The idea of purchasing a home with the intent of flipping it is a pretty tantalizing one. After all, there is a whole genre of television dedicated to the topic. Though many of those television stars can make the work seem easy, it is substantially more challenging. What often gets glossed over in the shows is the dirty work, the unwelcome surprises, and the intensive time commitment.
Though it may not be quite as glamorous as on TV, surely there is a very real, very lucrative motivation for flipping homes? In some situations, there is. Ultimately, reaping a profit is highly dependent upon market variations, the workload associated with the individual home, and smart business choices.
Before deciding to purchase a home with the intent of flipping it, you should think seriously about the potential risks of the investment. Is the hard work and construction something you can manage? Will building materials and appliance upgrades be enough to cover the associated costs?
Is Flipping Right for You?
Interest rates are at a serious low right now, which has encouraged many people to consider buying a second “project” home to flip for a profit or even consider renovating their primary home before putting it on the market. Add on an exceptionally tight market for entry-level homes and the idea of earning some extra cash for a bit of work seems like a great idea. But, there are certainly some questions one has to ask themselves before diving into the world of flipping.
The first, and perhaps most significant question is: do you have the time and the skills to make a profit on an investment like this? Many experienced home flippers will tell you that it really does take a village to make it happen since you likely won’t have all of the skills necessary to do everything. Even with a background in home construction, you’ll likely need a contractor you can trust, a good home inspector, and a real estate agent who can help you get the most out of your investment.
Another thing to keep in mind is that while interest rates are low, building materials are incredibly high right now. That means that any of the renovations you have planned are likely to cost substantially more than they might have before the COVID-19 pandemic. This can seriously hurt your bottom line, especially if you are buying in a tight market where the price to buy a home in the first place is skyrocketing.
Meeting Budget
If you are going to go ahead and flip a home, it is valuable to set a budget and stick to it. Setting a budget is good advice no matter what home projects you are taking on, but it is especially important when flipping because it can be the difference between making a substantial profit and getting stuck in a home that ultimately costs you far more than it is worth. Write down the necessary fixes and the estimated costs for completion. Be realistic about what is both feasible and affordable.
When it comes down to it, deciding to take more time to do something correctly will likely save time and money overall. This means pricing out material costs and comparing them to alternatives. It can also mean shopping around for the right contractor to complete certain work so things will get done the way you want them on time.
The cost and return on investment for a home can vary substantially depending upon the level of work that you do. For instance, minor cosmetic home repairs such as replacing appliances, finishing flooring, or doing some landscaping tend to have somewhere around a 10% return on investment. Moderate repairs such as updating bathroom plumbing or putting in new countertops can reap almost twice the return while extensive home repairs may earn a bit more.
Red Flags
Although many people often think of home flipping as a hobby or a quick way to make money, it is actually more like a business. This means that it requires a business mindset to be successful over the long term. Some of the most common mistakes are underestimating the time or money requirements and overestimating personal skill sets.
There are some major things to look out for when looking at a potential investment property. Simply having a good idea of the amount of time and money some repairs are going to take can save a lot of trouble down the road. For instance, watch out for extensive repair issues such as moisture and leaks or cracks in the foundation — these are things that will eat up the majority of your budget quickly.
Another important thing to watch out for is the location of the home you are intending to invest in. Home flipping is very location-based — the return on investment will be much lower to almost non-existent if the house is located in an undesirable location. Focus on looking for places that are close to downtown or major centers of employment. These areas should also be close to daily needs such as schools and grocery stores.
Deciding to invest in a house with the intention of flipping is a big one. Take the time to set a budget and evaluate the time/workload that will be involved in getting everything done while still making a profit. Expect the unexpected expenses, but think critically about the purchase before making it to avoid some of the reddest flags.
Image by tookapic from Pixabay
