Real estate investing can be a fly-by-the-seat of your pants business in hot markets which is why having a reliable hard money lender on your side is the lifeblood of successful real estate investors today. Unless you already have deep pockets, most investors will need to access a hard money loan to both acquire a new investment property and to have the capital on hand to make the necessary transformation that will turn your run-down property into real estate treasure.
A popular metric to measure the performance of any real estate investment is called Cash on Cash Return. This metric gives an investor a rate of return on the amount of cash invested in a given property. This may not be a perfect measure of ROI but it’s a good way to compare the potential return between two given investments or properties. Cash flow is the main problem investors run into. What do you do if you start a project and run out of capital to finish it? Or go into a property with good potential upside only to have the market bottom out around you – causing you to flash sell and move on. These situations have happened to almost every house flipper at one point so knowing your market, taking steps to mitigate risks (like working with a pro contractor team and staying within your estimated budget and timeline) will help you take on any project with the confidence that you’ll have a successful outcome.
And remember, your budget and cash flow do not just refer to rents received or mortgage payments made but the amount remaining after expenses are paid. Those expenses may include: utilities paid by the owner during a flip and while it’s up for sale, repairs, insurance, property taxes, home owners association dues, landscaping and material costs which can get up there if you’re competing in higher-end housing markets. It is important to remember that each property is unique and investors would be wise to do their homework to determine not only what the property is likely to rent or sell for but also what expenses will be incurred.