Fix-and-flip real estate has grown in popularity over the past few decades because of TV shows featuring the practice popping up on mainstream television networks. While house flipping can provide quick cash in a short period of time if done properly, does it hold the potential to double your money? The answer may just surprise you.
Doubling your money in real estate
Doubling your money as a real estate investor does not mean you bought a property for $150,000 and sold it for $300,000. Thanks to the power of leverage, doubling your money could simply be doubling the amount of money you personally invested because you got a hard money loan or a private mortgage. It might seem counterintuitive to get a loan that might charge high interest rates or points and fees to fund a fix and flip, but if used properly, it can allow you to achieve a much higher return.
For example, let's assume you find a flip that you can purchase for $255,000. The property has an after repair value (ARV) of $535,000 and needs around $120,000 in work. You get a hard money loan for the purchase price and repair costs, putting $75,000 down, which is equal to 20%. That leaves you with a hard money loan at 13% plus two points on $300,000. Once the rehab is complete, you sell for the projected ARV of $535,000 and after holding costs, real estate agent fees, and paying the lenders fees and balance on the hard money loan, you would net $168,500, which is a 224% return on your money.
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However, if you purchased this with your own cash, putting the full $375,000 into the investment, you would only net $478,500, giving you a total return on investment (ROI) of 127%. Using leverage makes doubling your money much more achievable than putting the full amount out yourself.
Location, location, location
The real estate adage of location, location, location seems redundant, but experienced investors and real estate agents say it for good reason. A recent data report from ATTOM Data Solutions found that house flipping profit margins are down despite the red-hot real estate market. This means it's more important than ever to focus on the property's location.
Focusing on markets that are in high demand will translate into the home selling faster, leading to lower holding costs and likely a higher sales price because demand substantiates home price appreciation. Hot markets like those in the Sun Belt right now can create a scenario where your calculated ARV is surpassed before you can even complete the work and get it sold, leading to higher profits and a greater chance of doubling your money.
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Fix and flipping ain't easy, but it can pay off
There are certain opportunities where you can purchase a property, do very little if any work to it, and sell it for a profit. But generally speaking, you will be hard-pressed to actually double your money without making notable improvements. So it's imperative you understand the many moving parts involved with this business and have a firm understanding of the due diligence process for each investment.
Learn the common mistakes new fix-and-flip investors make, and get to know your market intimately before investing. If you lock in the right deal, it can be a breeze to double your money on a flip and grow your wealth in no time.
