The first house my husband and I purchased was a nice 3 bed, 2 bath, 2 car garage property. It was 1,400 square feet on .3 acres and built in 1972. It was a foreclosure and had been vacant for 4 years. When we bought it, the place was not livable. We ended up doing most of the renovations before we moved into the property. Our plan was to live there for one year and then sell it at a profit. We succeeded, but we did make some mistakes along the way. If I could go back, I would have done a few things differently. Every mistake is a learning experience, though. We cannot put a price on the amount of knowledge we retained from this venture. That is why I can’t wait to share it with you.
Admittedly, this market has become insane and incredibly over-inflated. If you plan on carrying out a flip, you better find something priced WELL below market value to turn a profit (these options are extremely hard to come by and are constantly snatched up by cash buyers such as small LLC’s, hedge funds, foreign buyers, and other investment firms). It has become more of a buy-and-hold market, honestly. The only problem with this, though, is that it has taken so much inventory off the table and driven up rental and purchase prices for everyone. Most will no longer be able to accomplish what we did in a year. We did buy the house in 2016 and the market has become much more strained since then.
You really need to get creative in this market as of 2022. Prices are soaring higher than before the housing market crash in 2008. A flip like this seems almost unattainable. If you're really serious about flipping, don't be afraid to carry out investment group strategies. This means writing letters, knocking on doors, or just leaving business cards. You can look for investment partners online. You can find homes going to auction through the city. You can also look for hard money lenders. I will dive more into this in a little bit. Now, let's get going.
Start With The Money
We purchased our first house with an FHA Government loan. These loans require 3.5% down. They also require the home to be your primary residence. You can get away with renting it out, but if you go to purchase another home, you will be forced to go conventional that time around. Those loans need anywhere from 3-20% down. In order to make the repairs, we went with the 203(k) option. This allowed us to roll the cost of renovations in with our mortgage. We purchased the home for $135,000 from the bank and had them cover 2% of the closing costs. We added $30,000 for renovations to the loan, which came to $165,000 total. If you have liquid funds to throw at the project, awesome! You can close in less than 2 weeks and get the work done with much less headache. Some sellers may even sell to you for less just because you are paying cash.
What To Do When Choosing A House
When looking at houses, realize that it may take you months to find that perfect property. You may put in several offers and may be under contract a few times before one finally sticks. Do not get discouraged here. As stated above, you must find something well below market value to make this work. Do not overpay for something just because the market is hot. The tides are slowly turning for sellers at this moment, so now may be the opportune time to put in those low-ball offers on homes that have been sitting on the market for 80+ days.
Make sure you have a notebook, pen, and camera when entering a home. Do not get caught up on things that don’t matter. You need to stay focused; you’re there to do a job. First thing, take a picture of the front of the house, or at least the address number. This will help you keep your photos organized. Methodically walk around to each room and write down the work that needs to be done. Take photos of all problem areas that you see. Take note of the good things the house has going for it. This will keep you a little more organized when going back to review your notes. The houses begin to run together pretty quickly after the first 5-10 you see. Make sure you walk the outside perimeter as well. You should be looking at all the following:
Signs of shifting inside and outside the property (i.e. foundation issues) *Special note here. I prefer pier and beam foundation to a slab. If there are any big problems, such as leveling or plumbing, they are SO much cheaper to fix when you have a crawl space under the house. I feel like slab foundation homes are a cruel joke someone came up with in the 40s.
Any signs of water damage both inside and out
Exterior wood rot
Windows (if they are double or triple pane and have condensation inside, they will eventually need to be replaced
Cabinets (salvageable or replaceable?)
Water heater and HVAC system (how old are they? Manufacturing year will be on all equipment)
If the house is older, make sure electric has been updated (look for the panel and try to peek at the wires behind an outlet. If they are aluminum, you’ll at least need to have outlets with a converter)
Look at the visible plumbing pipes. PVC is best. Look for any corrosion. Think about paying to have a plumbing company to scope pipes with a camera. I do not like hydrostatic tests as they can actually make any plumbing issues worse.
