Every once in a while, you’ll hear a story about some plucky investor who bought a dirt-cheap house, renovated it in the span of a couple months, then resold it for a massive profit. It’s part of a practice called “flipping houses,” and it sounds super appealing on the surface, but is it really worth pursuing?
The Basic Premise
The premise of house flipping is pretty simple. You’ll scour the housing market for a home that’s very reasonably priced, but that may need some renovations or repairs, then make changes to the house that upgrade its appeal and value. Once ready for the market again, you’ll put the home up for sale, ideally for an amount that exceeds what you paid for the core home and what you paid for the repairs combined.
In theory, this sounds possible, even for an amateur. However, the reality is much more complicated.
The Big Problems
The short answer is that most people can’t see a profit when flipping houses. There are a handful of problems that stand in your way:
●Finding the right deal. First, if you want to turn a profit, you first need to find a decent house for an amazing price. If you pay too much initially, there’s no way to justify the purchase later on. This is tough, because as an amateur, you won’t have access to the same deals that a real estate agent might. You can always get your real estate license (and since you can get a real estate license online, it’s possible for anyone), but even then, you’ll be competing with other bargain hunters constantly. There’s no guarantee you’ll be able to find the “right” deal.
●Estimating costs accurately. Many new home flippers fail when it comes to estimating costs accurately. When scouting for a home and beginning the renovation planning process, you’ll need to ballpark the expenses you’ll incur when upgrading the home; if they make sense (i.e., you think you can turn a profit on them), you’ll proceed. But most people are notoriously bad at this. Hiccups in the repair process, unseen damage, and unpredictable factors will typically worm their way into your work, compromising your profitability.
●Minimizing personal financial risk. Buying properties is a major financial risk, especially if you’re putting up your own money or are signing onto new loans. If you can’t turn a profit, you’ll be responsible for the costs. If you can only afford to buy one property at a time, you’ll be dependent on each flip being successful. Even if you’re marginally profitable, having so much of your cash tied up can be challenging.
●Selling for what the home is worth. Finally, you’ll need to sell for your target price—and even in hot markets, that isn’t a guarantee. Working with a real estate agent can help, but their commission could eat into your bottom-line profits. You can also be patient, and keep your home on the market longer, but this can keep your investment illiquid.
Solving the Problems
These problems can be crippling, but there are ways for you to mitigate or eliminate them.
●Licensing. One of the best things you can do is get your real estate license. It will cost some money and take some time, but thanks to online classes, it’s faster and cheaper than ever before. Once you’re formally certified, you’ll have access to better deals (and be able to access them earlier) than your competition. You’ll also be able to handle your own property sales, which means you can spare yourself the commission while maximizing your selling price.
●Experience. It’s hard to judge the quality of a deal or estimate expenses, but over time, with more experience in the field, it gets easier. Practice and dedication can make you a better home flipper, and if you can’t afford to wait, you can always get advice and direction from mentors who already have that experience.
●Partnership. You can also minimize the risks you face, and cut your work, by partnering with someone else. There are risks and benefits to this arrangement; while you may be able to split the costs and the effort necessary to get a successful deal, you’ll also be dependent on them, and tied to their own experience and efforts.
The Bottom Line
The bottom line is that while it’s certainly possible to make a profit when flipping a house, it’s not something an amateur can typically pull off. But if you have a real estate license and/or real estate experience, a good mentor, and possibly a partner to help you execute your strategy, it becomes much more possible to be successful.
Only the most dedicated real estate experts can turn this into a viable strategy for growth and profitability.
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