4 Mistakes That Can Make House Flipping a Flop
Limit your financial risk and also maximize your return potential. Put simply, don't pay too much and make sure you also know how much financing, repairs and upgrades will cost before you buy.
1. Not Enough Money
Cost of FINANCING: Real estate is an expensive proposition. While low/no money down financing claims abound, finding these deals from a legitimate vendor is easier said than done. Research your financing options extensively and regularly. Use a mortgage calculator to compare the interest rates offered by all possible lenders each and every time. Financing means you're paying interest. Although the interest on borrowed money is tax-deductible, it is not a 100% deduction even after the passage of the Tax Cuts and Jobs Act. If you use a mortgage or home equity line of credit (HELOC) to finance your flip-house purchase, only the interest is deductible. The principal, taxes and insurance portions of your payments are not deductible. Remember every cent you spend on financing comes off your bottom line so KNOW THE NUMBERS before you act on any property.
RENOVATION COSTS: The 70% rule states that an investor should pay no more than 70% of the ARV (after-repair value) of a property minus the repairs needed. The ARV is what a home is worth after it is fully repaired. If a home’s ARV is $150,000 and it needs $25,000 in repairs, then the 70% rule means that an investor should pay no more than $80,000 for the home. $150,000 x 0.70 = $105,000 – $25,000 = $80,000.
Making a profit is tougher than it used to be, but that doesn’t mean there isn’t money to made. The first half of 2018 saw flipping profit margins shrink to the lowest average gross (ROI) since late 2014, just north of 44%, but that’s still 44%. By limiting overages & overspending mistakes you can obviously be closer to top dollar. The average gross profit on a flip is $65,520 and that’s still good money.
2. Not Enough Time
It can take months to find and buy the right property. Once the work is done, you'll need to schedule inspections to make sure the property complies with applicable building codes before you can sell it. 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 staging and selling the property. If you show it to prospective buyers yourself, you'll spend plenty of time commuting to and from the property and in meetings. Social media today is the number one way to move property but let’s face it – it takes a lot of time!
Is that worth it? It is, but the best piece of advice I could offer here is; be honest with yourself and admit quickly where your time is best spent. If giving up a little profit by sharing the load means you could sell your property 3 times faster than do it and move on to your next big deal. More money is lost by would be winners biting off more than they can chew than I could begin to tell you.
3. Not Enough Skills
They say the real money in house flipping comes from “sweat equity”. Professional builders, skilled carpenters and plumbers, often flip houses as a sideline to their regular jobs. They have inside knowledge, skills and experience to find and fix a house.
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 don’t know a Phillips-head screwdriver from a flat screwdriver, you will need to pay professionals to do all of the renovations and repairs. Accordingly, if the business end or math isn’t your thing the odds of making a profit on your investment will be dramatically reduced so it is crucial to KNOW THE NUMBERS!
4. Not Enough Knowledge
To be successful, you need the right property, in the right location, at the right price. In a neighborhood of $100,000 homes, you wouldn’t expect to buy at $60,000 and sell at $200,000? Generally, that only happens on TV. Even if you get the deal of a lifetime, snapping up a house in foreclosure for a song, say – you need to know which renovations to make and which to skip based on the specific market, neighborhood and buying trends where that property is located. You also need to know when to cut your losses and get out before your project becomes a money pit. Timing is Key here.
The solution here is research, research and more research. This is where having the right network of people to work with can really make the difference between winning and losing. If you can’t get all the information you need then use an investor to make sure you are as safe as possible in the flipping game.
Keep in mind that Zillow, the real estate listing firm, is now flipping homes in select markets. The company expects to buy and flip properties within 90 days, and they’ve got the data and knowledge to offer mom-and-pop operators some fierce competition. Big-league lenders have also started to seek profits in the flip-loan marketplace joining other private investment firms seeking a piece of the action.
Their only true advantage besides big pockets is INFORMATION and we all have the same opportunity to be in-the-know provided we are willing to roll up our sleeves. You might even call it “Brain equity”.