It seems like many people are getting involved in flipping houses these days, thanks in large part to several popular reality TV shows. Unfortunately, for most would-be investors, real life experience with a flip property will bear little resemblance to the predictable 30-minute television segments depicting a smooth renovation and quick sale.
Buying a property to flip involves a different decision-making process than buying a home for owner occupancy. This is not an easy endeavor, and potential flippers should take caution to understand the potential pitfalls. Here are a few things would-be investors may want to keep in mind as they embark on real estate investment:
1. Anticipating Market Value
There is an old adage that real estate is all about location, location, location. This still holds true when it comes to investing. More than square footage or number of bedrooms, location can be a critical factor in whether a property can be purchased for a reasonable price and later sold for a profit. But unlike buying a home for owner occupancy, the location factor becomes less personal for the real estate investor. It is no longer about finding a new home that offers an easy commute to work, for example, but a matter of buying a property at the lowest price within an area of anticipated market growth.
One of the secrets to successful flip property investing is staying ahead of the crowd. That means identifying what neighborhoods will become the next "up-and-coming" areas. New investors often do a fair job of identifying current sought-after neighborhoods. That's a good first step. However, experienced real estate investors become adept at identifying which neighborhoods are most likely to see jumps in property values in the near future while still offering some excellent deals today.
2. Staying True to the Numbers
While it's important to be able to envision a property's potential, it's also important not to get too caught up emotionally in the transformation. Renovating can be an enjoyable part of the real estate flip process and there is an obvious level of satisfaction in taking an less-than-desirable house and turning it into a marketable property.
In the end, however, the numbers still have to work. If an investor becomes too passionate about their vision for a certain property, he or she can find it difficult to walk away from a deal when a best and last offer is not accepted. Profit comes from purchase price minus costs—including renovation, a cushion for the unexpected, sales and marketing. Staying true to the math keeps investors from falling into a bad deal, which is even more important than identifying a good one.
3. Budgeting for Renovation
It's important to put together a renovation estimate before making an offer to buy a property because that offer needs to take into account expected expenses.
Defining a budget on a personal residence differs from investment property, and can be justified based on personal preferences and anticipated time spent in the home, but renovation of a flip property must fall within narrower parameters of what the market will bear for the neighborhood at this moment.
If an investor spends too much on renovating a property, it may attract a lot of lookers, but could end up being held too long. This will eat away at profits before a viable buyer is found. On the other hand, if materials or workmanship are shortchanged, word soon gets around the local real estate community.
Despite what may be portrayed on reality TV, real estate investing is not something to be done on a whim. Successful real estate investors are able to control their financial futures because they approach property investment from a business standpoint, not as a get-rich quick endeavor.