The act of fixing and flipping houses remains a popular form of real estate investment and is becoming something of a rage as the real estate market continues to recover and grow in value. This is most likely the most profitable form of fixed asset trading that yields large profits in the shortest time. But be warned, failure to do some background research can result in huge losses for the flipper.
The concept behind fix and flipping homes appears simple but experienced hands will tell you it’s not as easy as all those TV reality shows and mainstream media make it look.
The investor, in this case, you, buys a house that needs some work, you fix it up, then sell it for a nice profit. The complications come in when you begin to consider the different things you’ll have to contend with. These include getting the right deal in a good location, finding the right contractor to handle the rehabilitation project, valuing the property, getting finance, getting the repairs done right and on time, then finally selling the property at your desired profit.
You can see that it’s actually a time-consuming venture. You can’t do this for a few hours weekly and expect to succeed. So, if you’re looking for a nice, quiet side job that will make huge profits while you work a day job, house flipping is not for you.
If we are being honest here, the expected profit is usually the greatest motivation for embarking on this exercise. However, many factors will affect the final profit you will get. Such things as the initial purchase price, cost of funds (loan interest rate), repair expenses, advert expenses etc. These expenses will vary widely depending on the location and value of the property. Many people naively expect to make up to six-figures with their first flip. Though not impossible, it’s extremely rare.
You could put some checks and balances in place to monitor the investment as you progress. Like discussing with more experienced flippers to know what to expect and to guide you along and determine if you’re going the right way or not. They can also advise you beforehand on the kind of profit margin you could expect after deducting all expenses from the final sales price. From our experience, for a fix and flip that cost you $200,000, when you factor in insurance, loan cost, purchase price, property taxes, selling cost, HOA and so on, the accumulative expense will be in the range of $30,000 and $80,000.
How many individual investors have $200,000 or even $100,000 cash lying around to invest? We guess not too many. Most will have some equity but have to borrow the rest. This is where hard money lenders can help. They frequently finance flips but have a higher interest rate than conventional lenders, sometimes up to 15%.
Finally, you must understand that every flip is unique. Taxes will vary from state to state so will insurance rates. Some houses are subject to the dues of Homeowner’s Associations, some aren’t. Some flips will be concluded in a couple of months, some will take up to six months not counting things like weather-related delays, logistics problems, and contractor issues.
If you can handle all this, feel free to take the first step. You’ll be glad you did.