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How to decide whether you should buy a home in cash or take out a mortgage

Personal Finance Insider writes about products, strategies, and tips to help you make smart decisions with your money. We may receive a small commission from our partners, like American Express, but our reporting and recommendations are always independent and objective.

  • Buying a home in cash can be a great step toward financial freedom, but it isn’t automatically a better choice than taking out a mortgage.
  • Paying in cash can save you thousands on interest, closing costs, and monthly payments, but you could earn more in the long run if you invested some of that money in the stock market instead.
  • Paying in all cash could be risky if you don’t have much left in savings after buying the home.
  • Buying in cash can make your offer more competitive and may land you a discount, while a mortgage could come with tax benefits and the ability to improve your credit score over time.
  • Policygenius can help you compare homeowner’s insurance policies to find the right coverage for you, at the right price »

If you have the money to buy your dream home, then you might assume paying in cash is the way to go. This could be true, but the choice between paying in cash and getting a mortgage isn’t black and white.

The answer to the “cash versus mortgage” debate depends on your circumstances. There are several factors to consider, including how much you’d have left in savings, how you’d spend the extra money if you took out a mortgage, and what your priorities are.

Should you buy a home in cash or get a mortgage?

You may want to buy in cash if you:

  • Will still have significant savings after buying the home
  • Want to close on a home quickly
  • Wouldn’t put the extra cash into other investments

You may want to take out a mortgage if you:

  • Would put extra money you would have used to buy the house into the stock market
  • Would be in a tight financial situation after buying a home in all cash
  • Want to gradually improve your credit score, and don’t already make other payments that boost your score

Benefits of buying a home in cash

  • You won’t pay interest. Paying interest on a mortgage can cost you tens of thousands of dollars over a 15-year, 20-year, or 30-year term. Paying cash to avoid interest is a potentially great way to save money in the long run.
  • You won’t pay closing costs. Taking out a mortgage comes with a lot of fees, commonly referred to as closing costs. You could pay an appraisal fee or private mortgage insurance premiums. Lenders also have the right to charge “junk fees,” which could show up on an itemized list of fees as origination or processing fees. In total, closing costs typically set you back thousands.
  • You’ll have lower monthly payments. You’ll probably still have to make monthly payments on things like property taxes, homeowners insurance, and maybe homeowner’s association fees. But you’ll free up hundreds or thousands of dollars per month on mortgage payments, so you can spend that money in other ways.
  • It could make your offer more competitive. A seller may prefer to sell to someone who is paying in cash, because the closing process usually goes more quickly, and there’s less risk that something will go wrong with your financing.
  • You might pay less for the home. Because receiving a cash offer is more attractive, the seller may agree to give you a discount to close the deal.

Benefits of taking out a mortgage

  • You aren’t tying up a lot of money in one investment. If mortgage interest rates are low right now, then you could stand to make more by investing some of the money in the stock market than by avoiding interest payments. But if you’re pretty conservative with your investments or know you wouldn’t put that money toward the stock market, then paying in cash could still be more lucrative.
  • You aren’t spending a lot of cash at once. Yes, buying in cash can potentially save you a significant amount of money in the long run. But if you spend the bulk of your liquid cash on the home, then you could face trouble if there’s an emergency or if you need to make home repairs after moving in. It can be a good idea to make sure you still have money set aside for an emergency after buying a home.
  • Improve your credit score. Making mortgage payments on time every month for years should gradually boost your credit score. This tactic can be especially useful if you aren’t already improving your credit score by making payments on a car loan, student loan, or credit card.
  • Receive tax benefits. Mortgage interest payments are tax deductible. The deductions aren’t quite as substantial since the 2017 Tax Cuts and Jobs Act limited how much you can write off, but it’s still worth considering. In 2020, you may be able to write off up to $750,000.

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Cross-Sectional Patterns of Mortgage Debt during the Housing Boom: Evidence and Implications

Abstract

In this paper, we use two comprehensive micro data sets to study how the distribution of mortgage debt evolved during the 2000s housing boom. We show that the allocation of mortgage debt across the income distribution remained stable, as did the allocation of real estate assets. Any theory of the boom must replicate these facts, and a general equilibrium model shows that doing so requires two elements: (1) an exogenous shock that increases expected house price growth or, alternatively, reduces interest rates and (2) financial markets that endogenously relax borrowing constraints in response to the shock. Empirically, the endogenous relaxation of constraints was largely accomplished with subprime lending, which allowed the mortgage debt of low-income households to increase at the same rate as that of high-income households.

