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Mark Slobodan
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Saturday, May 9, 2015 - How to ensure your property is a diamond not a dud

How to ensure your property is a diamond not a dud

 

With reality television shows and famous celebrities highlighting the rewards of “flipping” property, more and more Canadian investors are on the hunt for these diamonds in the rough. Although theoretically the buy-fix-flip strategy is one that appears to provide the greatest returns in the shortest period of time, there are many factors that a landlord needs to consider before jumping in.

 

Even the smallest of oversights in this strategy can turn a project from a $50,000 profit into a $50,000 hole. When evaluating a profit, there are a number of factors that should be considered from purchase price to cost of repairs. Such an analysis will help you determine whether you have uncovered a diamond or a dud.

 

1. What are you buying?

 

You will need to determine what level of work you want to be involved in. A flip can be as simple as buying a house that needs new carpets and a fresh coat of paint, and can be as complex as a home that needs to be stripped to the studs and reconfigured.

 

Questions to ask:

1. How much time do you have to dedicate to the project?

2. Who will do the work (you, your bother, contractor, etc.)?

3. What type of property do you want (single-family, multi-family)?

4. Is there a demand for a specific type of property in your market?

5. What is the minimum amount you need to net from a project?

 

When you know what it is you are looking for, you will be viewing potential properties with laser focus and will be able to quickly turn away from the property that will take you off your track.

 

2. Understand the market

 

When looking for a fix-and-flip property, it is critical for an investor to understand their market inside and out. This property is one that you intend on flipping in a short period of time for a profit so there are a few key factors to consider before you make the buy.

 

Questions to ask:

1. Is this the most desirable street in the neighbourhood or the most problematic?

2. Is it one of many single-family homes on the street or are you surrounded by multi-family rentals?

3. Is it within the boundaries of the most desirable schools or do you fall a block or two short?

4. How long is the average home sitting on the market before it is sold?

5. What percentage of the asking price are homes being sold for?

6. Is there a neighbourhood price ceiling? If so will your after repair price fall under or above?

 

3. Identify your end user

 

One of the biggest mistakes new flippers make is buying the property before identifying their buyer. Your end user should be the person you are buying and designing for. You need to look for the property that will allow you to fill a need in the area you want to be in, and by doing this you can ensure a quick sale time while obtaining maximum sale price.

 

Questions to ask:

1. Are you looking to sell to an investor? If so you might want to stay away from that 5,000 sq. ft. waterfront property you have your eyes on.

2. Are you targeting the young couple or single professional? If so, what type of finishing are they expecting? What type of property do they desire? Is this the neighbourhood they want to be in?

3. Are you in an area that is seeing a migration of seniors? If so, that three-storey townhouse may not be the one for you.

4. Understand the number

 

When analyzing a potential flip it is important to understand that there are a lot more numbers (and dollars) to consider beside the price, renovation costs and sales price, including:

1. Monthly mortgage costs
2. Monthly insurance costs
3. Monthly utility costs
4. Cost of borrowing
5. Realtor commissions
6. Legal fees/closing costs
7. Income tax
 
*Income tax is something that is often overlooked or miscalculated. When an investor purchases a property with the intention of flipping, the profits from the sale are not considered capital gains, this means that the full amount of your profits at the end of the sale is being taxed at your marginal tax rate which could be the one thing that takes you from the black and into the red.

 

5. Funding

 

When looking at a property you plan to buy-fix-flip, it is important to remember that traditional financing may not always be an option.

 

While investors are able to obtain up to 80 per cent financing for a traditional buy-and-hold property, these ratios may decrease when you are purchasing a property that is distressed. It is also important to remember that traditional bank financing is not available for renovation costs (especially the unexpected surprises), so you will need to be sure you have the funds to move your project along in a timely manner as every day lost is money out of your pockets.

 

Questions to ask:

1. How much money do you have to invest?

2. Do you have partners or investors who will work with you?

3. Are you or the property able to qualify for traditional financing?

4. Can you afford to pay for private funding?

5. Do you have an emergency fund?

 

Answering these questions will give you a clear picture of what you can afford to buy, how much you can afford to spend in improvements, how long you are able to float your project, and how well you will be able to respond to unexpected surprises.

One of the biggest reasons a flip flops is because the investor is no longer able to fund the project within the required timelines. When you take that little bit of time to plan, you will see that you are able to move forward at a much quicker pace and keep more money in your pocket.


 

posted in Getting the House Ready to Sell at Sat, 09 May 2015 00:30:34 -0600



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