With the growing popularity of reality shows centered around flipping houses, you might be wondering how you can get in on this “easy money.” Like most things in life, becoming a successful house flipper requires careful planning, a stable financial backing, and a well thought out allocation of resources. While the television shows make it look easy, there are countless pitfalls that will need to be avoided along the way. Before you start flipping houses, make sure you understand what you are getting involved in and what common mistakes you should be careful to avoid.
The general premise behind these house flipping shows is that the investors purchase a property that they feel is undervalued, make some repairs, fix it up, and sell it for a huge profit. While this is sometimes possible, it is misleading to think that this is the way that flipping houses always works out. You need to be prepared for unexpected difficulties, issues with financing, or a delayed sale of the home. While sometimes these issues are unavoidable, many of the common mistakes can be avoided with plenty of advanced planning and research. Make sure that you understand the pros and cons of flipping houses before you take out another mortgage for a project house.
#1 Factor to Consider: What Kind of Projects Are You Willing to Tackle?
House flipping projects come in all shapes and sizes. Before you even consider purchasing a house to flip, you will need to decide what kind of home improvement projects you are willing to take on.
For the most part, house flipping projects can be placed into one of four categories. Each category strikes its own balance of risk vs. reward, so you will need to decide early on what your tolerance for risk will be. You will also need to decide how much money you are willing to put into your investment. In an ideal world, you would always recoup your initial investment when you sell the home. However, any experienced investor knows that the best case scenario is not always going to happen.
The least labor-intensive house flipping projects will involve mostly cosmetic improvements. Some people, including those without a construction background, would probably prefer to invest in this type of home. The cosmetic improvements involved in these renovations could be things like giving it a new coat of paint, replacing the flooring, installing new light fixtures, or revamping the landscaping. For the most part, these are homes that are undervalued for whatever reason. Cosmetic improvements can go a long way towards increasing their value. The goal is to purchase them at a low price and then fix them up so that they can quickly be sold again. You will need to target the right demographic of buyers and boost the home’s curb appeal as much as possible – without spending too much in the process.
A mid-level house flip might involve some larger projects, such as replacing major appliances, cabinets, or countertops. The bathrooms and the kitchen are often some of the most outdated spaces in a home. That means that these can often be a good place to make some major improvements that will quickly boost the value of the home. Bathroom remodels are very common with these types of home renovations. Make sure that you are choosing countertops, tiles, and fixtures that are appropriate for the value of the home. A nicer home in a more upscale neighborhood will need higher-end fixtures than a comparable home in an average neighborhood.
The most difficult houses to flip are those that involve structural damage. Homes with significant structural damage are often marked down significantly due to the impending cost of repairs. These homes will typically not pass a traditional home inspection, with one or more factors causing major red flags. While these are the houses that can bring in the most profit, they are also accompanied by the most risk. This type of project should not be attempted by novice house flippers. In fact, it can be difficult to accurately assess the costs and labor that might be involved without a background in construction. If you choose to purchase a home with structural issues, make sure you get a thorough home inspection ahead of time. The more information you can gather on the home, the better you will understand the work involved to get it ready to sell again.
On the opposite end of the spectrum is the fourth type of house flipping project. In some cases, a buyer might not choose to make any changes at all to a home. Instead, they buy it and simply plan to hold the home for an undetermined amount of time. This is most commonly done in rapidly appreciating markets. Buyers purchase the home as an investment, hoping to sell the home for a much higher price in a few years. In the right market, this strategy can work well, but it does carry a fair amount of risk. The home may not appreciate as anticipated, leaving the new owner stuck with a property that they do not necessarily want. Or worse, the property values might decrease, leaving them underwater on the home. If you are planning to purchase a property in a rapidly appreciating area, make sure you have the funds to pay the mortgage in the event that you can not garner a quick resale.
#2 Factor to Consider: Are You Prepared to Hold the Property Long Term?
In fact, any home flip can end with a property that is slow to sell. While there are steps that you can take to make your property as appealing as possible, unanticipated factors or a dip in the local market can leave you with a property that takes weeks, months, or even years to sell. An experienced house flipper will be prepared for this possibility, with a plan in place to pay the mortgage long term even if the house does not sell as quickly as anticipated.
#3 Factor to Consider: Have You Done Your Research?
While even the best-planned house flip can end with your house sitting on the market indefinitely, some home purchases are much better investments than others. Make sure that you have done all of your research before committing to a home. Do you understand the market trends in the area? Do you understand the work that the home will need to bring it up to the standards of the neighborhood? Do you know how much these repairs and renovations will cost? Are you sure that you will recoup your investment when the home sells?
Any experienced contractor will tell you that home improvement projects often end up being more expensive than originally anticipated. Make sure that you have plenty of cash reserves and a buffer in your profit margin before you commit to a home purchase.
#4 Factor to Consider: You Might Need a Bigger Down Payment.
Getting approved for financing on a primary residence is fairly straightforward. Getting approved for financing on an investment property can be more difficult. Even with good credit, many banks will require a 25% down payment on a home that will not be your primary residence.
Through certain lenders, it is possible to purchase these homes with a smaller down payment. These lenders, often called hard-money lenders, will give you a short-term mortgage that is based on the assessed value of the property. However, these lenders will often charge higher interest rates. It is not uncommon to see short-term mortgages with 10% or even 15% interest. While this can be a good option in some cases, the higher interest charges can quickly eat into your profit margin if you end up owning the home for more than a year. Make sure you have the cash to back your goals before you get involved in flipping houses.
#5 Factor to Consider: How Does the Home Compare to Others in the Neighborhood?
When looking for a primary residence, the common advice is to not purchase the nicest house in the neighborhood. You typically want to purchase an average house in a nice neighborhood rather than a nice house in an average neighborhood. This advice also applies to properties that you could potentially flip. You are more likely to recoup your investment if you can find a run down home in a nice neighborhood than if you find a similarly priced home in a cheaper neighborhood.
The bottom line when it comes to flipping houses is that you need to do your research ahead of time and you need to have money in the bank before, during, and after the purchase of the home. Only you can decide if the risks outweigh the benefits.
If you are interested in buying an investment property in Brazos County, TX, contact my team today. We have extensive experience working with buyers and sellers in the area and we will be happy to give you advice that is tailored to your unique situation.