Your first flip is a cornerstone of your investment career. It may launch a profitable side business that will steadily increase your net worth. Alternatively, it may sour you on real estate for years to come. Being a first-time real estate investor doesn’t necessarily put you at a disadvantage. However, since you are facing a slew of unknowns, this is not the time to be overly confident. Swaggering attitude is a sure sign of a first-time investor immaturity and a red flag for private money lenders like us.
Here are time-tested, down-to-earth recommendations on steps to take (and to avoid) if you are just starting with your fix-and-flip career.
Take Your Time Selecting the Right Property
In real estate, you make money when you buy. If you overpaid initially, there is rarely anything you can do down the line to make up for it. Don’t get attached to any property emotionally. It doesn’t have to be “cute,” it doesn’t have to have a “good feng shui”—the only thing it needs to have is an ability to make you money.
The property’s ability to make you money is primarily determined by the spread between your acquisition and rehab costs and its after-repair value. To have a realistic view of your costs, use our hard money calculator and read our blogs on how to use it properly. Also, learn the right way of determining your rehab’s after-repair value.
Don’t Get Discouraged
Admittedly, finding a good deal is often the most challenging step for first-time flippers. I often see them plunging into the frenzy of activity just to be fully depleted of energy in two or three months. Pace yourself. Your lack of experience might be working against you here as you are yet unable to sift through deals efficiently and unemotionally. You don’t have to dedicate all your time to driving around and checking on potential leads. Give yourself at least a year to find the right property. Persevere but don’t forget to have fun and live your life.
Find the Right Hard Money Lender
There is no time more important to have someone else’s experience on your side than during your first fix-and-flip. This is not the time to work with a private lender who approaches your loan in a purely transactional manner. For those lenders, it does not matter whether you will be making money or not as long as you are paying their interest rate.
We work differently. We are a local direct lender with a loyal following. Some of our clients came to us with significant rehab experience, but the majority were just starting out. We work with our borrowers before and after their settlement to ensure that their deal makes sense not only from our own risk-management perspective but also from these borrower’s profit-making potential.
Be Realistic on Your Time Frame
Ironically, it’s the most inexperienced investors who have the most unrealistic time frames for fixing and flipping. They are the ones that “move extra” fast. Their crews “finish even most complex rehabs in six weeks or so.” Their renovated properties “sell within a month.” Or so they think. Or hope. Or dream. Some private lenders play on this naiveite by structuring their loan terms around it and then charging points for extensions. Whether you chose to work with another hard money lender or us, please don’t plan based on the best case scenario. The majority of our borrowers repay our loans within eight to 12 months. The faster your move, the better it is for you. This is precisely why we don’t charge a pre-payment penalty. However, since you are a brand-new investor, base your time frame for the first deal’s completion on the industry’s averages and not your aspirations.
Actively Manage Your Contractor
Your contractor might talk a good talk and even have excellent references. The bottom line is that, if you are a new investor, you’ve never worked with that contractor before. Make sure that you have a water-tight contract that holds that contractor responsible for finishing up different stages of the rehab before he gets paid. Visit the site often to see the progress for yourself. Separate labor and material costs to increase transparency. Never release large amounts of money to your contractor in advance and beware of those contractors who insist on you doing so. Work with your hard money lender on developing a scope of work and a draw schedule that is clear, fair, and logical.