Are you memorized by those shows in which people are buying run-down houses, fixing them up and reselling them for huge profits before the first mortgage payment is due? Wow! What’s more, these people claim they made as much money on this one house as you did all of last year. They don’t look or sound any smarter than you, and they’re raking in the cash! You start crunching numbers and before you know it, you’re thinking about a career change. Flipping houses can be exciting, lucrative, demanding, risky, and rewarding all at the same time. The best line I ever heard applied to flipping houses (and also applies to investment property in general) is: “You make your money when you buy, you get paid when you sell”. If you do your homework, watch your time and money, and following a few overarching guidelines, you can be successful:
- You must be 100% confident you understand what the house will sell for QUICKLY after you fix it up. Be realistic. Don’t shoot for the top price in the market; in fact I recommend to price it 5-10% below what it should sell for to move it quickly (especially in this market).
- If possible, use cash to purchase the home. A simple flip where you finance the purchase and rehab can eat up $5000 right out of your profit in financing fees.
- Itemize what your costs are going to be to not only fix it up, but to hold and market the property. Make sure to include some contingency for unseen problems or items you decide to repair/replace once the work begins. Then don’t stray from that budget. So many newbie flippers just wing it when it comes to budgets
- Just as important as the budget is a schedule. Every day that you own the property means less money (profit) in your pocket when you sell. Make sure you are not slowing down the project by trying to do too much yourself. Keep the house busy with activity.
- If you are a armchair do-it yourselfer, pick your battles. Make sure that the quality of your materials and workmanship meet the price point you are working in. I have seen many do-it-yourselfers, do a poor job on an area they were trying to save money on, only to have the house not sell because everyone through the house saw the problem. Hire talent and quality.
- The potential profit margin ultimately drives the amount of work you can do on a flip, but I recommend to newer flippers that they should buy a house that needs a few (potentially major) items to repair, such as needing a new kitchen and bathroom, instead of 100s of small ones, such as new doors here and outside facia work there and a reworked kitchen here and tons of TLC everywhere.
- Have an exit strategy. What if the house doesn’t sell quickly? What are you prepared to do? I believe there are two easy answers: move yourself in and sell your house or turn it into an investment property and rent it. While moving in may be difficult or impossible, turning it into a rental should be one of your considerations.
Although this is not a comprehensive list, these are the guidelines that I give everyone that I meet that is interested in flipping. They will make you more successful, more money, and less stress. Good luck!