TV shows make house flipping look like a sure-fire way to make a lump of easy cash. However, the reality is often quite different, and there are several things worth considering before getting started. It’s always best to go in with your eyes open, so with that in mind, here are seven things to think about.
The first thing to think about before you get into the business of flipping houses is your job. Are you prepared to commit to flipping properties full time, or are you thinking of it as a side hustle? Take the time to weigh out the pros and cons of both options. House flipping can be very expensive, and having a stable source of income can ease the financial strain, especially if you’re new to this. However, flipping is very time-consuming. Ask yourself if keeping your job will give you enough time to handle the flip and whether you’ll have enough financial stability without your current employment.
Flipping properties is more expensive than buying a house to live in, so budgeting for it is slightly different. Apart from the cost of purchasing the property, you will need to factor in the costs of building materials, hiring contractors for work you can’t do yourself, selling costs, and the holding costs while the property is still in your name. Also, keep in mind that house flipping is seen as a high risk for conventional lenders, and your mortgage application may be declined. If a cash purchase is not an option for you, you will need to find alternative ways to finance the purchase of your investment property.
Understand the 70% Rule
The 70% rule should be the cornerstone of your house flipping budget. It will help you determine the maximum price you should pay on a property in order to maximize profit. Ideally, your maximum buying price should be no more than 70% of the after-repair-value (ARV) of the property minus the renovation costs. Anything above that, and you risk either just about breaking even or, worse, losing money.
A successful flip relies heavily on location, so it’s important to know whether you’re dealing with an up-and-coming market. Keep an eye out for how long houses typically spend on the market in the area you’re prospecting, but also what type of properties are being sold. For example, an area where foreclosure sales are common may give you a good chance to grab a bargain, but it’s also a sign of a declining neighborhood. Finally, don’t forget to check what’s being built nearby. A new school, a park or a shopping center can become selling points that will also boost the value of your property. A nearby power plant, not so much.
One of the most common mistakes first-time flippers make is underestimating how long it takes to flip a house. This is why establishing a time frame is just as important as setting up a budget. On average, a loan approval takes about two weeks. You can also expect to wait anywhere between 30 to 60 days from the time you made an offer until you actually have ownership of the house. Depending on the state of the property, repairs or renovations can take another couple of months. The entire time, you’ll be accruing carrying costs that will directly impact your budget, such as loan repayments, insurance, property taxes, utilities and so on. Setting up a realistic time frame will reduce the risk of unexpected delays, as well as the risk of straining your budget.
Sweat Equity vs. Contractors
Try to determine very early on how much renovation work you can do yourself and whether you’ll need to hire contractors. If you already have carpentry, plumbing or tiling skills, building up sweat equity is a good call and can take a load off your budget. Otherwise, it’s best if you hire a professional team. Keep in mind that a DIY renovation may not pass an inspector’s assessment, and the buyer might back out as a result. And the more time the property spends in your possession, the more you’ll become encumbered with monthly loan repayments.
What Happens if the Flip Flops?
If you struck gold and found a property that needs minimal touch-ups in a hot market, it is possible to flip a house in a month. Realistically though, the process may take anywhere between 3 to 6 months. And in a worst-case scenario, the house may remain on the market for much, much longer. So ask yourself what would happen to the property during this time. Perhaps you can rent it or live in it yourself. Or perhaps even wholesale it. Whichever the outcome, always have a backup plan if the house you are planning to flip doesn’t sell.