Property flipping is a reasonably straightforward concept on paper – buy old, dilapidated properties for cheap, fix them up to make them better, and sell for a higher value. To the uninitiated, it’s a perfect plan. How could it be any different from doing the Spring cleaning every year? For anyone that’s tried it firsthand, though, this couldn’t be farther from the truth. Buying a property to flip is a massive investment, and requires a lot of forethought put forth. If you want to save your investment and even chance a profit – you should learn how to avoid a number of these common mistakes.
Top House Flipping Mistakes to Avoid
Under Budgeting
Buying, renovating, and then flipping houses is work – hard work. When you do that kind of work, you need to be making money for it. However, poor financial planning can leave you farther in the hole than when you started – assuming you make it to the point where you can sell. Real estate is expensive, sure, but just having enough money to buy the property (and materials) won’t cut it. There are a lot of expenses that go into flipping a property – and that’s just accounting for nothing going wrong during the process.
First, you need to factor in the acquisition costs. Shopping around and finding comparable properties to find the best price will help lower those costs (relative to gross profits). Inspections and purchasing the proper insurance also factor in here. Then, we look towards the end of the process at closing costs. Buying and selling the house alike will both cost you money before you can get paid – money you need to have a plan for before the process begins. These closing costs can include the price of a real estate agent and marketing resources.
Finally, the recurring costs are the third big part of the equation. For the time you’re working on the property and owning the lot, you’re paying for it. Property taxes, utilities, and insurance are carrying costs that can mess up your production if you can’t keep up with them.
Getting a loan is a viable option for procuring the cash you need to take on the project, but the interest incurred for the time you spend paying it back will become just another cost. To make money flipping houses, you need to risk a lot of money, and keeping a keen eye for financial planning makes all the difference in the world. Your ROI can be very, very valuable – but every miscalculation and every mistake chips away at your final reward.
Underestimating Your Time
Renovating and repairing a home into working and sellable condition takes a lot of time. There’s no way around it. Time is money, and you can’t afford to spend too much time and make too little money. Bills have to be paid, after all. If you take on house-flipping as a side gig while you keep a day job, this can mean lost afternoons, weekends, or even days taken away from work to get it done. Even if you hire a team to take care of the physical labor for you, managing the job will still take time and money away from your life. The entire process of flipping a house can be months and months, even if everything goes according to a reasonable schedule.
Finishing the job doesn’t mean your work is over, though. Selling the newly renovated home is another matter entirely – and can be easier or harder depending on the area market. Inspections take time, client meetings take time, upkeeping the property takes time, and having a life outside your business venture is even more time. All the while, you’re still on the hook for those carrying costs. Flipping houses is no small feat – you need to be able to dedicate the time required to get the job done right, or else you’re stuck with assets that won’t make a profit. Budgeting your time and money are equally important, and possible with deliberate planning and execution.
Poor Investments
Everything you put into a home is an investment, and it’s easy to put money into all the wrong aspects. Renovating a house in any capacity is a series of choices from beginning to end, and it’s always possible to make a wrong choice. Learning to make safe decisions and thinking through your investments is critical.
Before you even purchase a property, you need to be always looking. Not just seeing, but looking for key factors. What is the neighborhood like, and how are the neighbors? What part of town is this house in? What is the state of the lot it’s on? What are the key components that you’re going to be renovating? How is the infrastructure holding up? There are a million questions to keep track of, and sometimes you won’t even know the issues that actually matter. Without the due diligence put in, you could be facing too big of a job, a buyer’s market that’s dried up, or even just a money pit that can’t be improved without complete demolition and starting from square one.
When determining if a house is worth your time to renovate, keep in mind the 70% rule. It would be best if you only had to pay 70% of the properties After Repair Value (ARV) minus the costs of repairing/renovation. That 30% off the top is estimated to be enough for both profits and incidentals. Of course, paying less than that 70%, while rare, could potentially be much more profitable.
Heart and Soul into Hearth and Home
Like renovating and flipping a house is a massive business undertaking; getting a mortgage for a home of your own is a massive personal undertaking. As one of the top mortgage lenders in Georgia, we have the most current rates available coupled with the knowledge and assistance of an experienced loan officer to guide you through an often confusing process of choosing the loan program to meet your specific needs. Contact us today to get started!