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Home builders look to tax breaks, easing of mortgage rules to stimulate recovery

The home construction industry has compiled a list of 20 recommendations — from tweaking the mortgage stress test to tax breaks for builders and billions of infrastructure stimulus spending — that it says will help builders and consumers boost the economic recovery post-lockdown.

If governments don’t invest in the construction industry, they are risking an erosion of consumer confidence that could lead to a potential credit crisis and extended job losses, warns a 36-page presentation by three home industry associations to the Ontario Jobs and Recovery Committee, chaired by Finance Minister Rod Phillips.

Some of the industry recommendations, including a more dynamic mortgage stress test and a return to 30-year amortizations, would cost little to no new government money, says the joint report by the Building Industry and Land Development Association (BILD), the Ontario Home Builders’ Association and the Canadian Home Builders’ Association.

It suggests that if new condo owners were allowed to begin paying their mortgage immediately upon occupancy without waiting for the municipality to register new buildings — a process with growing delays — it would free up $9.5 billion of trapped liquidity to consumers, builders and lenders.

Some recommendations such as the elimination of the Ontario land transfer tax through the end of 2021 and the removal of HST on new homes for two years, would come at a cost.

Among the other ideas being floated are home renovation and energy retrofit tax credits, the elimination of GST on rental construction and renovations and, the allocation of $2 billion to roads and other infrastructure projects.

The report is really aimed at all three levels of government to meet construction industry challenges but also consumers who will be more cautious about their financial exposure in the future, said BILD CEO David Wilkes.

Wilkes said the industry recognizes that governments have already made significant investments toward COVID-19 and that municipalities are struggling with uncertainty on how to pay the operating costs on community services and transit. He said that is why builders have presented a range of options.

The priorities, he said, are around faster approvals, lengthening funding horizons and relieving the tax burden so the construction industry can get back up and running and that the Toronto region’s housing shortfall doesn’t worsen as a result of the public health crisis.

The last thing governments or industry want is to find in five years the construction cranes have moved on from the GTA, he said.

An industry analysis in the report suggests that a downturn in new housing construction could reduce the GDP by $5.2 billion and cost as much as $2.9 billion in lost wages and earnings.

“We went into this situation recognizing we had a housing shortfall. We want to make sure that shortfall is minimized as we come out of it. There is a responsibility to ensure we deliver housing, but there’s also an opportunity to help kick-start the economy by providing opportunities for construction to move quicker than it currently does,” he said.

Although construction was designated an essential business through the shutdown, public health and safety measures, supply chain issues and other delays have slowed work. A survey of BILD members found there were 498 active housing projects in the GTA, including 276 in the City of Toronto. Sixty-five per cent of those were reporting delays of three to six months and 32 per cent expected longer delays, said Wilkes.

“With the delays, there should be a hard look at costs associated with new development from development charges to other fees and charges and potentially put a freeze on those,” he said.

The industry says that government fees and taxes account for a quarter of the cost of a new home in the GTA.

Some of the measures around expedited approval times, development charges and mortgage measures to ease borrowing were items the industry lobbied for during the last federal and provincial elections.

“We have been consistent in our recommendations and our views for the last couple of years,” he said, adding that the GTA’s housing needs dovetail neatly with an economic recovery.

The residential and commercial development industry says it employs 360,000 GTA workers earning $22 billion annually. The GTA, of which construction plays a significant economic role, generates 20 per cent of Canada’s Gross Domestic Product and 50 per cent of Ontario’s GDP.

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Buying a House Sight Unseen? Avoid These 8 Mistakes

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From grocery shopping to home buying, it seems like almost everything can be done completely online now. The idea of buying a house without seeing it is less daunting these days with all the new technologies and ways to buy a home virtually, and it’s becoming more common. In fact, 20% of homebuyers recently made an offer sight unseen, meaning they made an offer on a home without ever seeing it in person.

