Many real estate professionals started their careers by flipping houses for profit - you usually don't need too much capital and anyone can do it.  Fix and flip hard money lenders are willing to front most of the purchase price and renovation costs - opening the field to those without the initial money to buy their first project.  Investors can use hard money to leverage their position, advance to bigger projects, and make a higher margin of profit.

Fix and flip projects also have a relative high failure rate, - especially in a rocky market and secondary areas.  Fix and flips have to be completeled quickly, unlike a buying and raising rents.  Transaction costs and mortgage payments can put investors at significant pressure to sell the project fast - something that is not easy to do in some cases.

Here are 4 useful tip to maximize your next fix and flip project:

Tip 1: Find the best loan terms to finance the flip

The right financing will give you enough time and capital to see the project through renovation and an eventual sale.  Consider taking the time to make sure the terms of the loan are a good fit for your project.  Fees and high rates can quickly eat up your profits and put your flip at risk.  The most important aspect in a lender is reliability - you want to make sure they will be there for you at closing and provide you the necessary capital to renovate.  The last thing you’d want to happen is a bought property with no money to renovate it.

Here is an example to better illustrate this:

2 lenders offer you a loan, both offering $200,000 to purchase and renovate a home in a great area.  Both offers are similar but the interest rate is different:

• Lender 1 - 9% interest rate
• Lender 2 -12% interest rate

Both lenders offer the same overall terms, but the second lender is much more reliable, more experienced, and closed 10 loan in the past month.  The yearly difference between the two loans is $6,000 per year, but if the first lender cannot close - your profits are zero because you can’t purchase the property.  Work with someone that can get the deal done, and someone you trust.

Tip 2: Draft a detailed business plan

Your exit strategy will give you a better grasp of what you need to do in every step of the flip.  Start from the end result (ARV - after repair value) and work backwards. Calculate the costs of renovations, cost of fiance, and cost to purchase the property.  Reverse calculation will tell you exactly the purchase price you need to hit in order to make a profit, you can tell if a loan is affordable or not, and how much you need to pay a contractor to make an eventual profit. 

In addition, a detailed business plan and an exit strategy can help you secure a fix and flip loan.  Lenders love to see investors with a plan, with objective and realistic numbers that detail the costs of renovations, time to completion, and overrun costs.

Tip 3: Contractor management is key

when you start construction, the last thing you want is a fight with one of your contractors.  They can place a lien against the property, delay the project (costing you interest and time), and finding a new contractor to fix the last one’s mistakes will cost you a lot of money.  It's hard to eliminate all those risks - but we have a few ‘best practices' that will minimize liability with contractors:

• 1. Hire only licensed contractors - make sure they are bonded, licensed and have worker's compensation insurance.  You can find license information on a state (.gov) website online.
• 2. Sign a  written agreement with the contractor - make sure it is your own form, written by an attorney, and it details all the work to be performed.
• 3. Never pay upfront - buy materials yourself and pay the contractor only after the work is completed.
• 4. Make the contractor sign a lien waiver before payment, and schedule a walkthrough of all the work to make sure the contractor performed all required duties.

Tip 4: Plan for the unexpected

• Failing a final building inspection by the city
• Blowing a gas line when digging in the yard for landscaping
• Stubborn tenants that won’t leave the premise so you can start renovations

These are just a few examples of things that could happen and turn your fix and flip upside down.  This is why it is very important not to overleveraged yourself - buying a new project before selling the current one without taking into account a possible delay can cause you to lose both properties due to interest payments and carrying costs.  Adhere to the 70% rule - buy the project at seventy percent of market value to give yourself enough cushion when things go wrong and you go over-budget.  

Conclusion

Fix and flip projects are a popular investment strategy, with significant risk that could be mitigated with proper planning for the unexpected.