There tends to be a glamorization of house flipping, likely brought about by watching home improvement and real estate shows. The reality is that house flipping can be a difficult and often disappointing undertaking. Thats not to say some house flippers dont find great success, but there are also so many challenges that can come along too.
If youre considering wading into the flipping world, when youre realistic about the challenges, youre already putting yourself in a better position to deal with them.
The following are some of the most significant challenges you might face along the way if you flip a property.
Many homes are not a good investment in terms of flipping. You have to find neighborhoods that will appeal to buyers, but you need properties that are going to be priced below market value in that area. Your goal with flipping isnt to let the property appreciate slowlyits to sell quickly.
Some of the ways you can gain leads for properties well-suited to flipping include looking for probate properties, going to auctions or keeping up with foreclosure lists. Tax lien properties, wholesale properties, and short sales are other options.
You need to do the math before bidding on a property to know the highest price you can pay and still make a profit.
With each home you buy you have to think about the propertys actual value, current conditions of the market, comparable home prices, and how much you think itll cost you to make repairs and upgrades. These considerations have to be weighed against the possible listing price.
Some flippers can pay cash for properties, but if you cant, it can automatically put you at a disadvantage. That doesnt mean you cant work around this, but its something to be mindful of. For real estate investors, its not uncommon for mortgage lenders to want a significant down payment of 25 or more.
Youll also have to come up with the cash to do the work on the property, pay contractors, maintain the utility bills, and cover closing costs.
Along with planning for everything above, youre going to need a contingency to tap into if things dont go according to plan, which is almost inevitable.
You may be able to use equity from a rental property you already own or get an investor for private funding. Otherwise, your two primary options are a traditional lender or using your own cash, both of which have risks.
When youre an investor, and you experience delays on a project, it can be incredibly frustrating. Your contractors may have other jobs theyre working on, materials might not arrive on time, or machines and equipment might break down.
Once theres one delay, it often creates a ripple effect.
To avoid some of the impacts of delays, you shouldnt >
Above, we mentioned the importance of having a contingency cushion built into your budget, and the chances are very high youre going to tap into it when youre flipping a house.
You might not have known there was mold behind a wall, or a pipe in the wall could burst unexpectedly. Weather and delays can also contribute to expenses you didnt initially account for.
The best you can do to plan for the unexpected is to try to budget for them ahead of time.
Finally, when youre a house flipper, you absolutely have to understand the market, and its not easy. It takes time, experience and research to grasp whats happening in the market at any given time. Many new flippers just dont get it but they jump in any way.
Its not always the prime time to start a new project. For example, demand might be down, or mortgage rates could be high. There can also be external issues in the local area where you are.
You cant just consider the trends when youre already entrenched in them. A good flipper is ahead of the trends, and you can time your purchases and flips accordingly. Factors to understand include local house inventory levels, trends in mortgage rates, and property values.
If youre lucky, youll find an experienced local realtor who can help you a lot as far as understanding local housing conditions.
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