Look for water damage under the sinks, around the toilets, and around the showers.
Look at the condition of the roof
Take note of all cosmetic updates that need to be done (i.e. the pretty stuff)
Look around at your neighbors. Do they keep up their homes? Know the neighborhood and the schools. These will be selling factors.
Starting You Design Project
This is the fun part (at least I think so). This is where you hammer out a spreadsheet with all materials and approximate labor costs (you can Google what to expect on each job and go from there). Wait to start this process once you are in your option period. This is the 7-10 days where you must do inspections after agreeing to a sales price. Get in the house with a tape measure and start taking measurements of EVERYTHING. Measure the size of every room for approximate square footage that you will need for flooring. Measure the walls in the showers and backsplash to find out how much tile you will need. Measure the countertops. Measure the vanities in the bathrooms. Figure out if you will be changing anything on the layout. If you decide to do this, you must find ways of making it very cost-effective. Once you start tearing down walls and relocating appliances, the numbers can start going up so fast, they’ll make your head spin. Figure out what is most functional to those that will purchase the house. If you have room in the budget for that open-concept, then do it. If you can get away with adding one more bathroom, go for it. If you buy something with a converted garage, maybe look into how you can convert it back if it seems awkward. The way the market is now, so many people are just desperate to get a roof over their heads since the affordable inventory is at an all-time low. They will buy just about anything. That means the window for the types of housing you can invest in has widened.
The easiest way to pick out your design materials is to either start from the ground-up or go room-by-room. If you have no idea how to start your concept, first think about the overall style of the house. Is it more traditional or a bit rustic? Could a modern look work in the house? Get on Pinterest, make a board, and start saving simple design ideas that look pleasing to the eye and appeal to as many people as possible. You can get just a little funky and different here, that’s how your project will look custom and pop to potential buyers. You want them foaming at the mouths to get into your property. Although if the area calls for it, you can get away with doing low-cost updates. I rather enjoy the idea of bringing a house new life. Do not break the bank here, though. No need for that expensive mosaic marble tile at $14.99/sf unless it’s a high-dollar home. A small accent would be acceptable, but don’t get crazy with it.
Consider hardwood-look vinyl sheets in homes less than $150,000. They are extremely cost-effective, very easy to install, and surprisingly durable. You could put that in yourself and save a lot of money. It can even go in the bathrooms. For homes that are higher, look into a vinyl plank or even wood plank floor tile. Both are extremely durable compared to hardwood and laminate, and they are a lot cheaper. If you are replacing bathroom vanities, consider the ones that already come with the countertop and sink(s) installed. Need new kitchen cabinets? Look at RTA (ready-to-assemble) and unfinished for the best price. Do NOT get into custom kitchens unless the house values at $500,000+ after repairs. Even then, you could still get away with RTA cabinets. I also recommend choosing hardware that matches. If you're mixing, it must look pleasing to the eye. Nothing peeves me more than when I walk into a house and they have gold cabinet pulls with brushed nickel fans and doorknobs. Make sure any paint you do is neutral. If you decide on an accent wall, it must be tasteful. Also, stay away from things that are too trendy. You are looking for timeless and elegant. Who knows, you may be late on the trend and shoot yourself in the foot. Consider subway tile. The style is so versatile and very affordable (you can also install it yourself). Think it’s just a trend? That specific tile has been around for decades. It’s never going out of style.
