Are you addicted to HGTV? If so, you may be one of the millions looking into investing in property. To be precise: investing in rundown properties to flip them for millions. Home renovation for a profit can be lucrative, enticing many to get into the highly competitive industry.
In the third quarter of 2021 alone, 95,000 houses were flipped. It’s an increase from the second quarter. Although market prices and low interest rates from many mortgage options are attractive, the falling profit margins have been telling. The return on investment was at 32 percent, the lowest it has ever been since 2011.
This is not to say there’s no money in flipping properties. The point is you must do it right the first time around. If you want to go from watching flipping houses on TV to earning from flipping properties, follow a strategy.
House Flipping Strategy
Never Assume It’s Easy to Flip a House
Home renovation for profit is never easy because of the potential for financial risks. For starters, you don’t want to overpay for a home before learning about the cost of the repairs and upgrades. If you remember your HGTV renovation shows, you’ll know that any problems with the home’s foundation will eat into a renovation budget and the completion of the project.
Another concern with flipping a house is knowing how to price it right once you’re ready to put it on the market. It can be tempting to go with a big number, but if you happen to be selling in a buyer’s market, the competition could mean no offers for your property.
So understand how much you can invest in one property and learn property pricing that creates a bidding success.
Invest in the Right People
Unless you have the skills to tile a bathroom, redo the flooring, or install a toilet, never DIY a renovation for profit. You may think you’re saving money by not hiring professionals, but the mistakes you’re likely to make as a novice will end up costing you more money.
When you mistakenly take down a load-bearing wall or layer shingles without checking under the roof decking, you’ll have to hire contractors to redo the work. This not only adds to your budget but also likely pushes your completion further. The more time you spend renovating the house, the more days and weeks are wasted because the property isn’t on the market.
Learn About Permits
Permits have the power to move along your construction, helping you stay on schedule. And you can’t avoid them because any significant alteration requires a permit. Your renovations will depend on the condition of the property you buy. If the house you’re flipping only needs surface improvements, like an updated kitchen countertop or a fresh coat of paint, permits may not be required. But if you’ve chosen a complete fixer-upper, you’re likely to do some electrical work, plumbing repairs, and replacing the siding.
Although your contractor will take care of permit applications, knowing the process is still better because a well-informed flipper ensures their investment.
Knowledge of permits in every city or suburb allows you to plan properly for the flip. You’ll know if you can install a fence, for instance, at a certain height to get the perfect exterior style for the home. It also helps you know if you have enough time on a flip to add a skylight or update the door (both of which require a permit).
Learn About Market Prices or Sale Histories in Neighborhoods
Your profit margin is only as good as your location. If you’ve wondered about flipped homes that carry a $10,000 to $30,000 margin, the minor profit has something to do with “comps.” Comps are sales records of properties that have sold in certain areas recently. Agents use them to determine the price of the homes they will put on the market. They assess property value.
If you’re not aware of the comps in the area where your purchased property stands, you may overprice (or underprice) your flipped property. An overpriced property sits too long on the market; when a property sits for several weeks to months, buyers have the upper hand in negotiating a lower price. When a property is underpriced, you miss out on a chunk of profit.
Clearly, you can’t blindly price your flipped home at $500,000 if the comps tell you the same sort of properties in the same neighborhood have all sold for under that amount.
Build Enough Funds Before Diving Into House Flipping
Finally, get enough money to fund your commercial endeavor. Every business (and you must treat house flipping as your business) needs sufficient funds to operate and thrive. Never just rely on the next sale to fund your next investment because the uncertainty could be disastrous. You may not be able to sell the flipped house in time to finance a new property you’re going to flip.
When you’re acquiring property, plenty of expenses have to be considered on top of the home’s price. You must pay taxes and insurance; consider also spending for holding costs.
The money you use for your investments could come from financing options. Some mortgages offer low interest. Look up different lenders and calculate which ones will provide you with affordable rates.