Once you get your fix and flip business off the ground, you can use the skills you’ve learned and the profits you’ve made to create current income and build wealth to supplement your retirement. One of the key skills you will gain as you get a few properties under your belt is the ability to accurately assess a property for the cost of a full remodel or “rent ready” finish level. As you assess your properties, consider where you may be able to cut costs. In some cases, you may not need to purchase new appliance– used appliances you keep along the way are just fine. Or, using a composite countertop over the existing cabinets may be a better choice, rather than installing new cabinets and new granite slab. Steam cleaning tile and regrouting a bathroom shower could work just fine instead of a complete bathroom remodel. You get the picture — after finishing a few complete remodels it will be simpler and faster to complete a rent-ready remodel.

After your first few flips, you have also likely developed some reliable property sources. You can now look at those properties not only as fix and flips but also as potential buy and hold long term rentals. After you estimate the rent ready remodel expense, you will have to estimate the potential rent of the property. There are some great resources available today to do this quickly and accurately. Zillow’s rent calculator is getting more accurate by the day, and you can search for similar properties in your local Craigslist. There are rent specific websites such as Rentometer and Rentrange that can help you establish a fair rental price. Now you have almost everything you need — the potential purchase price, the rent ready remodel estimate and the estimated monthly rent. This is how the process can work:

Step 1: Purchase the property using the same financing sources you have in place for your fix and flips. But now, use profits you’ve made for the equity piece of your financing. Here’s the example:

Purchase Price: $150,000
Loan Amount (80%): $120,000
Equity: $30,000
Remodel Expense (Rent Ready): $10,000

The total investment is now $160,000 ($150,000 purchase + $10,000 remodel) and you have contributed equity of $40,000 from your fix and flip profits.

Let’s say you can rent the property for $1,200 per month after you have completed the rent ready remodel. Once the property is rented and the tenant is in place, the property is worth more and will appraise at a higher value than when you made the initial purchase. Let’s assume your bank appraises your property now at $200,000 and is willing to lend you 80% of that value. You now can take your original investment of $160,000 back which includes your $40,000 of equity investment. Now take that $40,000 and do it again! This is a simplified explanation of the BRRR (Buy, Remodel, Rent, Repeat) Strategy and you’ll have to take into account other items such as maintenance, vacancy, insurance, taxes and possibly property management.

For a future retiree, this strategy has a number of benefits:

  1. Future Income – Every rent payment that gets made will go towards paying down the mortgage on the property and create future value for retirement. If the property can cash flow using a fifteen-year mortgage, then in fifteen years you’ll have cash flowing and a high level of current income.
  2. Hedge Against Inflation – Rising inflation and reduced purchasing power is the enemy of anyone on a fixed income. Rents generally rise on an annual basis to keep pace with increasing taxes, maintenance costs and insurance as properties age. HOA fees almost always increase on an annual basis if an HOA exists. These rising rents allow you to keep up with inflation and preserve purchasing power.
  3. Easier to Manage Rentals – Through the flipping side of the business you will gain trade relationships with plumbers, electricians, painters etc. When a property needs maintenance or sprucing up between tenants, you have the benefit to call on these relationships to get the highest quality work at a fair price.
  4. Investment Diversification – If you have retired from a larger corporation or have diligently contributed to your IRA or 401k over the years, chances are you own financials assets such as mutual funds, ETFs or stocks, and bonds. Buy and hold real estate offers a prudent way to diversify your portfolio and cushion yourself against the ups and downs of the stock market and economy.
  5. Estate Planning Tool – There are many estate planning tools that can be implemented to help transfer the wealth that’s created by your rental properties. Consult a qualified estate planner or estate attorney to explore the options that are right for your situation.

Using your fix and flip profits plus your new found knowledge can make building a buy and hold rental portfolio easier and provide fantastic long-term benefits. In our next blog post, we’ll go through how fixing and flipping houses in retirement can provide you with an attractive level of income, great schedule flexibility and the psychic income that comes with a job that you actually enjoy!