How To Prevent Your Flip From Flopping
House flipping is when real estate investors buy homes and then resell them for a profit months down the road. Can you make money doing this? Yes. Can you make a lot of money doing this? Yes. But you can also lose everything you own if you make a bad decision.
1. Not Enough Money
Dabbling in Real Estate is an expensive proposition. The first expense is the property acquisition cost While low/no money down financing claims abound, finding these deals from a legitimate vendor is easier said than done. Also, if you're financing the acquisition, that means you're paying interest. Although the interest on borrowed money is tax deductible, it is not a 100% deduction. Every dollar spent on interest adds to the amount you will need to earn on the sale just to break even.
Paying cash eliminates the interest, but even then there are property holding costs, such as taxes and utilities. Renovation costs must also be factored in. If you plan to fix or dress up the home, and sell it for a profit, the sale price must exceed the combined cost of the acquisition, the cost of holding the property, and the cost of renovations. Even if you manage to overcome these hurdles, don't forget about capital gains tax, which will chip away at your profit.
2. Not Enough Time
Renovating and flipping houses is a time-consuming business venture. It can take months to find and buy the right property. Once you own the house, you'll need to invest time to fix it up. Before you can sell it, you'll need to schedule inspections to make sure the property complies with applicable building codes. If it doesn't, you need to spend more time and money to bring it up to par. Next, you'll need to invest time to sell the property.
If you are able to make a 10% profit on a house that cost $50,000, you'll make a $5,000 profit. For many people it might make more sense to get a good job, where they can earn that kind of money in a few weeks or months via a steady paycheck – with no risk and a very consistent time commitment.
3. Not Enough Skills
Professional builders and skilled professionals, such as carpenters and plumbers, often flip houses as a sideline to their regular jobs. They have the knowledge, skills and experience to find and fix a house. Some of them also have union jobs that provide unemployment checks all winter long while they work on their side projects.
The real money in house flipping comes from sweat equity. If you're handy with a hammer, enjoy laying carpet, can hang drywall, roof a house and install a kitchen sink, you've got the skills to flip a house. On the other hand, if you've got to pay a professional to do all of this work, the odds of making a profit on your investment will be dramatically reduced.
4. Not Enough Knowledge
To be successful, you need to be able to pick the right property, in the right location, at the right price. In a neighborhood of $200,000 homes, do you really expect to buy at $160,000 and sell at $300,000? The market is far too efficient for that to occur on a frequent basis.
Even if you get the deal of a lifetime, you need to know which renovations to make and which to skip. You also need to understand the applicable tax laws and know when to cut your losses and get out before your project becomes a money pit.
5. Performing The Wrong Updates
The #1 mistake I see "flippers" do, is put money in the right area but perform the wrong updates, or put money in the areas that do not maximise potential. For Example, In the case of old counter tops and outdated cupboards, Instead of replacing both counter top and cupboards, a new counter top and "refinished" cupboards with new handles, can go a very, very long way and potentially save you thousands! I have seen, (very frequently) that owners will focus on whats around the kitchen, like the flooring and appliances, and not focus on the big picture. So plan out each remodel / renovation, pick a budget, and pick neutral updates/features that will appeal to the masses!
The Bottom Line
Before you get involved in flipping houses, do your research. Like any other business venture, flipping requires time, money, patience, skill, and it will definitely wind up being more difficult than you imagined. This is where I would come in to assist you. Not only will I help in acquiring a home to invest in, I will show you how to get the most out of your investment.