Because of the significant shortage of homes on the market, savvy real estate investors have ample opportunity to successfully fix and flip existing properties and add much-needed housing stock.
These value-added real estate projects can range from renovating a vacant residence or adding another floor to an existing property, to turning a single-family home into a multi-unit dwelling. But before deciding on one of these opportunities, investors need to consider the following key factors when researching projects.
Economic fundamentals
When assessing a property to fix and flip (or fix and hold), it pays to concentrate on areas with strong economic fundamentals, including favorable tax incentives, great schools and positive community involvement. It is also beneficial to work within healthy job markets with strong anchor industries, which generally include cities where businesses are relocating or expanding and looking to hire more employees.
Another key item to consider is the current housing situation in a specific area. Neighborhoods experiencing moderate to severe housing shortages, but with properties on the market that are conducive for renovating and then selling or renting, are preferable for most investors.
Working with a reputable commercial broker and real estate agent who has experience in an area can help investors find homes with value-add potential in neighborhoods that fit their price point, renovation budget and ideal profit margin. Once the right location has been identified, most successful investors look for properties that can be renovated efficiently within the timeframe and budget that fits their goals. They work with contractors that have experience and references from previous projects, as well as positive feedback from clients.
“Investors should be careful not to overpay for a property at acquisition, or the chances of making a profit will be reduced or negated.”
Investors should be careful not to overpay for a property at acquisition, or the chances of making a profit will be reduced or negated. Other charges that may be incurred prior to starting a project include permit or development expenses, property taxes, title search fees, commissions and insurance. Construction and holding costs are the other significant variables that should be carefully considered prior to beginning a project.
Zoning concerns
Even when a property is located in a neighborhood that seems ideal, zoning laws may not allow certain changes such as increasing square footage, land area coverage or cosmetic changes. Permitting and development requirements often vary widely depending on the location.
Investors should conduct extensive research and work with professionals to understand relevant local laws concerning permits and developments. Many professional flippers keep track of any potential city council initiatives that may positively or negatively affect investment decisions.
One zoning trend that is becoming more prevalent in many areas is the expansion of allowable accessible dwelling units (ADUs), which are small, independent dwellings located on the same lot as an existing home. Some dwelling-unit regulations pertain to owner-occupied homes only, so investors should examine how the regulations apply to their business plan.
Housing additions
Ground-up construction of one to four units in infill areas is a strategy used by many professional flippers who have gained experience with other types of projects.
Another strategy that is growing in popularity is “pop top” additions, which are housing spaces built above existing homes or even apartment buildings. Adding one or two floors to apartments can create significant additional value but is not allowed in all municipalities and requires extensive planning, permitting and a high level of execution.
For investors looking to turn a profit with smaller projects, a more common and often less complicated way to add units to existing properties is the conversion of single-family homes to multi-unit dwellings. Most investors focus on homes that are already zoned for conversion to maximize their ability to make a good return in a short period of time.
A more complex fix-and-flip strategy is rehabilitating unlivable or abandoned properties, which can offer greater returns but requires a bigger financial investment and greater risk appetite. It is essential to thoroughly research the property and its history before moving forward.
Most successful investors in this segment engage professional home inspectors, meet with neighbors to learn more about the property and discuss needed improvements with the municipality to confirm the scope of work. These efforts are definitely worth the time and cost.
Regardless of how investors choose to focus their strategies concerning fix-and-flip properties, mortgage brokers can add value by helping them explore different lending options available for their project. They can also provide local knowledge to help steer clients toward the best opportunities on the market. Many lenders and brokers specialize in certain property types and geographic areas and can offer better terms that are suited for whatever fix-and-flip project an investor may choose.