Maybe you’re currently living in a condo in Chicago, but have to relocate and move to Dallas, Texas for work. Or, maybe your family is growing and you’re in a time-crunch to move into a bigger house with a yard. Whatever the reason may be, you’re likely going to be buying a home in the near future without seeing it first in person. And while it may seem risky, don’t worry. A completely remote homebuying process can still go just as smooth as it would in person, as long as you avoid these common mistakes made when buying a house sight unseen.

1. Using the first real estate agent you meet

While you might be in a time-crunch or just want to make a quick, competitive offer, you should still take the time to find the right real estate agent for you. Since you won’t be seeing the home in person, it’s important you find an agent that you trust, and knows the market and the area you’re buying in like the back of their hand.

Start by reading online reviews of real estate agents in the city you’re looking to buy, and then interview your top picks. Ask a variety of questions to determine if they’ll be a good fit for you, such as asking how many sales they’ve handled in your target neighborhoods.

2. Skipping out on a virtual tour

Seeing is believing, especially when it comes to buying a home. That’s why you shouldn’t make an offer on a home based on just those wonderful listing photos that initially caught your eye. Even if you love what you see, don’t make the mistake of not taking a virtual tour of the listing — photos can only show you so much.

If the listing has a 3D virtual walkthrough tour, you can easily see every nook and cranny of the home as if you were touring it in person. This is a great tool to use as you’re house hunting to help narrow down your top choices. However, to make sure you’re not submitting an offer unaware of the creaky floors or the lingering pet odor, it’s important to schedule a live video-chat tour with your agent. Even though you can’t be there in person, they can. And they’ll be able to answer those questions that listing photos alone cannot.

3. Forgetting to ask things that you’d normally see for yourself

When you’re house hunting in person, you’re able to use all of your senses. You can see the wonderful natural light coming into the living room, you can hear the noisy garage door, and you can smell the pet odors that are still lingering throughout the home. But when you’re buying a house without seeing it, you’re limited to only what is shown digitally.

Before you virtually tour the home with your agent, write out a list of as many questions or concerns you’d normally be able to see or check out for yourself. Be sure to include some of these questions during the video tour:

  • What can you smell in and outside the house? Maybe there’s a paper mill nearby.
  • What can you hear from the house? There could be a hospital close by or train tracks behind the home.
  • Do any appliances or features look outdated? The cabinets might’ve looked brand new because of a fresh coat of paint, but need to be replaced in the near future.
  • What is the internet and cell-phone service like? There could be a few carriers that don’t offer good coverage in that neighborhood.
  • Is there anything that stands out to you as a concern that wasn’t shown in the listing photos or 3D walkthrough?

If you’re moving to a home further out from the city and suburbs, consider asking what the wildlife situation is like or if the nearby river has ever caused flooding. Or, if you’re moving into a bustling downtown area, ask how the traffic is or what the public transportation options are like.

4. Not researching the neighborhood and surrounding area

Whether it’s because they’re excited for the house they’ve found, or they need to relocate as soon as possible, people often forget to look into the neighborhood and its surroundings. For example, the last thing you want is to move your family across Dallas for a great school, and then discover later on that your new house isn’t actually in the school district’s boundaries; or move into a new-construction home without realizing it’s a 5 minute walk from a high-crime area. If you’re moving to a neighborhood you’re already familiar with then this isn’t a big concern. However, for most people buying a house sight unseen, it’s likely that you’re not as familiar with the area.

Do your due diligence and use Google Maps to virtually walk through the neighborhood to see what the surrounding homes look like and what’s nearby. If your agent is up for it, see if they can take you on a video tour around the block. There could be new construction underway or other potential concerns that you aren’t able to see for yourself on Google Maps. Also consider joining online community groups, such as those on Facebook or Nextdoor, to gain local insights into the specific neighborhoods and communities from those actually living there.

5. Not vetting a high-quality home inspector

Whether you’re buying a house sight unseen or not, a home inspection is a crucial step in the homebuying process. It’s even more important to have this extra set of eyes from a professional when you aren’t able to see the home in person. Just as it was important to vet out your real estate agent, the same goes for choosing a home inspector. Don’t make the mistake of just hiring the first one you stumble across online. Be sure you do your research to find a reputable, qualified home inspector in the area of your new home.

6. Forgoing additional inspections

You’ll want to have a general home inspection to cover your grounds and make sure you’re aware of any problems with the home. For most, a general inspection is sufficient. However, depending on the age of the home or if there’s outside structures and features, like a pool, there’s some additional inspections you shouldn’t forgo. For example, if the home was built before 1980 (and in some cases, after that) you should consider having it checked for asbestos. Rather than showing up to your new home with unexpected surprises and issues, take the time to have it thoroughly inspected.

