The answer to the question of whether it’s a good idea to invest in house flipping is not necessarily a yes or no answer. There are many factors that go into the perfect house flip, some environmental, and some situational. Choosing to flip houses over other types of real estate investing will come down to the investor’s needs and capacity.
With that being said, if you’ve ever been interested in flipping houses it’s worthwhile to take a closer look at the in’s and out’s and find out if it’s a strategy you would want to pursue. If the current market is offering the opportunity for good deals and profits on house flips, it could be the right time to jump in and start investing in house flipping.
This is how to know if flipping houses is for you, the benefits and disadvantages, and the moves to make if you want to flip a house of your own:
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Why Flip A Home?
If you’ve only had exposure to traditional buy and hold real estate, you may be wondering what flipping houses are all about and why people do it.
House flipping refers to an investment process through which an investor will acquire an undervalued home, renovate it to make it more valuable, and then sell it at a higher price than they bought it for. Typically a shorter-term investment than other types of real estate, most flips focus on single-family residential properties they can transform in just a few short months.
For the investor, flipping a home gets them that key exposure to different real estate markets, help them achieve financial independence, and build a new career. With house flips, the investor will be active in getting the home ready for sale but once sold their responsibilities to the property end, not the case for those that buy and hold and have to manage tenants later.
One of the biggest draws to flipping a property is the ability to get a high return on investment using investment funding and only a small portion of personal funds. The average house flip in 2020 earned $62,000, a number that is predicted to rise as house flipping activity picks up in the new year.
House Flipping: Yes Or No?
Not every flip is automatically successful, and there are things the investor will need to consider carefully if they want to proceed. This type of investment can be risky compared to buying and holding, but the rewards can make it worth doing as long as a thorough plan has been put into place.
The first thing to think about is what your goal is. Do you want to make passive income that needs little oversight? Then flipping might not be the solution for you. If you want to start a real estate business that will replace your current job and help you become financially independent, then flipping could be the way to go.
If you’ve decided to continue with a fix and flip project, you’ll also need to be aware of the benefits and disadvantages that working on one might bring.
The Pros And Cons Of House Flipping
The top benefit has already been mentioned above – the ability to get great returns faster, which can free up your capital for other projects. Most property flips are completed within a few months, and more experienced investors can even manage more than one at a time.
Another pro is that it can be highly rewarding. With flips, you take on older or rundown homes that might not otherwise stand a chance and renew them into something valuable once more. Learning how to flip houses can be addictive and once a project has gone as planned it’s easy to see yourself doing it again and again. In fact, many house flipping investors make a full-time living off of dealing with undervalued homes.
However, just like there are distinct benefits there are also a few cons that can affect how profitable the flip will really be.
The first con to flipping houses is the cost. The cost of a loan, the cost of renovation, the cost of taxes, and more. There are a lot of expenses involved that can quickly lead to cash flow issues if the investor doesn’t stay on top of their budget. This can be especially true if the property is older, as these are the most likely to have hidden issues that can rack up the costs.
The next con is the level of management needed. Flipping is an active investment that needs a lot of input from the investor to make sure that everything is going according to plan. If you’re not interested in staying on top of contractors and constantly checking timelines, then the chances are good you won’t enjoy the flipping process.
The last big con to know about relates to property taxes. The quick turnaround of house flips can impact how much you end up paying in taxes, especially true if your flip is too short-term to benefit from long-term capital gains taxes. If you’re not careful, you may have to pay a tax rate higher than the one paid on your earned income.
Is House Flipping A Good Investment In 2021?
With the pandemic affecting real estate markets in 2020, many investors are wondering will house flipping be a good investment in 2021, and the answer is yes provided that some of the below factors are adhered to:
- The Investor Knows The Market
While the majority of real estate markets have only slightly softened due to the economic stresses of 2020, some have been more heavily affected and may not make for good investments for a few months yet.
For new house flippers, it’s essential to take the time to get to know the markets they are thinking of investing in. You’ll want to ask questions like how many recent property sales took place in the neighborhood, how much they sold for and that the home you decide on is one that will draw the attention of buyers when all is said and done.
If you’re unsure if the home you are looking at is a good deal, or it’s priced too high, then it will be best to look for another property. Remember that the initial sales price will have a big impact on how much profit you take home from the project.
- Finding The Right Property
The next thing that will be important for investors to consider when flipping houses in 2021 is where to look for a property.
Finding the right property at the right price for house flipping can be trying. The ideal house flips are properties that have gone into foreclosure or are in a somewhat rundown condition. Finding homes that fit these criteria is key to success, and there are several sources that the investor can consider when looking.
If you’re shortlisting properties by hand, try to get a professional property appraiser to view these homes with you and give you an idea of the value and which renovations will be needed.
The fastest way to find homes to flip is with FlipScout. FlipScout by New Silver is a free property-finding tool made with house flipping in mind. This tool allows you to search nationwide for properties that would make good flips, see the potential ROI, cost to renovate, and get access to funding.
Any properties you view will need to satisfy what is known as the 70% rule. This rule is a guideline for investors which states that they should not spend more than 70% of the property’s estimated after-repair-value (ARV) minus the rehab costs. Bearing that in mind, remember that the 70% rule is a guideline but will not guarantee any specific profits. At the end of the day, you’ll need to look at these things to get a better idea of whether it will make a good flip or not:
- Estimated value in its current condition
- Estimated closing costs
- Cost of materials and labor
- Estimated holding time and carrying costs
- Selling costs
- Doing Smart Renovations
Renovations are the one place where the investor gets to be creative, but also has the potential to end up costing the most. Home upgrades are essential to getting a good offer from buyers when it comes time to sell, but it’s important to focus on the right ones while sticking to your budget.
Not all renovations add to the value of a home and some can actually be a make or break factor. Kitchen upgrades, bathroom renovations, and outdoor efforts like improving the curb appeal can make the biggest difference in your asking price but also affect how much you take home. The goal is to try and strike a balance between upgrading and cost-saving without compromising on quality.
Take your kitchen renovation for example. You don’t need to pour tons of money into new cabinet installations if it’s possible to fix up the existing ones. Can you paint them and replace their handles with something modern? This will already make them look more appealing to buyers who will have no clue that the cabinets are not brand new.
When it comes to home renovations, you do what you can yourself and bring in the professionals where needed. Painting walls, doing some landscaping, and many other projects around the property can be done by the investor to save on the cost of labor. The money saved can be better spent in other areas that are more difficult to renovate by yourself.
By working smart with your renovations, you can easily improve the value of the property without going over the budget. As a rule of thumb, you should always leave some leeway in case of unexpected issues that can arise from renovating. Older properties often have hidden problems lurking behind the walls and floors that can really drive up costs to repair.
Investing in house flipping is a good idea, but it’s not the right move for every investor. If you’re thinking about getting involved in this kind of real estate you should make sure you’ve taken the time to go over all the pros and cons and are comfortable with continuing.