Flipping houses refers to the practice of buying properties, generally fixing them up, or upgrading them and then selling them at a profit. This strategy has been popularized by various TV shows and has made a few millionaires as well. And it’s possible to earn thousands or even tens of thousands of dollars in just a few months. However, if you make a mistake, it can cost you that much or more. Here’s a quick guide for investors thinking of getting into the house flipping game.
Learn the Warning Signs That Scream “Don’t Buy It”
The key to success in flipping houses is to find homes that need mostly cosmetic improvements. These are repairs you can make quickly and typically for little money. On the other hand, properties with major structural problems are something to be avoided.
For example, a new roof costs thousands of dollars, but a damaged roof could bring surprises like water damage to the walls or a mold problem. Even worse is a home with an outdated electrical problem. It takes time and money to replace it, and you don’t know what else is out of date.
Avoid homes with damaged mechanical or electrical systems, and don’t rely on a visual inspection. Have the property inspected by an independent professional, and get a detailed report. If there are cracks in the foundation, electrical glitches, or anything out of date or not up to code, don’t buy it. Stick to replacing the paint, carpet, trim and appliances. Furthermore, you should not give in to the temptation to buy a property sight unseen.
Understand What Upgrades Are Worth the Money
You should also try to understand what upgrades are worth the money and effort. Even something small like replacing a door can both achieve these returns and improve the salability of the house. Upgrading the front door to something more attractive and durable than the neighborhood average offers a 100 percent ROI.
Companies like American Vision Windows, for instance, can provide expert door installation services, such as replacing a beaten in front door with a secure one, and combining it with unbreakable glass panels that improve natural light in the home. They could also replace the drafty windows in the home or fix that broken skylight. If you want to learn more about window and door replacement options, you can look for more information here. Doing this alone could help you sell homes much quicker, and could even be a deciding factor in some cases.
Always Do the Math
While you cannot make a profit from flipping homes if you pay too much upfront, you must map out your profit margin on any project before you close on the home. Make a list of necessary repairs, including those identified during the inspection. Identify upgrades like new carpets, a new garage door or modern appliances. Don’t forget to take the labor costs into account. Add another 10 percent to the budget, because unexpected expenses will come up. Factor in costs like legal fees, especially if you’re buying a distressed property.
When you’re budgeting for the project, take your holding costs into account. What will the mortgage, taxes, and insurance cost each month? How much interest do you have to pay to any lenders who give you money to renovate the property? You have to pay these bills while the house is being renovated.
Furthermore, can you afford to pay these expenses if the house takes longer to sell than you originally planned? Create a financial forecast, and verify that you can cover these costs if the repair work takes an extra month. Then factor in your profit margin.
Don’t buy the property unless you see a significant profit, even after taking potential cost and schedule overruns into account. Don’t make the mistake of settling for profits that are barely better than what you’d see if you were working as a building contractor yourself either. You’d be better off working for others in that case, because you aren’t earning a living with the risk of losing everything.
Plan Several Exit Strategies
Fix and flip typically involves listing the house with a real estate agent as soon as it is done. However, fix and flip comes with a number of risks.
We’ve already mentioned the risk of the repairs taking longer than you expected or the repairs costing more than planned. Line up potential wholesale buyers, so that you have someone who could buy the property quickly if it needs more work than you can handle.
Consider researching property management services so that you can quickly install a paying tenant if the property isn’t moving in the planned timeframe. This saves you from selling the house at a loss, and you may be able to sell the property for a profit because it comes with a revenue stream – the paying tenant.
House flipping is a viable and often profitable way to make money in real estate. However, it isn’t as easy as what you see on TV. You have to do your homework at every stage to minimize your risk and maximize your profits.