7. Waiving contingencies

If you’re thinking of waiving contingencies in hopes to beat out other buyers and score the home, you should think twice about that decision. If it’s a seller’s market and you want the offer to be competitive and enticing, maybe you can get by with waiving some less risky contingencies like an early move in. However, it can be a huge gamble and mistake to waive higher-risk contingencies, like a home inspection contingency or financing contingency. To protect yourself in an already tricky situation, be wary of waiving certain contingencies.

8. Expecting the process to go according to plan

A common mistake in any homebuying process is expecting it to go exactly as planned. Add in buying a house sight unseen and you’ll likely find yourself navigating the process differently. It’s important to set a realistic timeline with a buffer in case there are any hiccups along the way. For example, there’s a chance that the loan-approval process could take longer than expected or that the needed repairs to the home you made an offer on are going to take a few weeks longer.

Having a realistic expectation and planning for a few bumps along the way will help you feel at ease in case anything does stray away from the plan. Prepare all of your documents well in advance so you have all the needed information for the loan approval process. Confirm if you’re able to have a fully digital closing rather than needing to be there in person, and periodically check in with your agent to see if there’s anything needed on your end to keep the process going smoothly.

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Determine After Repair Value | ARV

How to do a Financial Analysis of a Home Flip

Comparable Market Sales

Financial analysis of a fix and flip.

Financial analysis of a fix and flip.

  • Pending Sales
  • Active Sales
  • Walk the Neighborhood Local Realtors

Identify Repairs and Improvements Repair

When it comes to renovations you really need to think in terms of the different possibilities.   This is a fun and exciting part of fixing and selling properties.  It’s a chance to use your creativity and you imagination. But then you need to temper all that with the reality of the cost verses the value added to the property.  So consider breaking down your options in to these three categories:

Repairs – “Must”

This are repairs that are causing a safety hazard or that are required by building standards.

Renovations – “Should”

These will be mostly dictated by what is standard and customary.  So if all the other properties in the neighborhood have 3 bedrooms and two bath and your property has 3 bedrooms and 2 baths then you really “should” consider adding a bathroom.

Upgrades – “Could”

This is where your creativity and financial analysis could make or break a deal.  If most of the houses in the area don’t have a pool, and it will cost you a whole lot to put in a pool, but not sure if buyers are going to value it, that’s the “could” that you need to really think on.

Opportunities to Add Value

  • Amenities
  • Openings (Walls)
  • Conversions
  • Additions
  • Layout Changes

Account for Holding Costs

  • Buying costs
  • Holding costs
  • Costs of money
  • Selling costs

Set Minimum Profit

This should be a percentage of your After Repair Value that you set for every flip.

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Quick Guide for First-Time Home Buyers

Ready to buy your first home?

Ready to buy your first home?

Ready to purchase your first home?

When you finally decide to purchase your first home, it’s only natural that you feel a bit overwhelmed. It’s the most significant purchase of your life, and you want to make sure that it goes as smoothly as possible. There are a lot of things that you need to consider when purchasing a home, and you can use these tips to help take some of the stress out of the process.

 

Mortgage Pre-Approval

The first step of your home-buying process should be meeting with mortgage consultants at your bank to get pre-approved for a mortgage. The last thing that you want to happen is to fall for a house that you end up not qualifying for. In fact, there are many times where a real estate agent won’t work with you until you’ve gotten your pre-approval. The consultants are trained to understand your finances and look at everything to give you an evaluation and a pre-approval for an amount that you can afford. Once you know that number, you can start house-hunting for homes within that dollar range.

Credit is a huge part of what is taken into consideration when getting approved for a mortgage, so it’s smart to get your credit report before you begin. If you have anything lingering on your report that could be causing a negative impact, you should get it paid off. Other things taken into consideration when getting a mortgage are your income, and the down payment you have.

 

Seek Out a Real Estate Agent

There isn’t a law stating that you have to have a real estate agent when buying a home, but it’s recommended; especially for first-time home buyers. Having someone who is familiar with the process can be extremely beneficial while you’re going through it. You are going to have a lot of questions, and they have the experience to be able to answer them for you. In addition to giving advice, a real estate agent is likely going to have a broad network connection such as inspectors and insurance agents who can help you.

