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House flipping has grown in popularity over the past few years. The optimism of high profit margins and no need for tenant management or long-term property maintenance has made this method of real estate extremely intriguing for new and veteran investors alike.
However, finding the right property to flip, house flipping costs and other hassles associated with this process can make it seem much less appealing. Below are the top three “don’ts” when flipping a property. Be aware of these common mistakes, and steer clear of them to make your house-flipping endeavor profitable and stress-free.
Related: Looking to Invest in Real Estate? Learn How to Fix and Flip Homes With Guidance From These Investors
1. Overestimating your abilities
One of the most common mistakes investors make when beginning their house-flipping journey is overestimating their abilities. Confidence is key to success in your business goals, but it’s important to weigh that confidence with a realistic idea of what you can and cannot do.
Construction/renovation abilities:
Flipping a home usually requires substantial renovations and repairs. Since flipped properties were usually distressed prior to their flip, the process of flipping can entail major structural changes or repairs to complex systems like electrical or plumbing. While many investors have the ability to complete smaller-scale repairs or renovations, it’s best to leave the complicated tasks to the professionals.
Not only can completing these repairs be dangerous to your health and safety, but they can also lead to costly mistakes and a final product that could disappoint buyers.
Time management:
Time management is a valuable skill in many industries, but it’s especially helpful when flipping a property. You should be able to accurately estimate the time needed for the flip, including the average time for each renovation, and which projects can be worked on simultaneously.
If you have trouble with time management, your flip could be delayed, which could lead to increased holding costs and overall loss of profit opportunities.
Real estate market knowledge:
Knowledge of the market your project is in is crucial for a high profit margin. You should be informed on market trends, popular buyer preferences and surrounding property values before deciding which renovations to prioritize and how you should price your renovation while in the selling process.
Money management and negotiation:
Being able to effectively monitor and budget your finances is one of the key skills required in real estate investment. Especially when you’re flipping a home, you need to be able to plan where each dollar is going to ensure you aren’t creating a money pit. Keep track of your expenses, and be sure to store any financial records you obtain for tax purposes.
Negotiation is another side of money management. Lacking negotiation skills can lead to you overpaying for the property or contractors to conduct your repairs. Having great negotiation abilities will help you land deals with suppliers or contractors and make your profit margin larger.
2. Overdoing the renovations
Another common pitfall that house-flipping investors fall into is getting too excited with the promise of your flip and overdoing the renovations.
Reduced ROI:
Your Return on Investment, or ROI, can be diminished when you over-improve your property. Renovations are meant to increase the property’s value, so when you indulge in unnecessary and extravagant upgrades, buyers may not be willing to pay more for those features if they don’t see them as valuable.
Neighborhood incompatibility:
It’s important to have in-depth market knowledge of the area surrounding your property. Specific neighborhoods tend to have a “price ceiling,” or a relative maximum amount that buyers are willing to spend on a home in that area. If you overdo the improvements on a property within a neighborhood with a lower price ceiling, you may not be able to find many interested buyers.
Risk of overcapitalization:
Overcapitalization is when you spend more money renovating the property than the property is appraised for at the end. This is obviously something you want to do your best to avoid.
Related: Want to Make Money Flipping Houses? Here’s Your Step-By-Step Guide.
3: Underestimating the cost
The third issue investors run into when partaking in a house flip is realizing that they’ve underestimated just how much it will cost.
Carrying costs:
Carrying costs are the expenses that take place during the flip. For example, property taxes, utilities, loan interest and insurance all count as carrying costs. The longer you take to complete your flip, the more carrying costs you have.
Renovation costs:
Renovating the property is the most significant expense in your house-flipping endeavor. You will need to purchase materials, necessary permits and contractors/labor to complete the renovations properly. It’s important that you get quotes from multiple reputable contractors before settling on one to ensure you get the best possible deal, saving more money for possible unforeseen renovation issues.
Financing costs:
If you are borrowing money to finance and renovate your flip, you will incur various fees like loan fees and interest payments. If you are taking out a loan with unfavorable terms or high interest rates, consult a financial professional to see if this investment is the best choice for your business goals.
Marketing/selling costs:
When you’re done flipping your property, you will need to invest time and money into marketing and selling. Marketing is critical for attracting potential buyers.
Selling costs can include real estate agent commissions and closing costs. Be sure to budget for these expenses in your original financing plan.
Hidden expenses:
House flipping is known for its tendency to blindside hopeful investors with devastating, expensive and unforeseen repairs. Electrical problems, structural damage and plumbing issues can pop up and the most inconvenient times and derail the entire process.
It’s important that you budget for a contingency fund that can cover any disappointing surprises such as those listed above. Leave plenty of space in that budget after taking care of your foreseeable expenses.
When it comes to property acquisition, renovation costs and the hassle of marketing and selling your property, some may decide house flipping isn’t for them. However, with a savvy business mindset and a realistic budget, this method of real estate investment can be a great boost for your portfolio.
Related: How to Find Funding to Start a House Flipping Business
