Buying up homes for cash usually involves finding a distressed property in need of repairs, or a homeowner who needs to make a quick sale. Often, these properties will need work put into them prior to being sold.
Fixing and flipping homes is a lucrative way to enter the real estate industry. Buying up homes for cash simplifies the process for both the buyer and seller, and can lead to quick turnaround times.
Last year, 407,000 single-family homes were flipped by investors. This figure was up 58% from 2020 showing there is real interest in fixing and flipping still.
How do you start a cash home buyer business now?
Generally speaking, buying homes for cash involves a motivated seller. Motivations for selling a home quickly for cash vary. But, they might include unemployment, debt, tax problems, or divorce.
Often, homes bought for cash will need extensive repairs. The homeowner may not have the finances to carry out these repairs, and distressed properties are hard to market. Therefore, property investors with cash buy distressed homes, fix them up and sell them for a profit.
You can fix and flip houses on your own or with minimal labor as many people do. Or, you can start a small business that hopefully grows into a profitable enterprise.
However, Tommy Weisz of Cash House Buyers USA says "There are 4 essentials to consider to be a successful property investor".
What 4 essential things must you consider before buying up homes for cash?
For this article, it is assumed that you are looking to make a business out of property investment. Fixing and flipping homes as a side project is perfectly viable, but this article aims to help you go bigger.
Before your startup gets going you need to put together a business plan. There are a number of steps all businesses need to go through including market research, planning your exit strategy, and building a brand.
Modern technology such as 360-degree video and VR has revolutionized the real estate industry, but when you are starting up, it’s the basics you need to be most concerned about. For cash home buying, there are 4 crucial things you need to look into.
1. Financing options
Financing is vital for a cash home-buying business. After all, you’re literally in a cash-only game here.
Regular home buyers have the luxury of being able to apply for mortgages to buy a property. But, you need cash at your fingertips and the ability to move quickly when you identify the right investment property.
There are a few different ways to fund your startup, but you need to consider your profit margin and the risks involved with borrowing.
A few financing options for cash home buying are included here:
- Hard money loans
- Private money loans
- Line of credit
- Bridging loans
- Peer-to-peer loans
Because many of the properties you will be interested in will be distressed, it is unlikely that traditional lending options such as banks will help. Therefore, hard money lenders tend to be popular with people involved in fixing and flipping houses.
Self-financing brings more profit to the table, but if you use your savings to finance a property purchase, you will also carry all the risk.
Very often, hard money or private money lenders are used for house flipping projects as they can be approved quickly and are designed to be short-term lending solutions.
2. Generating leads and finding motivated sellers
The type of home you will be looking for won’t be advertised by real estate brokers. You will need to generate leads and ensure motivated sellers can find you easily.
Your cash home-buying business will need a website, and local SEO practices will help raise your online visibility. By improving local search engine optimization, your website will appear higher on relevant Google searches.
You can establish yourself on Google My Business, and hire an SEO agency to improve your search rankings. Cash home buyers tend to operate within a designated radius, so concentrate on being the number one in your market area.
3. Determine your ROI
Blindly buying a property because it looks nice will get you nowhere. You must understand your local property market, and follow buying and selling trends. Getting an understanding of the real estate outlook for 2023 is vital.
To get an idea of what the ROI on a property might be, you will need a full understanding of the cost of materials, labor, borrowing, and house sale prices.
Using comparables is a recognized way of establishing the potential selling price for a home. When buying a distressed property, you must understand what your expenditure will be, and what the return might be too.
Don’t forget the 70% rule
Investors in house flipping projects are seeing lower profits now. Investment returns on house flips in 2022, was at the lowest since 2008. However, the average gross profit was $67,900 across the country.
One way that investors can help to improve ROI is to use the 70% rule. This rule states that investors pay 70% or less of a property’s ARV minus the cost of renovations.
Using this investment rule when buying homes for cash should help you to establish a healthy ROI on each project.
Don’t underestimate the length of the project
One of the easiest ways to put a dent in any profits is to underestimate what is involved in a project. Buying a home way under market value may represent the opportunity to cash in at sale time, but have you correctly estimated how much work is involved?
This is particularly necessary when outside financing is involved. The longer it takes to sell your investment, the more interest you will pay on any loans.
4. Put together your crew
Many people flip houses by themselves with little outside help. This is fine when you are flipping homes as a side gig and can take your time. But, if you want to buy homes for cash as a business, then you will need a network of specialists to call on.
Some of the people you need for your team will include:
- Contractors - Electricians, plasterers, tilers, decorators, carpenters
- Suppliers - Building materials
- Legal advice - Property attorney, advice for permits
- Accounts - Bookkeeping, tax advice
Depending on your business entity, you will need an understanding of taxes for flipping houses, or have a professional contact who does.
As your business grows, you might have several homes in various stages of being renovated or sold. To keep everything running smoothly you will need reliable contractors and suppliers. Some construction and renovation work will require permits also.
Buying homes for cash represents a real way to get into the property investment game. If you can identify distressed properties in the right locations, then there is genuine potential for a healthy ROI.
To make a cash home-buying business work though, some essential things must be considered. Your finances need to be healthy and cash readily available. You need to generate leads and be visible. You must understand the local property market to establish possible ROI. And your business will need the right people working for it.