 

Consider Your Budget

One of the biggest considerations with the home-buying process is your budget. You may get pre-approved for a mortgage, and you may be able to afford the purchase of a home, but you should think about it too. Your lifestyle can impact the budget that you have for a home. When you take on a mortgage, it is an essential monthly payment, and doing so might mean that you cut out that weekly dinner with your friends. Realtors and financial experts suggest that you should ask yourself if you could still afford your mortgage if you lost your job and didn’t work for three months.

 

Have an Open Mind

Many people see million dollar homes for sale and have expectations that their first house is going to be like that, but it’s rarely the case. Keeping an open mind is essential. Your first home might need to be fixed up, and it might have awful wallpaper. The important thing to keep in mind is that all of it can get changed, and the fundamentals are there.

 

Consider Closing Cost

There are going to be more fees with purchasing a house that is outside of the house sell itself. That includes what you spend on a realtor and your closing costs. To ensure that you aren’t getting yourself deeper into financial debt, you should set aside two percent to contribute to those closing costs. They are going to vary depending on the property you’re purchasing, and where you live. Also, consider putting aside extra money for a rainy-day fund. When you own a home, you never know when something is going to break down.

 

Even though there are a lot of stresses that come with purchasing your first home, there is a lot of excitement, too. When you follow along with simple tips and guidelines to buy your first home, it’s helping to alleviate the stress so you can focus on all of the right things. Be smart, be logical, and enjoy the first significant purchase of your life.

 

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5 Mistakes to Avoid Getting Rejected for a Mortgage

Amassing a big pile of cash for a down payment–to apply for a mortgage is a daunting task. First-time buyers often rightly pause as they begin to grasp the meaning of the phrase, “mortgaging your future.”

If you can get over that hurdle, you could be well on your way to the seven out of eight mortgage applications that get approved. A pessimist might observe that that means the application has a one-in-eight chance (12.5%) of being rejected.

True enough, but you can reduce the chance of rejection by avoiding a handful of mistakes that have a virtually immediate negative impact on your credit score. The experts at Realtor.com have come up with a list of five mistakes you can easily avoid to make sure that your application is one of the seven that gets approved and not the one that gets rejected.

1. Use your credit cards

One way to establish creditworthiness is to use the credit you have. That doesn’t mean to pile it on, but use the cards you have and pay them on-time to build up a credit history. If you really don’t want to do that, some lenders will look at your history of rent payments and other regular bills that you have.

2. Don’t open new credit cards near the time you are applying for a mortgage

According to Realtor.com, opening a new credit card account can cost you up to five points on your credit score. That may be enough to disqualify you for a mortgage. Also, don’t spend a lot of cash (or use credit on existing cards) before you get the mortgage and moved in.

3. Don’t miss a payment on a medical bill

If you’ve run up some big medical bills, work with the doctor or hospital to develop a payment plan you can live with. Defaulting on a medical bill typically results in the provider referring your account to a collection agency and the agency can refer your status to the credit reporting agencies.

4. Don’t change jobs

Most mortgage lenders want to see at least two years of consistent income before approving a loan. There are exceptions, of course, but sticking with the job you have until the mortgage is approved is a better choice if at all possible.

5. Don’t lie on the mortgage application

This should be obvious. In the first place, if you do stretch the truth, it can be prosecuted as mortgage fraud, a federal crime. Second, mortgage lenders do their homework and chances are you’ll get found out, and there goes the mortgage. While it might seem quaint these days, honesty is the best policy when it comes to getting a mortgage.

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Fix and Flip Mistakes 10 Ways to Avoid Them

Fix and Flip tips

Buying properties at under-market prices, then undertaking required repairs/upgrades and finally profitably flipping them sounds like a pretty good plan, right? Unfortunately, especially for new players in the Real Estate Investment (REI) world, problems can add up fast if you are not very careful. Profits on paper can turn into real world losses, in a heartbeat, without proper preparation. The single biggest mistake that newbie fix and flippers make is not comprehending or underestimating the cost of rehab work. Also, if you would like to fix and flip while overpaying for the property to start with, you can find yourself in the hole even quicker.

