A Residential Route
Slow & Steady, or a Quick Flip?
You have plenty of time but not much available income.
This scenario is perfect for young people just starting out in life. You have plenty of time but not much available income. You have some DIY ability or the time to learn about home renovation.
- Step 1. Buy a primary residence that has room for improvement – this can be pretty much any type of residential property – single family, condo or multi-family home but remember Savvas’ advice from Chapter 9 – if you plan to keep this property when you move, the next one will have to be better for you in the bank’s eyes. If possible, buy the 3- or 4-unit home first, then move to a 2-unit and finally to a single-family or condo. If done that way, you should be able to get owner-occupant preferred financing each time.
- Step 2. Work on the house over time – make high-impact improvements like a new kitchen and landscaping. If possible, add some living area by finishing an attic or basement and some outdoor space by adding or enlarging a deck or patio. Try to avoid making expensive changes that won’t add value to the home like new a new roof, upgraded plumbing, and electrical systems.
- Step 3. In two years or less, if the market has been going up, sell the house. If not, buy a new house and rent this one. Both options are equally great in different ways.
Because you’ll be an owner-occupant, your downpayment can be as low as 3.5% of the purchase price. By living in the house for at least two of the past five years, you will be able to keep most, if not all, of the profit from selling the house under the current tax law. You needed a place to live anyway so you’re not taking on much if any, additional monthly expense.
The risk is high with a flip because…
On the other side of the spectrum are quick flips. They usually require that you close too quickly for traditional financing and that you have some construction knowledge or at least the ability to supervise people who do. The risk is high with a flip because a lot of your potential profit requires that you sell the property fairly soon after buying it. Market conditions, unforeseen repairs and other factors can sometimes get in the way of a quick sale.
- Step 1. Find a property – one that you can buy well, fix up and resell quickly. In their book, Flips, How to Find, Fix, and Sell Houses for Profit, Rick Villani and Clay Davis have done an excellent job explaining their proven method of flipping homes. If you’re going this route, make this book your bible.
- Step 2. Plan your work and work your plan – Even before taking ownership of the house, have your renovation plan set and your contractors standing by. Every day that you hold the house will cost you money so get as much in place before you are the one paying the bills. You can even start looking for possible buyers at this stage.
- Step 3. Sell and repeat – In any market, the best flipping opportunities are the ones that you create. Select your target market and make sure that everyone in it knows that you are looking for homes and that you’ll pay cash and close quickly.
Because of the necessity of a quick closing and possibly the condition of the property, you likely won’t be able to use conventional financing. If market conditions change dramatically, you should have the option of refinancing and holding the property to rent until conditions improve but that will require that you have a good credit score and some resources behind you. If you’re not able to refinance and you’re paying a high interest rate on a hard-money loan***(define), you’re in danger of not being able to rent it for enough to make the payments. Do your homework if you’re planning to go this route! The more money you can generate from friends and family at a favorable interest rate, the lower your risk.