When you buy a home, you don’t always know what’s behind the walls: mold, asbestos, water damage, antiquated electrical lines, foundation issues or crumbling plumbing pipes. But, if you understand construction and issues faced by older houses, you can make a more accurate estimate. When you get into these problems and don’t know what you’re doing, these problems can swallow your profit and put you under in a heartbeat. When you prepare to sell, you can’t list at a higher price just because the job cost you more than you had anticipated. The house is only going to be worth what the market will bear, what someone will pay for it at the end of the flip.
Expert Tips and Tricks
Flipping houses for a profit is harder than many people think. There are so many reality TV shows glamorizing the process of fixing and flipping, but in reality, flipping is a business. Just like any other business it requires hard work, strategy, and knowledge. Figure out what you can spend on both the house and the renovation, down to the last dollar, and include how much risk you are prepared to take. Price out the cost of carrying a short-term loan (if you need one), taxes, utilities and maintenance on the home for up to a year. Price out your material costs and labor. Look at comparable sales in the market to see what the likely sale price will be and don’t expect a penny over. Once you have a financial plan in front of you, with a reasonable margin for risk, begin shopping for homes that meet that budget. Don’t let a huge fixer-upper with potentially larger returns muddle your math.
Besides overpaying for a property, one of the biggest mistakes investors are making, when getting into flipping homes is using the wrong real estate agent. If you want a great experience as a real estate investor you should have someone on your team that can be a second set of eyes when purchasing flips. A seasoned realtor should have the skill set to be able to analyze an appropriate purchase price along with what the home can sell for after renovations. High level investors surround themselves with and learn from other high level investors. Free podcasts, books, forums, and REI clubs will only get you so far. In fact, often hanging out with all new or struggling investors after a while can really slow you down.
The level of investors you surround yourself with is usually the level to which you will rise in your success. High level house flippers and wholesalers recognize the importance in investing both time and money to surround themselves and be able to be coached by these kinds of groups. This is what keeps them on top and able to always implement the best systems to stay ahead of the game while continuing to prosper in a business where many others struggle just to get by. Once you are comfortable with an accurate exit price, it all comes down to having a solid renovation budget. If you don’t have experience in this area, get good help. Then we start backing out our numbers from the After Repaired Value exit price. We subtract renovation costs, carrying costs, selling costs and our profit. If you are using hard money you must subtract these financing costs as well. Most investors shoot for a 10% minimum Net ROI. Don’t cut corners on the repairs and always disclose everything you know to your new buyer. There is always risk involved but if you follow this guideline you should limit your exposure to a potential unprofitable flip.