The Short Answer
House flipping has the potential to provide great returns. This, combined with its scalability, gives real estate investors the chance to create a growing portfolio with high earning potential. While the allure of quick returns can be enticing, it’s essential to approach house flipping with careful consideration and a well-thought-out plan. This means knowing the do’s and don’ts of flipping houses.
Do’s
- Do thorough research
- Do budget realistically
- Do plan for project issues
- Do build a good team
- Do market strategically
- Do think like an investor
Don’ts
- Don’t underestimate costs
- Don’t overprice the property
- Don’t rush the rehab
- Don’t skip the home inspection
- Don’t go over your budget
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The Do's
Flipping houses involves taking a property, improving its value and then selling it for a higher price in order to make a profit. New investors who are tempted to jump into a house flipping project should take a minute to consider these tips, before potentially making some rookie errors.
Tip 1: Do thorough research
One of the biggest tips for flipping houses is to research both the location and the local real estate market. Flipping houses isn’t a time when you should “trust your gut” but rather, trust the facts. In your research, make sure to look into the property values, demand, and inventory levels in your chosen area. These factors all play a big part in the success of your house flipping project. The dynamics of the real estate market in each neighborhood are an integral part of flipping houses, as these determine the type of house, price point, and more.
Choosing the right location is one of the most important aspects of any successful house flipping project, so thorough research on the location is a must. Not only to ensure that you’re buying in the right place, but to ensure that the renovations can easily take place and that the home can be sold for the profit that is required. This means that the home should be easily accessible and in an area with a high demand for the specific type of property you have chosen.
Tip 2: Do budget realistically
When it comes to creating a successful house flipping project, the numbers are critical. This means that spending too much or too little can be detrimental to the project. Which means that setting a realistic and accurate budget for both the property purchase and the renovation project is of utmost importance.
A good rule of thumb to use, to determine how much you should pay for a property is the 70% rule, where you only offer up to 70% of the property’s after repair value (ARV). The ARV of a property includes its current value, the value of the renovations and looking at comparable property values in the same area.
Your budget should account for any unexpected expenses, so that these don’t derail your entire project. This buffer should be between 10% and 15% of the overall project costs. Underestimating costs can be the downfall of any house flipper, so carefully calculate all of the expenses upfront, including the likes of property taxes and utilities to keep the property operational.
Tip 3: Do plan for project issues
One of the biggest factors that can derail a house flipping project is when things don’t go according to plan. Rehab projects often change along the way, and preparing for these unexpected mishaps or changes can be the difference between the success and failure of a project. The key is to create a detailed project scope, including your timeline and budget, with reasonable goals along the way.
Along with this, allow for flexibility and adapt your plans, which may involve including a buffer of time and budget. For instance, if you rip up the floor and discover that there are termites underneath, you may need to pay for pest control to get rid of these before you can continue with the project which adds time and money onto the project.
Tip 4: Do build a good team
A good team is the foundation of a solid rehab project. To build a good team, you’ll need to find contractors that you can rely on to work within your budget and stick to your timeline wherever possible. Take the time to vet contractors thoroughly, checking references and verifying credentials. Thereafter, clear communication and regular updates are essential to ensuring the project stays on track.
Taking your contractors with you, when you are choosing a property is also a good way to get early project estimates and make more informed decisions. Choosing reliable contractors can make or break a project. By going over budget, taking too long, or doing a bad job, unreliable contractors can cost a real estate investor a lot of time and money.
Tip 5: Do market strategically
Getting your property sold to the right buyer, at the price you need, involves getting the property in front of the right audience. To do this, you’ll need a strategic marketing plan that will maximize the property’s exposure and attract the right potential buyers. You should make use of online listings, social media marketing tools, as well as traditional marketing channels and networking, to cover all your bases with marketing.
Highlighting the home’s best attributes will help generate interest and drive offers. Focus on the unique features, renovation improvements and anything that will attract a buyer, in your marketing efforts. Create a marketing plan, with a budget and stick to this.
Tip 6: Do think like an investor
Making a success of house flipping projects involves making the best decision for the investment. While these may not be the decisions you prefer, they will be the decisions that lead to the highest profit, and the house being sold. This means sticking to your budget, even if there are extra design elements you’d like to add to the project, it means not getting emotionally attached to the home and instead making strategic project decisions.
