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Investors have several options for purchasing real estate to earn a profit. If you’re interested in acquiring rental properties, commercial buildings, or fix-and-flip real estate, there’s a suitable investment strategy for you. Today, we will explore fix-and-flip real estate and explain how investors can rapidly generate profits through this approach.
You’ve likely heard the term “fixer-upper” used to describe properties that are old or in need of repair. Fix and flip real estate involves buying these properties at a lower price, renovating them, and then selling them quickly for a profit.
For most investors and real estate lenders, the goal is to sell a fixer-upper within 12 months or less. However, if selling takes longer than 12 months, most lenders are flexible and can extend the loan term.
The success of renovating and selling a fixer-upper hinges on several key factors. Creating and adhering to a realistic budget is critical. It’s also important to choose a property that, once renovated, can be sold at market value to yield a profit. Additionally, investors need to develop a detailed renovation plan to ensure they stay within budget and complete repairs on schedule.
If you’re interested in the fix and flip approach but unsure where to begin, there are essential steps you need to follow.
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Like any investment strategy, fixing and flipping real estate comes with its own set of advantages and disadvantages. If you’re interested in exploring the pros and cons of fixer-uppers, continue reading as we delve into them below.
Pros of Fix and Flips
Fixing and flipping properties is an excellent entry point into the real estate market, despite its learning curve. This strategy demands thorough research, considerable time, and substantial effort, but it allows you to actively engage in the real estate sector from the start.
One of the main advantages of fix and flip investments is the potential for quick profits. Unlike other real estate investments that may take years to yield significant returns, fix and flip can generate substantial profits within months.
Additionally, fix and flip deals provide considerable flexibility. This process can be tailored to fit your budget, goals, project timeline, experience, and priorities. It also offers the option to be as involved as you wish, whether you prefer a hands-on approach or a more hands-off role.
Cons of Fix and Flips
Going over your budget can significantly affect your success with a fix and flip property. Exceeding the budget cuts directly into your profits, making strict financial control crucial.
Fix and flip properties generally offer fewer tax advantages compared to other real estate investments. These benefits typically become available only if you convert the property into a rental.
Additionally, fix and flip investments are extremely time-consuming. Even if you employ independent contractors, you still need to oversee the project and ensure that it stays within budget. This involvement demands a significant time commitment.
Repairing damaged real estate demands substantial time, effort, and financial investment. Therefore, it’s crucial for investors to undertake the following steps before committing to a fix and flip real estate purchase.
1. Research the Market You Intend To Buy
The first step in any real estate investment is market research. Before selecting a fix and flip property, you need to analyze the market in the community where you plan to invest. Initially, you must assess the profitability of a fixer-upper and learn how to identify a favorable property deal.
Investors also need to understand the typical duration required to fix and flip a property and fully grasp the associated renovation costs. With this information, you may want to create a comprehensive business plan to document your expectations and budget timelines.
2. Find The Best Suited Property
Next, with a solid business plan in place, it’s time to select a suitable property to purchase. You can find a property through a real estate agent or by searching on your own. Regardless of the method, it’s crucial to thoroughly inspect every aspect of the property.
Consider the potential risks, benefits, profitability, location, and local competition. Additionally, before purchasing the real estate, ensure that you walk through the property to identify the types of repairs it will require.
3. Figure Out Financing And Consider Whole Life Insurance
Once you’ve identified a property to purchase, the next step is to secure financing. You don’t need a large sum of cash on hand to acquire real estate. There are several financing options available. For instance, you could approach private money lenders or use equity from other properties to secure a home equity loan.
However, it’s important to note that most fix and flip properties do not qualify for traditional mortgage loans. Because they are considered riskier than conventional properties, financing fix and flip real estate can be more challenging.
This is where leveraging money from a Whole Life insurance policy can be extremely beneficial. Unlike traditional mortgage loans, where the property would need to qualify before the mortgage company will lend, there is no qualification process for loans against Whole Life insurance. You can borrow for anything at any time and…it’s an interest only loan!
4. Hire Contractors to Help If You Don’t Have The Time Or Skills
Once you’ve acquired your property, the next step is to determine the necessary repairs. Start by listing the repairs that are essential, cost-effective, and will add value to the property. Then, proceed to hire contractors to execute these repairs.
Finding a high-quality contractor is vital for a successful fix and flip project. Rather than choosing contractors based solely on the lowest bids, consider their references, testimonials, and qualifications. If you’re uncertain about how to find a reliable contractor, ask for referrals from other investors. Craigslist and Angie’s List can also be helpful tools.
5. Make The Necessary Renovations to the Property
The most challenging part of property renovation is staying within your allocated budget. During the renovation phase, investors have the flexibility to be as hands-on or hands-off as they prefer. If you opt for a more hands-on approach, you can assist contractors with the renovations.
If you prefer to let your independent contractors handle the repairs and renovations, that is entirely acceptable. The key priority in the renovation process is to ensure that you do not exceed your budget.
6. Stage and Sell (or Rent) Your Property
Once your contractors have completed all the necessary repairs and renovations, it’s time to decide whether to stage, sell, or rent the property. To maximize its appeal, it’s crucial to clean and stage the property effectively. If you are an established landlord and require assistance managing your properties, contacting a local property management company might be beneficial.
If your goal is to sell the property and realize a profit quickly, it is important to take professional photos and list it at a fair market price. Alternatively, if you prefer to become a landlord and rent out your property, you should list it at a reasonable price and emphasize the benefits of renting to potential tenants.
Leveraging whole life insurance to invest in fix-and-flip properties can be a strategic way to utilize minimize the cost of capital when investing. Here’s a step-by-step guide on how to use this method effectively:
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Step 1: Understand Your Policy
First, familiarize yourself with the terms of your whole life insurance policy. Determine how much cash value your policy has accumulated. Cash value is the equity of your policy. It builds up over time and it can be used as collateral for you to use the insurance company’s money or even a third-party lender’s money.
Step 2: Review Borrowing Terms
Contact your insurance agent or carrier or agent to inquire about the terms for borrowing against your policy’s cash value. Find out what the interest rate is, when the interest on the loan is due, and how long it will take to receive the funds requested.
Step 3: Calculate Available Funds
Determine how much money you can borrow from your policy. This will help you know how much capital you have available for investing.
Step 4: Borrow from Your Policy
Once you have all the information and have identified a promising property, proceed to borrow the necessary funds from your life insurance policy. Ensure that you manage these funds carefully to cover both the purchase and renovation costs.
Step 5: Repay the Loan
Once the property is sold and the profit is realized, prioritize repaying the loan you took against your life insurance policy. Timely repayments are essential to restore your policy’s full cash value and coverage.
By using this structured approach, you can leverage your whole life insurance to fund, fix and flip real estate investments effectively while managing risks associated with borrowing against a life insurance policy.
Loans from whole life insurance have no IRS restrictions on how the funds are used. Unlike funds in a Roth, 401K, or IRA, which have restricted usage and allow no sweat equity, personal use or personal benefit, whole life policy loans don’t come with restricted usage rules or regulations. This is an added benefit of using whole life policy loans versus a Roth, 401K, or IRA to fund fix and flips.
At McFie Insurance our goal is to provide whole life insurance policies that allow people to live a better life. Give us a call today to learn how whole life insurance can provide you unlimited ways to leverage your policy’s cash value for any investment. Schedule a consultation today!
