing business with competent and trustworthy partners.