Property Investing Reality Check: Tips to Ensure Your First Flip Is Not Your Final Flop

HGTV and the myriad of home-improvement shows on PBS and other stations have led us to believe that flipping a house is a simple process. The process is …

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HGTV and the myriad of home-improvement shows on PBS and other stations have led us to believe that flipping a house is a simple process. The process is broken down into three steps including buy a property, fix it up, and sell it at a tremendous profit. Unfortunately, flipping a house isn’t quite that simple. It takes hard work and dedication to transform a rundown property into a gem that other people will want to pay a premium for.

Budget More Money

The biggest mistake that people make when trying to flip a property is underestimating expenses. Acquisition costs, material costs, and labour costs are only part of what you’ll have to put into a home to convert it from a diamond in the rough to an outright diamond. Take into account things like mortgage interest, property holding costs, taxes, and utilities to start, but that isn’t all you need to budget for.

Many people also fail to consider the fact that they will likely have to pay a realtor to sell their home. If both the purchaser and the seller employ realtors, the seller may be on the hook for fees that amount to roughly 5% of the total sale price. That amounts to $5000 for every one hundred thousand dollars of home value. This is why many people who flip properties also maintain real estate licenses.

In order to make a profit, the sale price of the home you repair must be greater the combined costs of acquisition, holding the property, and renovations. Don’t forget about the final insult, which is capital gains taxes.

Budget More Time

The second thing that most people underestimate when flipping their first house the amount of time that will be invested into the renovations. If you’ve never flip the home before, it’s a good idea to get estimates from contractors regarding not just the price of the renovations, but the time it will take to complete them. In general, you should expect delays and headaches to arrive at different stages of the renovation. The reason that this is so critical is that you will most likely be making mortgage and tax payments on the property during the renovation process. You can easily lose thousands of dollars if you’re renovation timeframe is extended by a month or two.

Understand Sweat Equity

If you think you’re going to simply hire contractors to flip your property, think again. The real value in flipping a home comes from the sweat equity that you invest. By doing the work yourself, you save thousands of dollars that would otherwise go to plumbers, electricians, carpenters, and other tradespeople. If you don’t have the skills to flip a house doing most of the work yourself, chances are good that you won’t be successful. While you can hire out certain complex tasks, like major cleaning done by Purple Rhino Exterior Building Cleaning Services, if you can’t swing a hammer, hang drywall, or install kitchen sink, then you probably won’t make a profit on your flip.

Understand Value-Adds

A “value-add” is anything that you do to a home that will return more money than you invest. Anytime you flip a home, the key to making a profit is to invest money in renovations which will improve the value of the home and make it more attractive to potential buyers. While certain improvements are universally appealing, a great number of things are dependent upon location. In a neighbourhood where the average home sells for $100,000, investing in renovations that push a home well above that, even if they are beautiful additions, may mean that your home won’t sell or won’t well for the price you need it to you in order to turn a profit. In general, the market is far too efficient for you to expect above average returns. Before you even think about purchasing a house to flip, you need to understand which renovations will make the house more valuable, which renovations you are capable of handling, and any applicable laws that will determine exactly what you can and cannot do to your home.

The Ultimate Asset

Out of all of the things listed above, the greatest asset that you can have when flipping a home is patience. Patience in the real estate market means several things. First, you have to be willing to wait for the right opportunity to arise. Not every fixer-upper is prime for being flipped. After getting the property, you have to be patient with the renovations, the inspection process, the sales process, and much more. In short, you have to be patient.

The bottom line is this. Do your research and understand that flipping a house is no different than any other business venture. It will require investments of time and money and will require you to have a basic set of skills and the patience to apply them.

 

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