Flipping houses is a great way to make a profit from real-estate investment. You buy a rundown house at a below-market price, renovate it and sell it off at a much higher price.
It looks so simple on fixer-upper television shows that you would think you could easily make a living by flipping houses. Not surprisingly then, more and more people have been getting into it in recent years.
But it’s much more difficult than you might imagine to buy and flip property.
The challenges begin with the first step. House flippers have to search tirelessly looking to secure run-down houses in suitable locations, not to mention at a price that will guarantee a profitable sale after repairs and renovations.
Next comes securing a home loan for the purchase and overseeing the renovation of the house for months.
To add to this, house flippers have to search for clients who might be willing to purchase the renovated house at a price that yields a profit.
Success or failure all comes down to whether or not one is able to sell the house at the desired price.
Most flipping success stories belong to experienced investors. They have a good idea about which types of properties will sell in which locations and where to find clients for the sale.
Beginners in house flipping have a relatively low chance of success. It’s difficult to make money flipping houses without experience in renovation and a good network for finding a buyer at the right time. If you are looking to get into house flipping, here are some common mistakes you should avoid.
1. Not Doing Your Due Diligence
Before you purchase a property with the aim of renovating and selling at a profit, you must do your due diligence on the house. Talk to a local real-estate agent about its location, the community, trends in the property market in the area, the highest price that a property will sell for in the location, and the amount of renovation that the property requires. A building inspection is a must.
Trying to begin a house-flip without a concrete idea about these factors can cause problems later. For instance, you might have to spend more money than you expected on renovations or might not be able to cover the costs of holding the house during the work on it if you don’t make proper estimates before the purchase.
2. Purchasing An Expensive House
When you are just beginning your journey in house flipping, it is important to keep your financial risks at a minimum. Refrain from purchasing the house at a price that will leave you unable to finance the renovations you planned or cover the home’s costs during months of renovations.
To purchase a house you can afford, follow the 70% rule. This states that you should not buy a property for flipping if the purchase price of the house plus the cost of repairs totals more than 70% of the estimated after-repair value of the house.
Example: If you estimate that the house will be valued at $1,000,000 after renovations, you should not purchase it if the cost of the house plus the cost of the renovations exceeds $700,000.
3. Renovating Over Budget
One of the most common mistakes among house-flippers is spending more on renovations than necessary, or more than the location of the house supports.
Do not get tempted to invest in extravagant renovations and interior designs. Buyers of a house in any specific location expect certain amenities in properties within that area. Create a checklist of only what needs to be fixed or renovated to suit your area and stick to it. Don’t spend unnecessary dollars on vintage fireplace mantels, expensive wallpapers or flooring.
Overspending on renovations that are not required will only increase the selling price of the house.
This will make it more difficult to find a buyer, adding to the time and money you will have to spend selling. Consider reducing expenditure on such renovations and lowering the asking price, to make the process easier for both you and potential buyers.
4. Not Calculating Your Carrying Costs
Carrying costs, also known as holding costs, are the recurring expenses you incur while you own the property. These include the mortgage repayments, interest, insurance fees, utilities and property taxes. Carrying costs are determined by loan size, loan type, and the location and age of the property.
Failing to calculate these costs before purchasing the house can leave you surprised by the expense later. And the cost will only increase the longer you take to complete the renovations and sell.
5. Not Getting A Trusted Builder
Renovation costs make or break a house flipping strategy, as it is the value of the after-repair house that determines whether a project is successful at generating a profit. There are many people who assume they can renovate a house as a DIY project, but unless you have experience in the house renovation and remodeling business, it is a big mistake to undertake the renovation yourself.
Not only will you take longer to complete the flip, you’ll also lower the quality of the repairs. The longer the repair takes, the more it will cost in terms of utilities, loan interest and insurance fees. Also, if a potential buyer happens to discover a subpar repair in the house during inspection, it will create a bad perception of the home and will make finding other clients an ordeal. Getting a trusted builder will prevent all these.
6.Overpricing The House
Before putting the house on sale, you must look at the market price of others in the same neighbourhood with similar amenities and facilities. While you can surely sell the house off market, it is better to list it with the local real-estate agent, who can advise you on the amount buyers are ready to spend on a house in that location.
Even if the price you set for the property is justified by the cost of repairs and value of the home, it may be unaffordable for the people looking to buy in your location. If people cannot afford the house, it will be on the market for a long time and lower your chances of fully recovering the repair costs.
If you are looking to get a home loan to invest in house flipping, feel free to call us at 1300 889 743 or fill in the free enquiry form for expert advice on the best loans and lenders available for you.