House flipping became one of the popular day-trading in the first part of the 2000’s. Yet in the hastiness to make profits, many of the would-be real estate professionals overlooked the basics, which led to their failure. In this post, we go over the 5 largest mistakes the would-be flippers have made in these markets and a way to avoid these.
About The Basics
Flipping which also known as investing in wholesale real-estate is a form of investment strategies in real-estate where investors buy a property with an intention to sell the property to make a profit.
These profits are usually derived from a price appreciation that results from a favorable real-estate market or from capital improvements on the property and in some cases both. An example of this can include when an investor buys a fixer-upper in a popular neighborhood conducts substantial renovations, followed by offering the property at prices which reflect the new amenities and appearance.
The investors that flip properties usually focus on a purchase a subsequent resale for either a single property or groups of properties. These investors also try to generate an income that is consistent by involving themselves in ongoing flips according to Assetcolumn.com.
So, you may be wondering how to flip a house or building? The basic explanation is that you will want to purchase the property at a low price and then sell it as high as possible similar to most other investments. But opposed to adopting the buy and then hold strategy, you will complete these transactions as fast as you can to minimize the time frame that the capital is regarded as at risk. Typically, the focus is on speed over maximum profits. This is because every day which passes will cost you money in insurance, property taxes, utilities and a mortgage.
This is the basic plan, now are here are a few of the drawbacks.
1. Not Enough Money
Experimenting in real-estate can become a costly proposition. The initial expense is the acquisition of the property. While no/ low money down financing claims are popular, finding these types of deals from legitimate vendors is not that easy. In addition, when you finance an acquisition it will mean you will pay interest. Even though interest for borrowed money will be tax-deductible, the deduction will not be 100%. Each dollar that is spent on this interest will add to the amount that you should be earning on your sale in order to make a profit or break even.
Find out about the different financing options to find out what mortgage will match up to your needs along with finding the type of lender which offers the lower interest rates. A simple method to research the total costs of a prospective property is to use a mortgage calculator. These are the tools that will allow a way to compare interest rates on offer by the different lenders.
If you pay cash for a property it will eliminate costs involved with interest, but you will still have property-holding costs like utilities and taxes. You may also need to factor in renovation costs. If your plans involve fixing the home up and then selling to achieve a profit, your sale price needs to exceed the overall costs of acquisition, the costs to hold the property and any costs involved with renovations. If you are able to progress past these hurdles, you need to still consider capital-gains taxes which will also decrease your profits.
2. Limited Time
Flipping and renovating homes is time-consuming. It could take you months to even find the right property to buy. Once you become the owner of the property, you now need time to invest in fixing the property up. Before you can put the home up for sale you will need to arrange for inspections to ensure the house complies with the necessary building codes. If by chance it doesn’t, then you will need more money and time to remedy any issues. The next step involves investing time in selling the home. If you are the person showing the home to any prospective buyers, you will spend even more time having to travel from and to the property for every meeting.
Is this really worth all your effort and time for a project that may net 10% profit? For most people, it makes a lot more sense to stick with a reliable day job, which is free from risks and a time commitment that is consistent.
3. Insufficient Skills
Real money that is involved in house flipping is derived from “sweat” equity. So, if you have skills with tools like a hammer, you are skilled in hanging drywall, installing a toilet or kitchen sink, then you have the skills necessary for flipping houses. If you decide to pay professionals to conduct all the work, odds associated with making a good profit on the investment dramatically reduce.
4. Limited Knowledge
In order to find success, you need to choose the right properties, the correct location along with an attractive price. In neighborhoods of homes that cost $100,000, you can’t expect to buy a property at $60,000 and then sell the home at $200,000. The markets are much too efficient to allow this to occur.
Even when you manage to close a once in a lifetime deal and snap up a home in foreclosure, you still need to be aware of what renovations you need to make and the ones to skip. It also becomes important to know about applicable zoning laws and tax laws, as well as when you need to cut any losses before the project turns into a money-pit.
The professionals will take time as well as wait for ideal properties. The novices will rush in and hire the very first contractor that they meet, and then make bids on addressing the work they are unable to do by themselves. The professionals will either do this work on their own or have a network of reliable and pre-arranged contractors.
The novice will hire realtors in order to sell the home while the professionals will rely on the “for sale by owner” in order to lower their costs as well as maximize profits. The novice thinks they can rush through these processes, cover the home in one coat-of-paint and then expect to earn a small fortune. The professionals have an understanding of buying as well as selling homes and that it can take time and in some cases, the profit margins can be slim.
Flipping homes need to be approached as a type of business which means it needs money and time, patience and planning, research and skill. It will also in most cases result in being a lot harder than you thought it would be. If you are in search of a get rich quickly venture with flipping homes, you may end up losing a lot of money.
I’m a single mother of 2 living in Utah writing about startups, business, marketing, entrepreneurship, and health. I also write for Inc, Score, Manta, and Newsblaze