How To Get The Work Done With FHA
The process of getting the work done can be a little tricky since FHA gives you the money needed for renovations in ‘draws’. Typically, 3-4 draws are standard. They also require the work to be done BEFORE they give you the money to make sure it is going where it’s supposed to. To streamline the process as best as possible, hand over that spreadsheet for the lender to look over. Include the cost of labor after you discuss that with your contractor. You are required to have one signed onto the project. You can get away with doing some of the work yourself, but the check will be made out to the contractor. They can just pay you after it’s received. You are also not allowed to use a family member as your contractor (even if they’re licensed). My suggestion here is to find a contractor willing to work with you, knowing they will not be doing all the work. This saves you the most money since you are not paying a ton extra on labor. Also, (even though I hate this) I recommend getting a Home Depot or Lowe’s credit card, as well as one other Visa or Mastercard. Take the contractor with you to buy most of your material (so you can get his discount). I found a lot of affordable materials online as well such as light fixtures, ceiling fans, and hardware. Each time you get large sections of the work done, you will need an FHA inspector to come out and inspect the completed work. They may charge you every single time they come to inspect so I would try to negotiate rolling the fees into your mortgage. They will then give the contractor a check. Have the contractor write you a check for the materials purchased and the rest goes to him for whatever labor he’s charged you for. Immediately go and pay off those credit cards with the money!
When You Go To Sell
Pay attention to the market when you’re thinking about listing the property. Find out how much homes are selling for around you now. If you are not making at least a 20% return on your investment, it’s not worth selling yet. The best way to sell is ‘for sale by owner’. That way you will not be paying mondo fees to real estate agents and title companies. You may need to find a realtor that will do the basic paperwork for you for a small fee and find an affordable title company to work with. I know there are resources online that have paperwork templates for you to use as well. You just need to do a little research. I recommend selling the property as-is so the buyer cannot come back and tell you to do extra work. It’s up to them to inspect the house and figure out whether the investment is worth it. Also, if you think the house will not appraise, include an appraisal addendum after agreeing to a sales price with a buyer. Say you know the house will appraise at $200,000 and you are under contract for $220,000. The addendum will require the buyer to come up with an extra $20,000 cash (that a lender will not cover) if they want the house. Lastly, you should provide the survey of the property for the buyer. This will cost you anywhere from $400-700. We were fortunate to have our house come with a survey, so we did not have to pay for one at the time we sold.
Everything We Did To Our House
Unfortunately, I did not take step-by-step photos on this house, but I will be doing that on the next one. We had the contractor help with some of the demo work, replace an exterior column, build the concrete shower pan, replace the roof, and install laminate flooring in the living room, kitchen, and hallway. We purchased carpeting from Nebraska Furniture Mart and had them install it in all three bedrooms. We also bought our appliances from there. We hired painters to paint the exterior, retexture and paint the interior, as well as do some minor sheetrock repair and paint all the cabinets in the house. We hired another contracting company to install new countertops in the kitchen and master bath. We luckily had enough scrap left over to use for the guest bath vanity that we renovated right before selling. We also hired another contracting company to install the frameless glass for the master shower and finish out the guest shower. We had a window company replace a window in the front of the house. Lastly, we ended up having to redo all the plumbing right before we moved (that hurt). You must expect big hick-ups in your project that may feel like a punch in the stomach. You need to learn to roll with it and just get it done. If you must rework your plans for selling afterward, then so be it. Do what you gotta do or you will drown in this venture.
We did a lot of work ourselves, which saved us thousands in labor costs. We framed and tiled the master shower, installed new toilets, tiled the master bath floor, installed the plumbing fixtures and lighting, put in a new backsplash, changed out the electric outlets, put in a new HVAC system, replaced all the baseboards, and refurbished and painted the deck that was already in the backyard. LOTS of work, but worth it in the end.
I hope this article gives you a better understanding of how to manage an investment property. This process is not for everyone and many can lose A LOT of money learning things the hard way. You need to make very smart decisions when taking this on and consider living in the property yourselves for a while if the market is not quite there yet. You can put it up for rent for a while, but that’s a whole other bag of worms to consider. For now, we are owning one house at a time until we have funds to own multiple. That process can take several years. Good luck to you and remember to have a little fun in the process!
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