Ready to dive into real estate investing and flip your first house? These tips from the pros on the challenges you’ll face can help keep your flip from becoming a flop.
They include everything from finding the right property marked at the right price to getting together the money to make the deal.
House Flip Challenge No. 1: Finding a Suitable Property
At first glance, a property may seem like the deal of a lifetime. But it’s vital to do your research. A low price is a start, but you need to look further than that when investing in real estate, especially for a flip.
For example, if you buy a two-bedroom home to renovate, but the majority of demand is for three-bedroom homes, your property is not going to sell quickly, no matter how magical your renovations are. Find out what’s selling, and look for a property that comes the closest to meeting that criteria––something you can mold into what buyers are looking for.
Once you’ve determined a potential property suits buyer demand, it’s time to do the math. Have you factored in every cost? New investors often don’t account for every expense, and many end up taking a loss because of the oversight. Remember to account for property holding costs, such as taxes and utilities, renovation costs, marketing costs, closing costs and capital gains taxes.
You should also factor in the value of your time. Flipping houses takes plenty of it. Finding the property is just the start. You’ll be doing repairs, showing the property to buyers, negotiating deals, overseeing inspections, etc. Estimate the time you’ll spend from start to finish and factor in that value as an expense you’ll want to regain when you sell. If the anticipated sale price won’t pay you a reasonable amount for your efforts, it’s not the right property.
Challenge No. 2: Finding money to Finance the Deal
A majority of flippers pay cash for their properties. Many traditional lenders won’t finance investment properties unless you have considerable assets. Some flippers use hard money lenders, but the interest rate can be double or triple that of a conventional loan.
A better solution is to seek funding from people who have considerable investments in lower-paying instruments, such as certificates of deposit. If, for example, they are making a three percent return on their current investment, you could offer them an eight percent return with a private mortgage, or some other type of creative equity partnership.
Networking is critical for real estate investors. The more people in your network, the more potential funding sources for your deals. Don’t expect it to be easy to get these folks to agree to your offer. But the more prepared you are when it comes to presenting a potential deal, the more likely you’ll get a “yes.” And with each successful deal you get under your belt, your offers will become increasingly attractive to potential lenders.
Challenge No. 3: Hiring Reliable Contractors
Most of the profit in flipping houses comes from sweat equity. The more work you do yourself, the more money stays in your pocket. If you have to hire a professional for everything, your profit margin will quickly dwindle. The more skills you have, the better: laying carpet, painting, replacing fixtures, etc.
For the work you’re not qualified to do, you’ll need to find reliable professionals who will show up on time, complete the work, and charge you fairly. This can be a serious challenge. The best place to start is by asking for referrals from your trusted network. A contractor who leaves a job unfinished or who does shoddy work can quickly suck the profit from a deal.
You may be able to afford to completely renovate a home, but is that the wisest move? Figure out what renovations are absolutely necessary, and skip the rest.
Challenge No. 4: Selling the Property
A house that is priced correctly will sell within three months, according to real estate professionals. A house that is overpriced will sit, and a house that sits becomes shopworn and stigmatized. Buyers and buyers’ agents see the days on the market and assume there’s something wrong with it; often they won’t even go see it based on that assumption. You should have determined what you could sell the renovated home for before you purchased it; you should also have determined how long you could hold it at that price before lowering it. Always keep the math in mind, and know when to cut your losses.
These are some of the main challenges facing those who decide to house flip for profit. With the right level of preparation, attention to detail and sweat equity, you can make a profit in this type of real estate investment.