9 Things to Remember Before You Flip Houses
Buying houses and flipping them is a popular form of real estate investing. But flipping isn’t always as easy as it looks on television. Here, the top real estate agents Bellevue, WA investors depend on offer nine tips about flipping homes for the greatest success
Have Enough Money on Hand
Flipping is always costly, even when you think you have a property that doesn’t need a ton of renovations. The price of materials and labor can rise between the time you purchase the house and the time you start work. You may discover things that need to be fixed as you work, even if your building inspection didn't reveal any issues.
Keep cash on hand for expenses and set up a budget for materials and contractors, giving yourself an extra cushion knowing you will likely exceed your original expected costs. Some loans let you roll the cost of renovations into your mortgage but remember, you’re paying more for that through interest. Try to keep your loan as small as possible and pay renovation expenses directly.
Budget Extra Time
Just like your monetary budget for the project will probably go over, so will your time budget. Give yourself a buffer of at least a few weeks between your targeted end date and the date you want to relist the home.
You can help keep contractors on track, however, by setting up a timeline at the start. Visit the job site often to assess progress. Pay your workers in milestones so if their work stops, no more payments.
Know Your Real Estate Market Intimately
The possibility exists that you could buy a house and be unable to resell it, at least at a profit, if you don’t study the market well before buying. Do your homework to determine what kind of niche you could fill in the market, whether that’s housing for people buying their first homes or elegant renovations on properties for a burgeoning luxury market. It makes no sense to enter a market for which there is no demand.
Research Locations Well
Part of your market study--a big part--should be location. Learn which neighborhoods are in demand and where houses hold their value. When looking at homes for sale in Bellevue, WA, for example, in addition to recent market trends for home sales, consider these factors:
• Proximity to water or water views
• Easy access to major thoroughfares and Highways 90 and 405
• Close commute to major employers, such as Microsoft or Boeing
• Neighborhood amenities, like schools, restaurants, and shopping
Bone Up on Negotiating Skills
Profit from flipping houses is on a narrower margin than most people think once all the costs are added up. To make the most of your investment, you’ll need to negotiate well to buy low and sell high. Take the time to study and practice your negotiation skills.
Purchase Price Tops Selling Price
Many investors focus on selling price when they first start flipping homes. But it’s the purchase price that’s most important. You can’t control the selling price because you don’t have a crystal ball, only recent trends. What you can control is your mortgage and how much you spend on renovations. Focus on staying as lean as you can so if you don’t command the resale price you hoped for, you will still make money.
Follow the 70 Percent Rule
The 70 percent rule is a handy yardstick in home flipping. It says that you should not pay more than 70 percent of a property’s ARV (after repair value), less the cost of renovations.
(ARV x 70%) - renovation costs = maximum purchase price
So, if a property’s ARV is $500,000, and it will cost $50,000 to renovate it, you should pay no more than $300,000 for it.
Build a Trusted Team
You will need a team of professionals to help you make a profit on your properties. House flippers usually have an extensive contact list for these people:
• Lending officers
• Real estate brokers
• Accountants and tax experts
• Interior designers and home stagers
You want to make sure your team is reliable so you finish the job to code, to the demands of the market, on time, and as close to your budget as possible.
Think Like an Investor, Not a Homeowner
Remember, when you buy investment properties, you’re a businessperson, not a run-of-the-mill homeowner. Leave emotion at the curb and let the numbers compel you. You may have to let some properties go because they’re too costly to repair (remember the 70 percent rule) or because there’s not enough demand. The point is to make money, not create the house of your dreams.
Flipping houses is a fun and fast-paced way to invest in the real estate market. Heed the advice above, and you stand a good chance of making it a profitable one too.