While Chip and Joanna Gaines make flipping houses look easy and fun, starting this venture on your own is not quite like HGTV. Here are some things to consider if you’re thinking about getting into house flipping.
Types of Properties:
One of the first steps to begin flipping is deciding the type of property and whether you’re going to flip it or rent it out. There are many aspects to consider depending on what type of property you choose.
- Single Family Homes – It’s important to consider the area and who your buyer will likely be. This will help you determine what aspects are most important when rehabbing. For example, a spacious kitchen may be more important for a home in a family neighborhood than in a smaller city home that is more likely to be purchased by a single person.
- Multi-Unit (Duplex, Condo, Apartments) – Thoroughly researching the local codes is extremely important when deciding to flip a multi-unit building. Knowing and following the regulations that apply to your building can save you a lot of money and headache!
- Rentals – In some cases, it may be beneficial to rent out a property rather than flip it. You’ll want to carefully calculate the income potential of the property. You’ll need to take into account the rental rates of similar properties in the area, property taxes, utilities, the cost of the home and rehab, any management fees and insurance among other varying factors such as vacancies and maintenance.
- Traditional Loans – It is possible to flip houses with a traditional loan but it’s not common for many reasons. Traditional loans are slow to close because the lender requires extensive information and anything they see that raises question will require more documentation which can further hold up the process. Traditional lenders also prefer to make loans on homes that are in good condition. It is a possible option if you have significant assets, significant equity in other properties, you have experience with successful projects, and have excellent credit. The options below are generally much easier for those starting off in house flipping.
- Joint venturing – Rather than taking on a loan on by yourself, you can partner with other investors to buy your flips! You will want to consult a lawyer and sign documents when investing with partners.
- Hard money lender – This is a much quicker process and more flexible than traditional lenders. The drawbacks are higher interest rates and a shorter repayment time frame. However, the quicker you can flip the house and pay off the loan, the less interest you’ll pay and the higher your profit will be.
- Private money lender – If you can find someone interested in real estate investing, this can be a great option because you can negotiate the terms of the loan. This can we a win-win for both parties. Start with your own sphere of influence to find private investors. You’d be surprised how many people out there are looking to invest!
- Crowdfunding websites – this can be a fast way to connect with people looking to invest! You’ll want to check the fees and loan time-frames but this option is growing in popularity with the Internet bringing investors to you.
- Cheap Doesn’t Equal a Good Deal. Some houses are cheap for a reason. For example, it could be in a bad neighborhood, under powerlines, located on a main road or intersection, needs too much work, has asbestos or lead based paint or other unknown hazards. Even with inspections, things can still pop up that you were not expecting. There are many variables that factor into the price. There’s a big difference between cheap and a good deal!
- Underestimating Repairs. It’s more expensive than you’d think to rehab a house! You’ll want to make sure you do your math carefully so you don’t end up losing money on your flip. You’ll want to make a detailed list of everything that needs to be done in the home. The more detailed this is the smoother your flip will be. You can get more accurate estimates from contractors. The little repairs add up so make sure those are included! Don’t forget to keep a “Reserve Fund” as part of your budget.
- Hiring a Bad Contractor. You’ll want to learn what different repairs really cost. Get multiple bids when you’re starting off so you make sure you’re not overpaying. A bad contractor can really slow down your timeline. It can often take longer for them to get started or finish than what they estimate. Once you find good folks to do business with, keep referring business to them to keep them in your corner for your projects. Many times, you will find it’s not necessarily about the money but about the people you work with.
- Over-Renovating or Getting Emotional. You need to set you budget and stick to it! Remember if you go over budget, you’re eating away at your potential profit. Don’t make unnecessary renovations that don’t really add value to the home. Focus on where you’ll get more bang for your buck. And remember, you are not the one who will be living in the home so make sure you’re renovating for what a potential buyer would like. Also, take in consideration of the properties around your project. What types of homes and finishes are in these homes?
- Getting Trapped in a Bad Loan with High Interest Rates. As discussed previously under financing, hard money loans can be a great way to get the money for a flip fast. However, if projects get delayed and take more time than you realized or you’re running into more issues with the home than anticipated, sometimes it can take a lot longer to flip a home than you calculated. You can get trapped paying high interest rates digging into your profit and eventually end up owing money on your “flip.” Yikes! It’s important to thoroughly plan and research before diving into this venture! But if you do your homework right and put in the hard work, flipping houses can be very profitable.
What more information on investment buying, call us! We are here to help!