House Flipping: Is It As Easy As It Looks?
If you’re a fan of HGTV shows or social media accounts it can be easy to become convinced that house flippers who buy discounted real estate as an investment property and then "flip" the property by renovating the home and reselling it at a profit, are making quick money. Is flipping homes really worth it? A lot of that depends on the purchase price, interest rates and repair value. No two situations are alike, so to know if your real estate investment will soar or plummet you’ll have to evaluate several aspects of your scenario. Here’s how to determine if flipping that piece of real estate you’re eyeing will be as easy as it looks.
If you are experienced in property valuation and are confident you can negotiate for a low price before managing a renovation project, then house flipping could be an attractive way to invest in real estate. There are two major ways to flip a house — either find one that’s priced well below its worth because of the seller’s financial circumstances, or find a house in need of some repair that you can renovate on budget to increase the value.
Keep in mind that not only do you need to invest significant upfront costs to purchase and renovate the property, but you’ll also have to put in some sweat equity by either doing the renovations yourself or managing them on a tight budget.
Don’t get so excited about house flipping that you forget there are inherent risks to flipping a property. If your renovation project goes over budget, you could find your margins are slim. Also, if you have difficulty finding a buyer you’ll be stuck paying the property’s expenses until you do. These can include mortgage payments, taxes, and insurance.
People who decide to become house flippers do so because they believe they can earn quick returns by acting fast to improve a home and list it at a higher price.
Getting Started With House Flipping
Still want to flip houses? Here’s how you would get started in real estate investing.
In order to purchase the first house that you will flip, you’ll need the capital. Unless you have enough cash on hand to purchase a home outright, you’ll need to obtain a mortgage. It can help to get pre-approval for a mortgage so that you can act fast to purchase a deal, such as a foreclosure, when you find one on the market. As with any mortgage, your credit come into play. This type of investment requires a good credit score, especially if you already have a mortgage and need a second mortgage to test the waters on the flipping business.
Remember, you’ll also need money for your down payment, closing costs, and insurance on top of what you’ll have to set aside for renovations.
Find your team
Once you find a property that meets your requirements, you’ll need to assess the scope of the work, this will help you determine if you should hire contractors or if you can make cosmetic renovations by yourself. Your real estate agent can help you make some estimations but it’s also smart to have a general contractor that you plan to work with. Down the road you may need to potentially hire tradespeople such as a plumber or electrician.
Keep in mind that if you’ve never done renovations by yourself before, the process could be costly and expensive. If you’re the first-time homeowner of a fixer-upper it could be worth partnering with someone who is more experienced to help evaluate the extent of renovations necessary.
Make a budget and business plan
Obtaining pre-approval on your mortgage and talking to your real estate agent about what the market in your area is doing can help you better understand what your budget for purchasing your property and making renovations should be. Remember to build an emergency fund into your budget that you can use for unexpected situations.
To help evaluate which projects make the most sense for your budget and the value you are hoping to get out of the home, consider Remodeling’s 2020 Cost vs. Value Report for your area.
Purchase your property and get to work
Once you’ve found a property that meets your requirements, it’s time to make an offer. You’ll want to start your renovation process as early as possible to reduce the amount of time you’re paying for the expenses on your home. Keep in mind that there is typically a time period between when your offer is accepted and when you’re able to close on the home and take possession. You can use this time period to organize your renovation project.
Costs and Fees
What are the upfront costs of house flipping? Here are the financials you should consider before you get started with your first flip.
Consider all of the costs to close on your home including a home inspection and a deposit on your mortgage. You might also have to purchase title insurance and pay for any legal fees associated with closing, in addition to paying any local taxes.
Unless you’re doing all of the renovations and updates yourself, labor is likely to be a major cost of your house flipping project. Many first-time house flippers opt to take on smaller projects that simply need cosmetic upgrades so that they can save on labor costs until they truly understand how the mechanics of house flipping work.
The materials you use to remodel your home can have a major impact on your total project cost. Before getting started, consider where you can find used materials for a discount to help reduce costs.
You’ll need to pay property taxes for the duration that you own the property. Property taxes are calculated based on your home’s value. The number is usually in flux from year to year. In some jurisdictions, the seller will have already paid the year’s property taxes when you purchase the home. In other cases, you might owe property taxes monthly from the day you take possession
Home insurance will likely be mandatory if you get a mortgage, and is strongly advised even if you do not. If you’re not dwelling in the home be prepared for your insurance to increase. Certain home renovation projects can also increase your insurance initially, although some upgrades could lower your insurance over time.
Pros and Cons of Flipping Houses
Flipping a house is a serious project, not to be undertaken by the faint of heart. It can take lots of time to remodel a home, and you aren’t guaranteed a return on your investment. Here are the advantages and disadvantages to consider.
- Could be a faster return on investment than significantly hedged investments in the stock market.
- You have a measure of control over flipping a house, unlike other real estate investments.
- Enjoy the relative predictability of the real estate market.
- Flipping a house can get expensive, especially if you are taking out a mortgage to pay for the cost of purchasing the home.
- Renovations can take a lot of time. If you are paying someone else to renovate the home you also need to provide a high level of oversight.
Other ways to invest in real estate
Flipping a house isn’t the only way to make money in the real estate market. If you want to make money as a real estate investor but aren’t sure house flipping is for you, be sure to consider all of your available options before you forge ahead. Here are some strategies to weigh.
Instead of flipping a house immediately, another option is to turn your property into a rental unit. While some upfront capital is needed, you might not have to invest as much money renovating a home to rent as you would if you were trying to re-list it.
Turning your property into a rental can provide you with monthly income. You don’t have to rent your entire property, either. If you’re able to find a home that has two separate suites, such as a garden suite or a basement suite, you can rent out part of your property while still living there.
Keep in mind that becoming a landlord does involve managing your tenants. You’ll have to make repairs and ensure your property is kept clean and up to date. There’s also a risk that your tenants could damage the property, so you’d have to factor the cost of any repairs into your overall earnings.
Real estate investment trusts
If you want to get in on the real estate action without buying physical property you could consider investing in a real estate investment trust (REIT). You can buy into a REIT the same way you would purchase a stock. The trust will use the pooled funds from everyone who has bought into it to buy and manage properties.
REITs pay a dividend to shareholders, so depending on how well it does in the market you could count on some additional annual income. They’re also one of the easiest ways for small investors to participate in commercial real estate.
However, keep in mind that there is a level of investment risk with a REIT. If you’ve invested in a mortgage REIT, for example, you’re exposed to any potential losses the mortgage industry might take.
Real estate crowdfunding
A relative newcomer on the block is the world of real estate crowdfunding. Through online platforms, such as Fundrise or RealCrowd, investors can participate in projects initiated by real estate developers. This method of investing allows you to become a shareholder in various properties on the platform.
Even though it doesn’t take a lot of money to participate in a crowdfunded real estate venture, the risk can be quite high since you often know very little about the investment and who is managing the project, particularly if you aren’t able to read the financial history of the company first.
House flipping might not be as easy as it looks on television, but a well-executed house flip can prove to be a worthy investment opportunity. Before getting into any investment, be sure to understand the risks. Know your budget and create a business plan so that you can be sure you’ll actually make a profit on any home you buy.