Whether you’ve seen it on TV, or it’s been a lifelong dream, flipping houses comes with some benefits, but some drawbacks as well.
While there is definitely profit to be had in the renovation business, it is not without risk. Once you begin to rehab a house you may uncover or discover structural issues, comprehensive damage, and other situations that soon exceed your renovation budget to fix.
Keep in mind the three biggest rules of real estate are location, location, location. If you see a house listed for an extremely low price, there is always a good reason. And one could be that it is located in a bad area. While a house in need of some TLC in a good area has a lot of potential for profit, a house, even in good condition, in a bad area does not. Property value is not just based on the house you buy alone, so if the neighborhood’s values are going down, the house you buy will too, and you may not see a return on your investment.
Next, there is the financing options to think about. You can work with a bank or hard money lender to get the necessary funds you need to procure the property and begin the flipping process. Hard money lending can be a good option because they offer shorter terms for the loans and can be approved faster than traditional loans from a bank.
The profit you gain from a flipped house can be determined from the very beginning, depending upon how much you pay to purchase the property. One way to do this is to start at the end profit and work your way backwards. Take the sale price you want to sell the property for and find out what 70 percent of that would be. Then take that amount minus your remodel budget, and that is the maximum price you should pay to acquire the property, (70% of sales goal (-) remodel budget (=) bid price). Overspending when you first buy the house will limit or even diminish your profits when it’s time to sell the house.
You will make the most return on your investment if you can do some of the repairs yourself. Hiring out for every job and task will run up a hefty bill, and if you can roll up your sleeves and do some of the labor yourself, it will save you a lot of initial cost, and ensure you gain a larger profit later.
If this is your first time flipping a property you may want to talk with a peer mentor or someone who has completed the process a few times. That way you can find out what were some unexpected challenges they faced, which hard money lender they worked with, and what practices worked best for them.