House Flipping for Beginners | Benefits, Drawbacks, and Tips
House flipping is more popular than ever. Buying a home that needs repair and renovation, and turning it into a profitable investment seems attractive to many people. While house-flipping can be a lucrative investment option, it may not be suitable for people who are looking for a safe-bet investment.
The truth is flipping houses is no different than any other business: It requires knowledge, preparation, and patience. In this article, we’ll explain what house flipping is and what you should know before taking the plunge.
What Is House Flipping
House flipping is the practice of acquiring distressed properties, with the motivation of renovating them and reselling them for a profit. With house flipping, you’re buying a property as a real estate investment rather than a place to live.
In general, the concept means extensive repairs or improvements by yourself, the temporary owner. The main idea of house flipping is buying low and selling high. You invest your money with the motivation of earning profit in a short time, which is usually months or sometimes a year.
How Does House Flipping Work
The house flipping process starts with finding distressed properties. You can spot them through foreclosures, bank short sales, or property auctions.
Having a strategy and spending your money wisely are two essential keys to a successful house flipping process. Choosing an undervalued property is important too.
Later, you’ll need to invest in renovations that will increase the property’s resale value and attract possible buyers.
Advantages and Disadvantages of House Flipping
House flipping indeed brings significant profit, but there are obvious risks along with rewards. Before you get started, you’ll need to be aware of some of the benefits and drawbacks.
Making a Good Profit
The primary and the most obvious motivation for house flipping is to profit. If done in the right way, you’ll not only generate big returns on your investment, but also you’ll achieve in a short time.
One advantage of house flipping is that you can do it as a side job, as it doesn’t require your full-time attention. This way you’ll make extra money. Plus, you’ll have the chance to see if house flipping is right for you before you fully commit yourself.
No Need for an Office
You won’t need to rent an expensive office or warehouse to do your business while you’re initially getting started because you’ll most likely be the only employee. From the comfort of your own home, you can run your own house-flipping business.
Path to Personal Growth
House flipping is a great opportunity to learn and gain experience. When you’re flipping houses you’ll learn how to manage a business. You’ll also learn the essentials of the real estate business which is a huge benefit.
One of the most important aspects of real estate is networking, which can help you locate excellent off-the-market opportunities that no other investor has. When you’re flipping houses, you’ll make new contacts from the industry and these contacts may be useful in your future real estate investments.
Drawbacks to Flipping Homes
Emotional and Financial Stress
One thing you should be prepared for is stress. House flipping comes with both emotional and financial stress: While missed deadlines burden you emotionally, increasing costs will stress you financially, especially if you’ve borrowed outside funding.
While you’re flipping houses, one issue you might face is a house without a clear title. If not addressed and fixed properly, you might face a lawsuit. This is why make sure you have a competent legal advisor next to you during the process.
Another downside of the house flipping business is the unexpected costs. You may like a house a lot and put a lot of money only later to find out that you’ve not checked the roof or the garden properly.
How To Start House Flipping
Proper Neighborhood Search
Note that returns aren’t always guaranteed with house flipping. If you buy a good property in a bad neighborhood, no amount of restoration will entice buyers. This is why spending some time to find the right location should be your first step when you’re starting your house flipping journey. Getting assistance from a real estate agent might help.
Before you commit your funds and invest in a property, it’ll be useful to get a house survey done. You can work with a reliable contractor who will assess the house and will help you understand the estimated costs.
The Rule of “70 Percent”
Real estate investors use the 70 percent rule to see how much they should pay for a house. According to this rule, the ideal is to pay only 70 percent of the after-repair value (ARV) of a house, minus the repairs.
For example, if a property’s after repair value is approximately $300,000, the maximum you should be paying should be $210,000. If you think the renovation will cost $50,000, don’t pay for more than $160,000.
Still, note that this rule doesn’t guarantee a profit, but lets you spare a budget for unexpected expenses.
Team of Experts
As a house flipper, certain skill sets will help you succeed. Construction, real estate, and design knowledge, for example, are useful abilities to have. Even if you don’t have those skills, you’ll need to know where to go when you need help.
Before you start flipping houses, make sure you have a good network of lenders, real estate and insurance agents, and contractors who can assist you to find, fix, and sell a home.
The following step is to determine how you’ll fund your project. You’ll need to get preapproved for a loan if you don’t have any cash on hand to spend toward the property. To do so, you’ll need a good credit score. Plus, the bank may require a down payment.
Financing a home is not just the initial cost of buying the home and repairing it. You’ll also need to consider property taxes, insurance payments, marketing expenses, real estate agent fees, etc.
As we’ve tried to explain there’s a lot to learn if you’re new to flipping houses. Purchasing and flipping properties isn’t as simple as it might sound. But you may be successful at flipping homes if you take the time to understand how to do it correctly.