There was a time when flipping houses was a great way to invest in a project and be rewarded with a big return on that investment but that’s not quite as true as it once was. That doesn’t mean there isn’t money to be made in flipping houses because there is. It just means you need to be a little more careful about it. Let’s take a look at the dos and don’ts of flipping houses so you can invest your money wisely and maximize your chances of making a decent profit.
Do Understand What You’re Getting Into
Flipping houses isn’t as easy as the house flipping shows make it appear. It takes a fairly sizable initial investment and additional investments along the way. Before you start, familiarize yourself with the rules and regulations regarding real estate in your area so you know what you’re allowed to do and, more importantly, what you’re not allowed to do. Some things you may want to do to the house you purchase will require permits and sometimes those permits can be on the expensive side. If you know beforehand, you can plan those permits into your budget. Get on good terms with a real estate lawyer you trust to get the best advice available to you.
Don’t Underestimate the Problems You May Run Into
Flipping houses is a high risk venture and a lot could go wrong even before you put your house up for sale. Planning ahead is great but it doesn’t prepare you for every problem you may face along the way. Old houses are especially tough to deal with because one never knows what one will find once walls start opening up. Mold, ancient wiring, plumbing issues and a whole host of other problems may be waiting to be uncovered inside the walls of older homes. Budget extra money for emergencies to cover these potential issues. It’s a good idea to set aside 20% of your overall budget for those unexpected surprises and sometimes even that won’t be enough to keep you from going over budget.
Do Look for the Potential in a Fixer Upper
A fixer upper can be an excellent option if you’re looking to flip a house. You can often get a great price on a house that needs repairs or updating, do those repairs, make a few upgrades and then sell the house for significantly more than you paid for it. Look at the bones of the house. Are the rooms big? Does the layout work? Is there anything special about it buyers will look for (spacious backyard etc)? If you’re looking to flip a house for the first time, look for a property you’re not going to have to put a tremendous amount of work into. We’re going to talk about projects that are going to jack up your costs in a moment but if you can look at a house and see the potential in it, it’s worth taking a closer look at.
Don’t Ignore Big Problems for a Lower Price
Getting a house at a low price is great but only if you can get out without spending a fortune on repairs and renovations. In the section above, I mentioned projects that jack up your costs and we’re going to talk about them more in detail now. The most expensive projects to tackle include:
- Gutting a bathroom or kitchen
- Moving a bathroom or kitchen
- Taking down walls
- Altering structural walls
- Finishing an unfinished basement
- Correcting problems with the home’s foundation
- Fixing roofs
- Moving a fireplace or chimney
There are, of course, other renovations and other problems that may come up as you work in the house that will be expensive but the items on the list above are the most expensive fixes you’ll be able to see on your first walk though. It’s also a good idea to build a cozy working relationship with a contractor you’d like to hire for your flips. Have your contractor go with you when you tour the home and discuss your renovation ideas along the way. Your contractor will be able to tell you exactly what you’re looking at in terms of money.
Do Pay Attention to Location
A great neighborhood is important for a quick sale but buying houses in a great neighborhood often means spending more money. If you see a house for sale at a low price in a great neighborhood, it probably needs a lot of work. You’ll probably have to contend with all or at least most of the projects on the expensive fix list we talked about above but in this case, those expensive fixes may actually be worth the financial investment. Look at the comparables in the neighborhood. Are other houses selling for substantially more than the house you’re looking at? If so, you may have a potential dream house on your hands. If the cost of the house plus the forecasted cost of renovations (remembering also to budget that extra money for unexpected expenses) is still less than other houses are selling for in the area, you can make a tidy profit. This is especially true if the basic bones of the house are in good shape. You can avoid costly renovations in the living room, dining room and bedrooms and spend a little extra updating the kitchen and bathroom. Updated kitchens and bathrooms greatly increase the value of houses so by focusing your attention there, you can actually wind up saving money and still making more money in the end.
Location also works in the other direction as well though. You may find a great house that only needs a few repairs in a bad neighborhood. You may find a great house that is well outside an easy commute to a major city. These are definitely things to consider. It is much harder to sell a house that is in an undesirable location. Make sure you look for train tracks, airports, busy roads, farms or other environmental factors that may make the home less desirable to avoid buying a house that is just going to sit on the market after you’ve invested your money to buy it and renovate it.
Don’t Forget Curb Appeal and Landscaping
You can do all the work you want inside the house but it will be of little use if no one wants to walk through the front door. Make sure you really take a look at the house and decide whether or not it will need a lot of exterior work. It will be much harder to sell your house for what it’s worth if you don’t take a little extra time and money to spruce up the exterior. A new coat of paint or siding may be in order but landscaping can also make a huge difference. Consult with a landscaper, get their ideas and work out a budget. Just make sure you have a little extra in your initial budget to cover having this work done.
Do Consider Foreclosed Property
If you’re going to go the foreclosed property route, it’s best to choose post-foreclosure real estate or at the very least, research the title of the home as much as possible before you buy the property. If you buy a home at a real estate auction, you may be responsible for back taxes, liens or unpaid mortgage payments. That will definitely cut into your budget. It’s also important to remember that most foreclosed on property is sold as is. This often means a lot of repairs to both the house itself and the property it sits on. Even so, looking at foreclosures can be a great way to score a great deal on a house.
Don’t Let Yourself Get Overwhelmed
Flipping houses can be stressful. No, scratch that. Flipping houses is stressful. If you budget carefully, take your time, work with contractors you trust and don’t buy before you’ve learned as much as you can about a property though, you should be fine. If you’re not sure flipping houses is right for you, don’t do it. It is a huge commitment and isn’t one that should be taken lightly. If the project seems to be spiraling out of control, step back and try to relax. Look at all your options and decide on the best course of action. Tackle the biggest jobs first – the things that need to be done to make the house salable. If you don’t have enough left over in the budget to do the smaller things you wanted to do, at least you’ll have the big things taken care of and should still be able to turn a profit. You need to be realistic about this. Flipping a few houses isn’t going to make you rich. If you’re good at it and you stick with it, you may eventually start making a tidy profit but don’t expect that to happen over night. Experience will help you figure out what works and what doesn’t. You’ll learn more from the mistakes you make than you will from the things you get right the first time. Not every flip will be a success and you need to be prepared to take a loss sometimes. If that isn’t acceptable to you, flipping houses may not be either.