Start Strong: Build Your Financial Foundation First!
Ready to start searching for a distressed house to flip for profit? Not so fast! Finding a house to flip is not the first step to becoming a successful real estate investor. The hours you spend searching for that special property would be better spent making sure your financial house is in order.
Significant debt, low-credit scores, low cash reserves, and unstable income are all financial liabilities that can make it more difficult for you to successfully complete a house flipping project. Most notably, a crumbling financial foundation will not stand up to the scrutiny of a private lender who can fund your flip. We certainly support getting started in this business, but only when you have taken the time and put in the effort to get your financial foundation on solid ground. The TRUE first step to becoming a real estate investor is to take a realistic look at your finances and see where you can improve.
Set Firm Goals & Take Steps to Achieve Them
You won’t ever be able to achieve your financial goals if you don’t know what they are. Begin by writing out short-term goals that you would like to accomplish within the next three to six months and analyze the cost of achieving each goal. With this number in mind, you’ll be able to determine just how much you’ll need to be earning and saving each month. Focus on the most impactful improvements you can make without getting frustrated.
The most important financial concerns when applying for a rehab loan are:
1) Your Credit Score
While there are many factors that contribute to your overall credit score, you should take steps immediately to improve your score before seeking out a new house flipping project. One of the first questions that lenders will ask is about your credit score, and you want to make a good first impression with it. There are several ways to impact your score in a three to six month time period including; zero late payments, paying down debt, getting a raise, and asking your credit card issuers for credit line increases (if applicable). If you can’t do these things to improve your score, it’s a good indicator that you won’t be able to handle the financial burden of a house flipping project. Start slow and make improvements where you can.
2) Available Cash Reserves
If you are living paycheck to paycheck, its time to start looking for ways to save. No lender will want to take a risk on a household that is one incident away from bankruptcy. Even if it is only $20 a week, the sooner you start, the sooner you will be have a nice nest egg that you can borrow against when the time comes. Patience is key for saving. Start a rainy day fund today.
Another great option to build your cash reserves is to look into a side gig. Flipping a house is going to be a major time investment and it might be good practice and in good financial sense to see if you have the bandwidth for adding in another project. By shuttling the funds from a night shift at a restaurant or retail shop directly into your cash savings for six months can make a big difference in your overall financial stability.
3) Proof of Steady Income
The more variable your monthly income is, the more cash reserves a lender will want to see in your bank account. — What if you had a ‘down’ month in the middle of a project and couldn’t afford the interest payments on a loan? Cue cash reserves. You can combat this risk factor by locking in you and/or your spouse’s day job (Don’t quit your day job!) or shifting to retainer work if you are a freelancer. Long term contracts and proof of steady income in the past will all help to paint a better picture of your finances going forward.
4) Limited Debt Liability
As you’re working on improving your financial health, it’s important to pay off and existing debt and fact that into monthly savings plans. If you’re working towards being able to eventually be eligible for a private loan, be sure to factor those interest rates into your long-term savings plans and financial goals. Keep in mind that to eventually qualify for a private loan, you’ll likely be required to have at least three years of positive credit history and possibly meet a minimum annual income requirement. Don’t be discouraged if your debt can’t be paid down overnight – it may take a few months (or years) to be ready for a rehab loan, but it’s worth the wait.
Slow and Steady Wins the Race
By increasing your dedication to a proper savings plan and setting firm financial goals you hope to achieve, you’ll be able to set your sights on a financial plan that works for you, your income, and your spending habits. As you increase your savings, you’ll be able to pay back any owed debt to decrease your debt-to-income ratio, improve your credit score, and eventually apply for a purchase and rehab loan with 100% confidence in being approved!