Whether it be an undetected damaged roof, a missed cracked foundation or not checking the (broken) air conditioning system (because you bought the house in the winter time), a whole variety of potentially expensive issues can arise after a property is put under contract or purchased. However, by then it may be too late.

Here are some of the top pitfalls to avoid on the road to fix’n flip real estate riches.

Be prepared for surprises.

While it is true that some properties you fix and flip will really only need cosmetic fixes (paint, minor clean up, etc.) most properties that are out there and can make for a great fix and lip are ones with low prices and are in need of much more work than just “surface” work. For example, reselling the property to a normal retail buyer means it has to pass a formal housing inspection to confirm the entire property is up to current building code requirements.

  • That means you maybe cannot get by with minimum fix-up. What may be required are real repairs that include major issues such as mold or mildew problems, pest infestations, outdated plumbing or electrical that might need upgrading. Any of these things can send your “real” purchase price soaring. Going over budget on the initial purchase price (including all repair and upgrade costs) can leave you with no profit when you go to sell the property.
  • It is instructive if not imperative to start with what the (highest) ceiling price is for the area in which property is located, before bidding on any of them. Next take a very close look at THAT price vs. the price of the property you are considering as a purchase + the anticipated improvement/fixup costs + your anticipated profit; adding up those three factors allows you to ascertain the maximum purchase price you can justify paying.

Work “backwards” from that point to determine expenses, carrying costs and most important, net profit.

  • You should have firmly in your mind what minimum net profit you are looking for, which is a function of the how much you can sell the property for, and still hit your target profit number.
  • Always build in some extra funds for unexpected costs.
  • But,if the numbers don’t work, then walk away from the deal.

Do NOT Skip the inspection.

Assuming you have time, bring in a competent inspector, contractor, experienced handyman and at least do a drive-by of the property and view as much as you can inside and out. When possible, get into the property itself in advance of the offer and take a very good look around, in order to prepare for an efficient fix and flip.

Don’t limit your research to just the property you are acquiring.

  • Be sure to research the neighborhood as well. For example, if your “sure fire” investment property is in a neighborhood in decline, the overall value of the post-rehab property may fall way short of your pre-rehab profit expectations.

Don’t pre-pay contractors or others in full in advance.

Pay them, in installments, when certain pre-determined milestones are met. For any large project, you should create and maintain a detailed “draw schedule”. The contractor collects the draws or “progress payments” when certain phases or parts of the project are finished.

Failure to rent the property out, if the sale takes a long time.

During the months it takes for escrow to close, the rehab to get finished, and the resale to get underway, market conditions can shift. It is better to make a small profit for a few months, while trying to sell the property. Rather than letting it sit there empty, make some profit while you have to make payments to the lender month after month after month.

Avoid 100% DIY (Do It Yourself) Fix and flip projects.

To many REI-ers give themselves credit for skills they may lack. For example, unless you are a licensed realtor, you may not want to try the sell the property yourself. The paperwork alone can drown you in detail. Same goes for trying to do all the repair work yourself. Your time might be better spent on your “core” knowledge areas (flipping houses vs. painting) It is possible to retain a lower cost with high quality talent to accomplish such tasks for you.

Ignore the “70 Percent Rule” at your own risk.

It is a basic, tried and true formula in the REI biz that you should take your ARV (After Repair Value), multiply it by 0.7 and subtract your repair cost estimate. That is the maximum amount you should be paying for a property—no exceptions. This is considered a sacred  rule because it will keep you safe from overspending on rehab and winding up with a property you can’t sell for a profit.

Avoid taking on too big of a fix and flip project on your first deal.

A modest clean up or cosmetic fix up is one thing. But then there are projects that may include flooring, insulation, landscaping, stucco, doors, windows, kitchen cabinets, counter-tops, etc. Not only do such rehabs eat up a lot of money, they take a lot of time to accomplish. When you are using hard money financing, time is literally money. Buying properties that need too much work is a quick way to turn a profit into losses.

Figure out your financing before you jump in.

There are great loan programs for Flippers.  You can get up to 90% loan to value and up to 100% of your covered in a loan.   Always ask if there is a prepayment penalty, and what the draw fees are.  Is there a pre-payment penalty for early payoff.  Button up your financing before you make an offer.  It will reduce the stress of the loan.

Credit to Tod Snodgrass, 

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