On the surface, fixing up and flipping a home looks like a foolproof way to strike gold! However, if that was the case, we’d surely all be real estate billionaires, wouldn’t we? For every success story, there are many horror stories, and the truth is, it is a risky business to get caught up in.
As with all risky investments, however, the rewards can be great, while the consequences of failure can be devastating. Knowing both the pros and cons of house flipping is essential if you’re considering taking your first brave steps into this world.
The Pros of House Flipping
TV shows lead us to believe that house flipping is a quick and easy way to make a great profit, and it can be if things go to plan. Provided you do have a solid plan in place, and a good idea of what you’re getting involved in, here are some of the main advantages of house flipping.
Potentially Quick Profits
Want to earn more than your annual salary in just a few months of hard work? It is possible, and if you continue the day job, you can more than double your yearly earnings in the first quarter of the year. In many cases, profits of more than $60,000 are not uncommon.
The world of real estate is vast, made up of professionals in a myriad of fields, from realtors and solicitors to contractors and home inspectors. By spending time within these circles, you’re likely to make several contacts that can help you with future investments. With contacts come potential business opportunities, and you never know, you might even be the next Real Estate TV star.
You Gain a Valuable Education
There’s no better way to gain experience and educate yourself than by getting stuck and putting your neck on the line. While flipping a home, you stand to learn about general real estate, your local market, construction and renovation, negotiating, and buyer insights. This can be a great way to prepare yourself for selling, renovating, or even building your own place one day. With the valuable insights you’ll learn, you may not need to rely so much on third parties in the future, saving you money.
When you flip a home, you’re typically working for yourself, even if you are still working full-time elsewhere. Dedicating your time and energy to a project that you believe in, and having the guts to see it through can leave you with an immense feeling of accomplishment and pride. Not only this, but you can prove to yourself that you have an eye for spotting potential, and are equipped with the skills needed to get the job done.
The Cons of House Flipping
So far so good, but it’s not always easy, and mistakes can be extremely costly in the house flipping business. Care, attention, and a solid plan are essential if you want to avoid the following disadvantages of house flipping.
It Might Not Work
With such a volatile market, any real estate purchase is a risky investment. However, buying a fix and flip property can be even riskier than usual, as you’re typically already invested in your own property while taking on a second. Many things can go wrong, which can cause you to lose money rather than make a profit.
- Unanticipated expenses such as building permits, materials for unforeseen structural problems, contractors or realtor fees can push you over budget, quickly trimming your profit margin to nothing. It’s essential to do your research and anticipate any cost in advance, and budget for it.
- Holding costs before, during, and after renovations can stack up, which is why it’s always best to flip and sell as quickly as possible. Unfortunately, this isn’t always possible; a crash in the economy can turn buyers off or the location you’ve chosen may not be desirable enough; and these are just 2 of many other reasons why your house might not sell as quickly as you’d like. All the time you’re holding onto it, you’re paying the mortgage (if necessary), taxes, utilities, insurance, and maintenance, costs that will eat into your profit margin.
- Taxes can also eat away any profit you might have anticipated. After renovations, your property may be subject to higher property taxes, potentially putting buyers off. Additionally, any profit made on an investment property may be subject to capital gains taxes.
It’s Time Consuming
Even if you hire people to carry out the majority of the work, you’ll still need to be fairly hands-on, especially for your first flip. This takes a lot of time and energy, which can be difficult to juggle with a full-time job and a family. If you plan to do most of the work yourself, it will take even more of your spare time.
No matter how well you cope with stress, flipping a house can soon make you flip out! There’s a lot of risks involved, and a lot of cash at stake. If you’ve borrowed, this can be even more worrying, and many small things are wont to go wrong along the way. Delays in construction can have a domino effect, while the anticipation of waiting to sell can also become a significant source of stress. So take all these factors into careful consideration before making a decision.