Thinking like an investor also means being wise with your negotiations. Ultimately, the goal is to get the house sold to create a profit. This may require a certain level of flexibility, so the key is to strike a balance between achieving a suitable profit, and getting the house sold in a timely manner, which may require negotiating the price.
The Don'ts
Now let’s take a look at some of the common mistakes to avoid when flipping houses. For new investors, these tips could save you some costly mistakes, and for seasoned investors they could be a much-needed reminder.
Mistake 1: Don’t underestimate costs
One of the biggest errors that house flippers make is underestimating the costs of the renovation project. While the lowest contractor bid may be enticing, don’t cut corners, and don’t forget to add a buffer into your cost estimates. There are many variables with renovation projects and things can go wrong, so it’s important to pre-empt the project costing more than you think and building that buffer into your budget.
Factoring in all the costs of the property purchase and the renovation project is imperative to making a success of flipping houses. Along with this, don’t forget to include the costs of maintaining the property for the period of time that you own it and are renovating it. For house flippers, these costs include property taxes, utilities and more.
Mistake 2: Don’t overprice the property
While the temptation to sell the upgraded property for a high price is prevalent, for house flippers who are hungry to make a profit, this may be detrimental to the project if they get carried away. Overpricing the property, while it may provide higher returns on investment, may lead to the property sitting on the market for a long period of time and getting stagnant.
Essentially, once a property has been on the market for a long time, it becomes less desirable and therefore harder to sell. So, pricing the property correctly is a vital part of getting it sold timeously and making a profit. A real estate agent can also guide you in this regard.
Mistake 3: Don’t rush the rehab
Time is of the essence when it comes to house flipping, however this doesn’t mean that the renovation process should be rushed. Typically, rehab projects that are rushed can result in subpar work. Contractors may cut corners in order to meet the shorter timeframe, and this often results in work that isn’t up to scratch. Overall, this will impact the value of the property based on the shoddy workmanship or low renovation standard. Which impacts the return on your investment in entirety.
Rushing through renovations increases the risk of overlooking important building code requirements. Failing to comply with local regulations can result in fines or delays, as well as potential legal liabilities down the road.
Mistake 4: Don’t skip the home inspection
It’s a good idea to encourage potential buyers to do a home inspection, so that you are transparent with them about the condition of the property in its entirety. This builds trust and reduces the risk of any legal issues after the sale of the property. Buyers who are confident in the quality of the project that has been done, are likely to make an offer on a property that is competitive.
Mistake 5: Don’t go over your budget
Overextending yourself financially in a house flipping project is one of the biggest mistakes that investors can make, so it’s essential to avoid overleveraging or investing more than you can afford to lose. It’s key to maintain a financial buffer for these projects because overextending yourself in this regard can lead to the entire investment being put in jeopardy.
Bear in mind all the costs involved with house flips and get to know the risks involved. Overleveraging yourself financially can exacerbate the financial risks, which means that investors have less margin for error, and this is not a sustainable way to move forward.
Final Thoughts - The Key To Profitable House Flipping
The key to profitable house flipping is a combination of strategic planning, informed decision-making and disciplined project execution. Real estate investors should take note of the following tips to success:
- Understand everything before you begin.
It’s important to make sure that you understand all the repair costs involved, the house flipping process and everything in between, before you head down this road. Knowledge is powerful and in this case a necessity to making a success of flipping houses. - Focus on the value-adding improvements.
It can be easy to get caught up in making improvements during the renovation process, but this can get costly and eat into your profits. Stick to the upgrades that are going to add the most value, as this will help you get the best return on your investment. If need be, consult a real estate agent and don’t forget about curb appeal. - Stick to your budget.
We’ve said it once, and we’ll say it again, stick to your budget and don’t overextend yourself financially. Getting yourself into hot water financially is easy to do, if you aren’t sticking to your budget on both the purchase of the property and rehab project. - Use the ARV to help you make decisions.
Work out an accurate ARV estimate using a reliable tool so that you can make informed investing decisions, like making the right offer on a property and knowing roughly how much to spend on renovations to achieve this. The property’s ARV will also be useful when you’re applying for financing, for example using hard money loans.