Construction Loans Defined

Financing Flipping Houses
I have written about construction loans more than a few times when discussing financing flipping houses. It is an excellent way to buy investment property that needs work, rehab it, and do it all with the bank’s money. The Property Pundit wrote an excellent post describing what a construction loan is and how [...]

Financing Flipping Houses

I have written about construction loans more than a few times when discussing financing flipping houses. It is an excellent way to buy investment property that needs work, rehab it, and do it all with the bank’s money. The Property Pundit wrote an excellent post describing what a construction loan is and how to use it. I encourage anyone interested in flipping houses to read it and become familiar with construction loans for rehabs.

Flipping Houses Training

I have been asked to do the featured seminar at the upcoming Construction Expo in Minneapolis on October 31 and November 1 about Flipping Properties 101.  If you are interested in learning about Flipping Houses, it will be a great opportunity to get a lot of information in a short 2 hour training.  And best of all, [...]

I have been asked to do the featured seminar at the upcoming Construction Expo in Minneapolis on October 31 and November 1 about Flipping Properties 101.  If you are interested in learning about Flipping Houses, it will be a great opportunity to get a lot of information in a short 2 hour training.  And best of all, the Expo and seminar are FREE!

Some of the topics we will be covering are:

• Can you flip?
• What type of flip are you doing?
• Before you flip!
• Financing your flip
• Developing your flipping budget
• Finding your flips
• Setting your offer price
• During your flip
• Exit strategies
• Plus 30+ minutes of Q&A to answer your questions.

I look forward to meeting you there.

Flipping a $30,000 House

No, we have not gone through a time warp and are back in the 1970s!  There really are houses on the market in Minneapolis today for $50k, $40k, and even $30k.  As you expect, most of them are in North Minneapolis, but they are not all in rough neighborhoods.  Many investors/rehabbers are reaping amazing profits and [...]

No, we have not gone through a time warp and are back in the 1970s!  There really are houses on the market in Minneapolis today for $50k, $40k, and even $30k.  As you expect, most of them are in North Minneapolis, but they are not all in rough neighborhoods.  Many investors/rehabbers are reaping amazing profits and cash flows by doing ”flip and holds” (as I like to call them). 

There are properties available in decent neighborhoods that have simply been neglected for years and with the stigma of North Minneapolis, have been on the market for a long time.  Most of these are 2-3 bedroom, 1 bath houses with 2 car garages.  Some have hardwood floors and they were built in the 1930s-1950s. 

Assuming you will need to do full kitchen and bath remodels and some other significant repair such as a roof, windows, or furnace, let’s run the numbers on how a $30,000 house may flip:

Purchase Price:	$30,000
Closing Costs:	$1,000
Repair Costs:	$30,000
Total Cost:	$61,000

Many of these house are then appraising for $90k-110k.  Truthfully, they are difficult to sell [today] because of the glut of properties in North Minneapolis and the apprehension of many to buy in North.  We do expect a turn around in a several years.   

These are perfect properties to buy, fix up and put in your portfolio (“flip and hold”).  Most investors will take out 90% loans on the properties, potentially pulling out $10-20k (more than they put in for a down payment!).  With a 90% LTV loan on $90k ($81k loan value at 7.5%, 30 year conventional), your monthly loan payment (before PMI) is going to be:  $563.  Add in PMI, water/sewer/garbage, taxes, insurance and you have a monthly cost of approximately $675. 

Prospective tenants are very excited to lease these newly remodelled single family houses.  This allows you, as a landlord, to be very picky on who you rent to.  Most of these tenants are paying $1000 for a 2 bedroom and $1200+ for a 3 bedroom.  Your cash flow is $300-500 per month!  And because the property was just completely renovated, your annual repair bills are very low. 

These deals can be arranged in many ways with you participating by doing the flip or letting our seasoned investors do it for you.  We even have a very successful property management company that can take the day to day part of being a landlord off your plate.  If you may be interested in an opportunity like this, I encourage you to contact me so we can discuss it further.

Finding Your Flips

After all your flipping prep work, you will need to generate leads on potential properties to flip.  Unfortunately, not all leads will end in you buying a property to be flipped.  Many leads will be dead ends for various reasons including (but not limited to) the lack of a seller’s motivation, condition of property, and even competition.  [...]

After all your flipping prep work, you will need to generate leads on potential properties to flip.  Unfortunately, not all leads will end in you buying a property to be flipped.  Many leads will be dead ends for various reasons including (but not limited to) the lack of a seller’s motivation, condition of property, and even competition.  Because this is a numbers game, you need to define how many properties you want to flip each year or month and then how many leads you will need to generate properties to make offers on.  The following techniques, when used consistently, should allow you to generate enough flip leads which in turn will allow you to find (and make offers) on properties to flip:

• Prospecting-The following tools will generate leads on potential houses to flip.  Once you generate the lead, use the county’s on-line property tax system to find the owner.  Call them or send them a letter asking if they are interested in selling and that you can close quickly.
  • Use the MLS or a realtor to find properties that are below the average price range for your target neighborhood.  Although it is not a perfect statistic, use a price per square foot as a rough way to find leads on properties.  Also, look for keywords in the listings that say:  needs TLC, fixer-upper, As-Is.  Additionally, review properties that have been on the market for an extended period of time. 
  • Drive or walk around your target neighborhood.  Look for houses that have uncut grass or are vacant and/or boarded up.  Properties that also appears to need exterior work may be leads.
  • Sometimes desperate sellers will attempt to sell the property themselves first, before using a Realtor.  Check the classifieds in the local paper and Craig’s List for your area.
  • Check the foreclosures listings in the newspaper.  I do not recommend buying the property at the sheriff sale, but  contact the sellers to see if you can help them out of a bad situation.  Otherwise, simply make a note of what properties are going into foreclosure and watch for them to become available (probably on the MLS).
• Advertising can be an effective technique to generate qualified leads as people are calling you to discuss their property/situation.  Small “bandit” signs at intersections and boulevards is a highly effective technique that many national firms use.  You can also create letters or post cards and mail them to your target neighborhoods calling the recipient to call you if they need to get out of their house quickly.
• Networking involves connecting with as many people that you can find that many have knowledge of a lead on a house that needs to be rehab’ed.  These may include Realtors, contractors, neighborhood residents, and other investors.  One great source is to connect yourself with attorneys that handle estates.  Often the family members are not interested in going through the process of selling or fixing up their relative’s home and just want it taken off their hands.  Many times these will be homes that have been neglected for years by an aging owner. 

Even once you start your first flip, do not turn off your lead generation process.  If you intend on continuing to do house flips, you will want to always have leads in your pipeline.  The above techniques will not only generate property leads, they should also help you understand your target neighborhood better.

Great Minneapolis Multi-Unit Investment Property Opportunities

I continue to be amazed by the quality of the investment properties that are for sale in Minneapolis.  Many of these are priced 10-20% below what they would have been priced at just 12-18 months ago. 
Here are some examples:

30xx 3rd Ave South, Minneapolis, $324,000.  4-plex building, each unit has 3 bedrooms, 1 bath.  It has updated kitchens, [...]

I continue to be amazed by the quality of the investment properties that are for sale in Minneapolis.  Many of these are priced 10-20% below what they would have been priced at just 12-18 months ago. 

Here are some examples:

• 30xx 3rd Ave South, Minneapolis, $324,000.  4-plex building, each unit has 3 bedrooms, 1 bath.  It has updated kitchens, hardwood floors and bathrooms.  All utilities are separated with newer furnaces and water heaters.  This building should cash flow over $1500/month for a well qualified borrower!
• 27xx Blaisdell Ave South, Minneapolis, $499,000.  7-unit building.  Most units have 1 bedroom, 1 bath.  It has been exceptionally well maintained building by a caretaker that has lived there for 14 years!  Even with owner-paid heat, this property cash flows almost $1000 per month.
• 36xx Elliot Ave South, Minneapolis, $300,000.  4 unit building that is currently bank-owned and vacant.  It needs light renovation, but could be a gem as it has 2 bedroom units and all utilities are paid by tenants (4 boilers).  Once repaired and rented, it could generate over $1100 per month.

These are just a couple of the outstanding opportunities in the investment property market right now.  Don’t wait, call me now and discuss how you can get started.

Financing Your Flip

Assuming you don’t have a pile of cash under your mattress to buy that house to flip, you will need to get it somewhere. These are the most common ways to finance your flip:

Hard money lender-These are individuals in the market that finance investors/rehabbers for short periods of time (less than 1 year and [...]

Assuming you don’t have a pile of cash under your mattress to buy that house to flip, you will need to get it somewhere. These are the most common ways to finance your flip:

1. Hard money lender-These are individuals in the market that finance investors/rehabbers for short periods of time (less than 1 year and typically for 6 months) for higher than bank’s interest rates or a large percentage of the flipping profit. They will generally take a creditor position against the property to protect their investment. Your closing costs will be lower as their is no bank involved to charge fees. If you chose to hold the property, you will replace the hard money lender with a traditional mortgage.  They can also make a great advisor for your first house flip.
2. Construction loan-This is generally the best was to finance your flip to secure as you should be able to borrow not only the initial purchase amount, but much of the rehab costs also. Often you will need to contribute 5-10% of your own money and can then borrow 80-90% of the repaired value of the property. This method is typically easy to convert to traditional financing if you chose to hold the property. The initial construction loan also traditionally has lower closing costs.
3. Traditional loan with flipper infusing cash-Many first-time flippers will make the mistake of using a traditional financing product to purchase the property. They will then spend their own money to fix up the house, waiting till it sells to recoup their cash investment. This method requires the flipper to have all the necessary funds available up front to not only rehab the property but to also hold it during the sales process. Then, if you decide to hold the property, you will no choice but to refinance to pull your cash out to continue doing other flips.

There are many other complex and interesting ways to finance your flip which are beyond a short blog post, such as: self-directed IRAs, credit cards (yes, many people do it!), limited partnerships, and borrowing against the cash value of your life insurance.

Researching your different options for financing your flip in advance will make this process much smoother and should help you put more money in your pocket.