Can you still make a profit while flipping houses?
Television shows and infomercials may have made it seem like flipping houses can be profitable for anyone who has the courage to give it a go. However, the real estate market is not what it was in the early 2000s when flipping homes was at its peak, so it is not as easy to make a profit as you may think. Do not be fooled into thinking anyone can flip houses either. You need to have a variety of skills to make it work as well as plenty of money and time.
While it is risky, it is still possible to make a profit from flipping houses. Read on to find out what is involved with flipping houses, how you can make a profit from it and why it may not be such a good idea after all. Flipping houses is not something to invest in lightly, so make sure you understand all the necessary information before making a decision.
What exactly is house flipping?
Before getting into house flipping, it is important to understand exactly what house flipping entails. House flipping is a strategy used by investors to buy real estate at a low price, improve the property and then resell it at a higher price. Foreclosures and old houses are the most popular properties bought by investors for house flipping because they are inexpensive and can, therefore, create a strong profit.
House flippers have the option of doing the work needed on the property themselves or they can employ contractors to do the work for them. Doing the work themselves can save money, but only if they are confident they have the necessary skills. Otherwise, they risk spending more when they are forced to hire a contractor to fix their mistakes.
How Flipping Houses Can Make a Profit
Are you thinking about getting involved with house flipping? If you want house flipping to succeed, there are several things you need to do correctly to make a profit.
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Firstly, you need to know your local real estate market thoroughly. Only by knowing the market value of comparable properties in the area can you know if the purchase of a property is actually a great deal. It is worth obtaining a real estate market license to access the multiple listing service for your local area. This allows you to find properties as soon as they are put onto the market, which is where the real bargains lie.
Make sure you buy properties at an extremely deep discount. The difference between the price you pay and the price the property is sold at needs to create a sufficient profit for the house flipping to be worth your while. Never buy a property for house flipping based on emotional factors, as you might when buying your first house for yourself. Whether you love a house or not has nothing to do with the practicalities of business.
To make the house’s resell value higher than the price you bought it for, you obviously need to fix it up. Ensure you know how much the repairs and improvements are going to cost. If you overlook these costs, you could end up spending a fortune on repairs. This is often an area where new house flippers face the most trouble.
Consider both the current repair costs needed as well as what future repairs are necessary to reasonably sell the house. For example, if you know your house needs a new roof within the next few years, make the replacement yourself. Homebuyers who inspect the home are not going to offer a good price if they know the house needs a large repair within the first few years.
Why Flipping Houses Can Be a Bad Idea
There are various factors for why flipping houses can be a bad idea. You need to weigh the pros and cons and carefully look at your personal and financial situation before taking the plunge. For instance, house flipping may have run its course.
There are fewer and fewer people flipping houses these days for the simple reason properties are not selling as well as they used to. For six consecutive quarters, the number of properties flipped in the United States has declined rapidly. In the space of one year, house flipping has gone from accounting for 6.2 percent of all home sales in the country to 4.6 percent.
You need to purchase the right property to turn a profit. Even if you do have a good eye for which properties resell at a higher value after being flipped, the average gross profit for flipped houses has fallen dramatically in recent years.
In the space of a year, flipped properties dropped from an average return of 31 percent to just 24 percent. Bear in mind the gross profit is not what you keep in your pocket. It does not include the renovations costs or the costs involved with reselling.
To make house flipping worthwhile, you need to resell the property as soon as possible. Unfortunately, homes are now sitting on the market for a much longer time. The longer you wait for the property to be sold, the more it costs you in the meantime. During this time your capital is tied up in the property and you face increasing interest payments, not to mention other costs like insurance and taxes.
Mistakes to Avoid
There are many mistakes house flippers can make, leaving them without a profit or even in debt. If you are serious about flipping houses, ensure you avoid making these three mistakes:
- Not Having Enough Money – Make sure you have enough money to cover every part of the house flipping process. Running out of money can leave you in an extremely bad situation. In some cases, you may need to get a loan for renovation repairs.
- Not Having Enough Skills – You may think you are a capable plumber and carpenter, but when it comes to the reality of fixing up a house, you might find you have been over-confident with your skillset.
- Not Having Enough Time – It can take months to actually find and purchase a property. You then need to invest your time in renovating it. Your time is also taken up with property inspections and all manner of other things. Flipping houses can require as much time as you spend on a full-time job.
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