Although popular reality television shows make house flipping seem like a relatively low-risk endeavor, nothing could be further from the truth. It would be more accurate to call the business of house flipping “high risk, high reward.”
The risk factors involve losing substantial sums of money when a fix-and-flip runs over budget or sits listlessly on the real estate market. Those are reasons that motivated entrepreneurs may want to conduct diligent research about the industry and possess a firm knowledge about the process. The following can help you minimize risk and improve your chances of a high reward.
Entrepreneurs typically enter the house-flipping industry to take advantage of a business model that can garner a high annual income. However, you may still need to borrow and/or secure financing before you begin your project.
There are plenty of fix-and-flip loan products available. Many involve relatively short terms and high-interest rates. Two things can help lower rates and improve profits — cash for a down payment and a good credit score.
A house that looks good from the street generally garners more attention and higher offers. But a house that enjoys structural integrity can be less expensive to renovate. Finely manicured lawns and gardens are secondary to items such as foundations, floor joists, roof rafters and structural walls. Those items can inflate the cost of a fix-and-flip far more than cosmetic upgrades.
It may be worthwhile to think of house-flipping like an hourglass. Once you complete the closing, you are on the clock to pay monthly installments on loans. The time to remodel and bring a home to market can also impact when the next project begins and how many you can flip each year. The saying that “time is money” never held more true.
One of the primary reasons fix-and-flip projects run behind schedule and over budget stems from not having available subcontractors. If a house requires new electrical wiring, you may have open walls until the specialist completes their portion. If they are unavailable, sheet rockers, painters and others can be delayed. It’s essential to have the right people ready to proceed.
If you haven’t already noticed, houses are listed according to the “asking price.” That means most property owners are willing to take less. In terms of a blighted house that requires renovations, there can be a lot of wiggle room. People who enter the industry may want to hone their negotiation skills before bidding on properties. It’s okay to bid low and walk away sometimes. The alternative could be paying too much and losing money.
Experienced house flippers exercise a great deal of judgment over the process. But few stray outside the "70 Percent Rule." This simple equation tasks entrepreneurs with calculating the total cost of the project and expected resale price. With those figures on hand, the maximum financial investment should never exceed 70% of the expected final sale.
House flippers can make a good living once they learn the nuances of the business. If you are considering trying your hand, accumulate knowledge and minimize risk whenever possible.
