5 mistakes that make house flipping a flop
House flipping has become the day trading of the first decades of the 2000s. But in the rush to make a profit, far too many would-be real estate moguls overlook the basics and end up failing. In this article, we'll look at the five biggest mistakes would-be flippers make in this market – and how to avoid them.
Flipping (also called wholesale real estate investing) is a type of real estate investment strategy in which an investor purchases a property not for his own use, but with the intention of selling it for a profit.
That profit is typically derived from price appreciation resulting from a rosy real estate market or capital improvements to the property – or both. For example, an investor might purchase a fixer-upper in a "hot" neighborhood, substantially renovate it, and then offer it at a price that reflects its new state-of-the-art appearance and amenities.
Investors who flip properties concentrate on the purchase and subsequent resale of one property, or a group of properties. Many investors attempt to generate a steady flow of income by engaging in frequent flips.
So how do you flip a building or house? In simple terms, you want to buy low and sell high (just like many other investments). But rather than adopt a buy-and-hold strategy, you complete the transaction as quickly as possible to limit the amount of time your capital is at risk. In general, your focus should be on speed as opposed to maximum profit. That's because each day that passes costs you more money (mortgage, utilities, property taxes, insurance, etc.).
So that's the general plan. Now, here are the pitfalls.
1. Not Enough Money
Dabbling in real estate is an expensive proposition. The first expense is the property acquisition cost. While low/no money down financing claims abound, finding these deals from a legitimate vendor is easier said than done. Also, if you're financing the acquisition, that means you're paying interest. Although the interest on borrowed money is tax-deductible, it is not a 100% deduction. Every dollar spent on interest adds to the amount you will need to earn on the sale just to break even.
Research your financing options extensively to determine which mortgage type best suits your needs and find a lender that offers low interest rates. An easy way to research a prospective property's total cost is by using a mortgage calculator. This tool will also allow you to compare the interest rates offered by various lenders.
2. Not Enough Time
Renovating and flipping houses is a time-consuming business venture. It can take months to find and buy the right property. Once you own the house, you'll need to invest time to fix it up. Before you can sell it, you'll need to schedule inspections to make sure the property complies with applicable building codes. If it doesn't, you need to spend more time and money to bring it up to par. Next, you'll need to invest time to sell the property. If you show it to prospective buyers yourself, you'll spend plenty of time commuting to and from the property and in meetings.
Is that worth it, for a venture that might net you a 10% profit? For many people, it might make more sense to stick with their day job, where they can earn the same kind of money in a few weeks or months via a steady paycheck – with no risk and a very consistent time commitment.
3. Not Enough Skills
Professional builders and skilled professionals, such as carpenters and plumbers, often flip houses as a sideline to their regular jobs. They have the knowledge, skills, and experience to find and fix a house. Some of them also have union jobs that provide unemployment checks all winter long while they work on their side projects.
The real money in house flipping comes from sweat equity. If you're handy with a hammer, enjoy laying carpet, can hang drywall, roof a house and install a kitchen sink, you've got the skills to flip a house. On the other hand, if you've got to pay a professional to do all of this work, the odds of making a profit on your investment will be dramatically reduced.
4. Not Enough Knowledge
To be successful, you need to be able to pick the right property, in the right location, at the right price. In a neighborhood of $100,000 homes, do you really expect to buy at $60,000 and sell at $200,000? The market is far too efficient for that to occur on a frequent basis.
Even if you get the deal of a lifetime, snapping up a house in foreclosure for a song, say – you need to know which renovations to make and which to skip. You also need to understand the applicable tax laws and zoning laws, and know when to cut your losses and get out before your project becomes a money pit.
5. Not Enough Patience
Professionals take their time and wait for the right property. Novices rush out and hire the first contractor that makes a bid to address work they can't do themselves. Professionals either do the work themselves or rely on a network of pre-arranged, reliable contractors.
Novices hire a realtor to help sell the house. Professionals rely on "for sale by owner" efforts to minimize their costs and maximize profits. Novices expect to rush through the process, slap on a coat of paint and earn a fortune. Professionals understand that buying and selling houses takes time and that the profit margins are sometimes slim.
The Bottom Line
You should approach flipping as a business. And, like any other business venture, it requires time and money, planning and patience, skill and research. It will likely wind up being harder than you imagined. But take it lightly at your peril: If you're just looking to get rich quick by flipping a home, you could end up in the poorhouse.
For related reading, see Top 5 Must-Haves For Flipping Houses.