It's easy to see why so many people are interested in house flipping. It seems like a dream job where you make your own hours and turn a quick profit.
On the surface, house flipping appears simple: buy a house that needs work, fix it up, and then sell it for a big profit.
What's not to love? Especially if you have any experience in home improvement, design and real estate.
And, with more and more people jumping aboard the house flipping train, it can seem like everyone is making money doing it - and lots of money.
But, really, that's not actually the case.
As profitable as house flipping can be, it can also be a massive financial drain and huge stressor. In fact, before you dive in to your first flip - read this article on the 7 reasons not to flip houses, just to see the other, more realistic, side of flipping that people don't often talk about.
After all, who really wants to admit that their flip was actually a big... flop.
5 Main Mistakes for Beginner House Flippers:
There are a lot of mistakes that house flippers can make, especially in the beginning, that can cost you a serious amount of money and time. Not to mention, the stress, lack of sleep, anxiety, and other costs that don't always show up in your bank account.
So, if you're seriously considering house flipping, let's talk about the main mistakes that you should avoid if you want to start investing in flipping houses.
1. Not Knowing Your Market:
This one is key. You need to invest the time in getting to know your market. Successful real estate agents know how important this is. If you can't seem to figure out the market in your area (after all, they do change often), find a mentor or a great real estate agent that can be your ally as you tread into the world of flipping.
The reason why this is so important is because you need to know if the flip you are buying is actually a good deal that leaves you enough money to renovate properly and then sell for enough of a profit to make it worth your while. Just because something is priced below market and needs work - doesn't mean that it's the perfect flip.
Take the time to learn the market and choose a flip carefully. It's better to wait for the right flip than get sucked into a flip that will cost you more than you make.
2. Not Remembering the 70% Rule:
There's something called the 70% rule in real estate. This rule states that you should never pay more than 70% of the after-repair value (ARV) of a property minus the repairs that are needed. The ARV is what a home is worth after it is fully renovated and ready to sell.
Here's an example in numbers: If a home’s ARV is $300,000 and it needs $40,000 in repairs, then the 70% rule means that an investor should pay no more than $80,000 for the home: $150,000 x 0.70 = $105,000 – $25,000 = $80,000.
Adjust as needed to fit the flips and market you are considering.
2. Not Setting Realistic Renovation Budgets:
Renovations rarely cost what we think they will, even when we aren't dealing with a flip that could have a lot of hidden damage that even a good contractor can't see at first glance.
You might think it'll only cost $5,000 to redo that horrible 1960s kitchen - when really, the wood is rotted and the whole thing needs to be gutted, to the tune of $15,000 (if your finishes aren't too fancy).
You want to make sure that you overestimate the costs of renovation, in addition to what the contractor estimates, so that you have an accurate budget to work from when choosing a flip.
And, if you're thinking that you'll do all the work yourself, this can be a problem, too. Staying on a strict renovation schedule when it's just yourself and a volunteer crew can be another recipe for disaster.
3. Not Saving Enough Money:
Flipping requires cash. Check out this lengthy description of expenses, courtesy of Investopedia: "The first expense is the property acquisition cost. While low/no money down financing claims abound, finding these deals from a legitimate vendor is easier said than done. Also, if you're financing the acquisition, you're paying interest.
Although the interest on borrowed money is still tax-deductible even after the passage of the Tax Cuts and Jobs Act, it is not a 100% deduction. Every dollar spent on interest adds to the amount you'll need to earn on the sale just to break even.
And if you use a mortgage or home equity line of credit (HELOC) to finance your flip-house purchase, only the interest is deductible. The principal, taxes and insurance portions of your payment are not.
Research your financing options extensively to determine which mortgage type best suits your needs and find a lender that offers low interest rates. [...].Of course, paying cash for the property eliminates the cost of interest, but even then there are property holding costs and opportunity costs for tying up your cash.
Making a profit is tougher than it used to be. In fact, 2019 saw profit margins shrink to the lowest average gross return on investment (ROI) since 2011, according to ATTOM Data. [...] The average gross profit on a flip in 2019 was $62,900, but keep in mind that’s gross. [...]
Even if you manage to overcome the financial hurdles of flipping a house, don't forget about capital gains taxes, which will chip away at your profit."
Couldn't have said it better myself.
4. Not Doing Your Research:
In addition to knowing your market and choosing renovations wisely, you also need to research potential buyers in the area. What are they looking for? What do the other homes on the market offer?
If all the homes for sale in that area are offering granite counters, you should budget for granite counters in your renovation, too. That's what buyers are looking for and you want to be competitive with the market.
If the other homes available are using similar types of flooring, look into that, too. What about front and backyards, is there a standard expectation? Take note.
You can do a great job renovating - in your opinion - but not hit the nail on the head for the target buyer. Learn who the potential buyer is and deliver what they want.
Otherwise you might struggle when it comes time to finally sell that flip.
5. Not Factoring in Enough Time:
A flip is likely going to require more time than you expected, especially if you plan to do any of the work yourself. Once you get a trustworthy team in place and you've run through a few flips, the process will go faster and you will also have a more realistic expectation of how long it will take.
For your first flip, it can take months just to find the right property. Then, lining up new vendors will be more challenging than you might think. After the work is done, you'll need to schedule inspections before you can list. Then, there's the listing time period, which can take awhile, too.
There are ways to speed up some of the process. For example, one option when it's time to sell is to find a real estate agent who is certified to use our real estate bidding platform, USA Homebids, where homes are selling in days, with multiple bids and for over asking price. Not a bad deal! Reach out if you'd like to know more about how you can find a certified agent in your area.
What do you think? Still ready to start flipping? We thought so! We love house flipping over here at Enyart Homes and look forward to helping our clients find that perfect first flip (or second, third and fourth flip, too). Give us a call at 916. 524. 9733.
In fact, we have a lot of tips on the blog for how you can flip - profitably. For more advice, check out this post with 5 tips for profitable house flipping.
If you're a seasoned house flipper, make sure to share your top flip tips - or biggest mistakes - in the comments below.
Thanks for reading!