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Why Home Flipping Is More Of A Risk Now Than Ever Before
Despite an extremely competitive real estate market that currently favors sellers, the profits for home flippers have decreased dramatically.
Flipping houses has often been thought of as a fairly easy way to get rich quick. Buying a fixer-upper, doing a quick renovation, and selling it for much more than you purchased it for sounds easy enough. However, it’s actually much more complicated than you’d initially think. Flipping a home is far from a passive job, and requires your constant attention to manage repairs and renovations, handle taxes and finances, and prepare the home for resale. And no matter how much work you put into remodeling the home, there is no guarantee it will sell quickly or that you’ll earn the profits you’re hoping for.
That said, people who are successful at flipping houses seem to have the process down to a science, which allows them to make a substantial living. But recent financial trends within the housing market do not bode well for home flippers. With the sky-rocketing housing prices and increased demand from homebuyers in the wake of the COVID-19 pandemic, you’d think that now would be the perfect time to enter the market as a home flipper. However, the high demand means that home flippers have to pay more for the properties they choose to invest in as well as increases the likelihood that their offer may be outbid. Rising construction costs and appliance costs, as well as labor and lumber shortages, are also extending the time it takes for remodels to be completed. And as they say, time is money, and all of these extra costs are hacking into potential profits home flippers hope to gain.
During the Spring and Summer of 2021, home flippers earned the lowest profits on their investments since 2008. On average, home flippers would earn profits of approximately 43% when normally profits would be at least 50% more than what they originally paid for the home. This doesn’t have to mean that you can’t make a substantial living off the profits you earn from flipping homes. However, it does mean house flipping has gotten much more complicated and you’ll need to pay attention to all the tiny nuances if you want to be successful.
Location is everything.
If house flipping is something you are actively involved in now or want to pursue, the key to earning profits may be where your properties are located. Location will be important to potential buyers, who may care about factors like access to city hubs, entertainment, and good school districts. You should also consider new developments in progress that may turn the area where the property is located into a potential hot spot in the near future.
In addition, pay attention to reputable real estate sources to follow trends in the housing market. This will give you expert advice and opinions regarding areas you would be wise to invest in and locations to avoid. At the time of this writing, Realestate.com is reporting that prime areas for house flipping are Phoenix, Dallas, Raleigh, Columbus, and Columbia, SC. In addition, it’s always a good idea to confer with a knowledgeable real estate agent who can help you navigate specific neighborhoods you are interested in.
Make smart investments.
Don’t be afraid to let some deals pass you by. It’s important you make smart investments to mitigate some of the inherent risks that come with house flipping. Before going gung ho on a property, make sure you know what you’re getting yourself into. Ask for the advice of a trusted real estate agent who can give an indication of how this home compares to what other homes are selling for in the area, as well as give an indication of what potential buyers may think of it. In addition, seek the opinions of contractors where necessary so you have a clear understanding of what repairs are necessary, how long they will take, and what it will probably cost. Even after that, set aside money to account for unexpected issues and delays. If you still have a good chance of making a decent profit on the home after considering all of the above, it may be worth pursuing.
If you’re still questioning if a property you’re interested in is a good investment, consider following the 70% rule. This rule states that an investor should only pay 70% of the after-repair value (ARV) of a property minus the necessary repairs. In other words, you should only pay 70% of what the home is worth after you’ve finished renovating it and it’s ready to relist. Additionally, paying for the home in cash or microflipping (reselling the property with limited renovations or repairs) can also help protect your profits in some situations.
Do the work yourself.
While hiring a professional contractor and construction crew will certainly get the job done, doing any renovations that you can by yourself can save you money in the long run. The real money comes from the sweat equity, or the physical labor you put into the home. Even pulling up old flooring or carpeting by yourself or painting a few walls on your own will be good for your budget. Of course, don’t attempt any repairs that will result in significantly more expensive damage if you make a mistake. Things like electrical and plumbing repairs always warrant calling in a professional, as well as any major demolitions or renovations, such as installing a new roof.
Along the way, make sure to keep organized records of all the work you are doing on the house, what you are paying, and to whom. Keeping impeccable records will help you keep track of the project, and be your best friend when taxes are due. In the event something went wrong at the property after it’s sold, you may need to rely on your records to defend yourself if the new residents decided to pursue legal action. The key is to do everything by the book and write it all down to the best of your ability.
Educate yourself before you start flipping homes.
When house flipping goes wrong, it’s often because a novice home flipper jumped into the deep end before they were ready. People who are new to home flipping make rookie mistakes, such as rushing in and buying the wrong property, not being financially ready, and not having enough time to devote to their investment property. Because novices aren’t experienced, they generally don’t have enough knowledge to help them pick the right property and truly grasp what to expect when finances and taxes come into play. They also may not have yet gained the skills that would allow them to put as much sweat equity into the house as possible. In other words, they have to rely on expensive contractors and professionals for every task because they can’t do the DIY work themselves, which cuts into profits.
As with any new job, some of the learning will have to take place on the job. But as a novice home flipper, do your research, consult with a knowledgeable real estate agent, and learn everything you can before making your first investment. Your preparation will pay off in the long run. You may also want to consider working with a more experienced partner, at least in the beginning, who can help keep you on track while you flip your first few homes.
Learn more tips and tricks for buying or selling homes at the Dabl Real Estate Hub!