What Not to Do When Flipping a House

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Interested in learning how to begin flipping houses? Before making the major purchase, take into account these crucial suggestions.
The American dream of homeownership and financial independence has become more popular among some in recent years, and flipping houses is one way to finance this dream. The Great Recession’s shockwaves, which were largely caused by irresponsible lending practices in the mortgage market and poor choices made by Americans eager to own a home, have mostly subsided.

It can be tempting to buy distressed properties with the intention of fixing and reselling them in areas of the country where real estate is either hot or affordable. House-flipping can be a great investment for those who have the skills, money, and wherewithal to complete a labor-intensive renovation.

However, despite the impression that house flippers on TV shows and Instagram give of their business, it’s not something that should be taken lightly. Take into account these crucial suggestions before deciding to flip a house.

How to Flip Houses For Beginners — Checklist

Know Your Market

In a seller’s market where houses sell before they even are listed, flipping a house might be a smart investment idea, but it’s crucial to know your limit. In other words, don’t buy a $400,000 house that’s going to require a $100,000 investment when the average home in that area sells for $500,000.

A general rule of thumb is to keep a healthy profit margin between the purchase price, estimated costs of repair and final resell value.

Talk to Your Bank Before Making a Decision

If you’re going to take out a loan to cover the cost of purchase, pay attention to the fine print on fees, because they can be substantial.

Understanding the various fees associated with a refinance, including additional closing costs, which can cost in the tens of thousands of dollars, is also helpful if you intend to take out a fancy loan like an interest-only loan with the intention of refinancing once the work is finished.

Be ready with a healthy cash budget for paying for the improvements yourself unless you already have a relationship with a lender. It’s uncommon for a new homeowner to qualify for a loan that not only finances the purchase but also the repairs. Improvement projects financed by banks are generally high-risk loans for financial institutions, and interest rates on hard money loans from private lenders can creep up to 15%.

Run a Personal Cost-Benefit Analysis

Some questions to ask yourself: Is the financial gain worth the time, monetary investment and emotional bandwidth it takes to rehab a property?

If, for example, you have a background as a builder or contractor—or own a company that employs such skilled labor—you’ll be able to do much of the work yourself and likely reap a greater profit than someone who has to hire out all of the labor. Realtors, too, oftentimes get into house-flipping as they learn about deals before the general public, have labor resources at their disposal and have a better feel for the residential marketplace than the average house-hunter.

If you plan to live in the house while it is being renovated, a more introspective question arises: Are you willing to live temporarily in a construction zone in exchange for a roof over your head and the possibility of financial reward in the future?

Prioritize Your Renovations

Big-ticket items like a kitchen remodel will quickly eat your budget and not necessarily pay off dollar-for-dollar. Prioritize the things you can do with your skillset that previous owners didn’t want to tackle, like stripping wallpaper, painting walls and ceilings, sanding hardwood floor, repairing bathrooms and landscaping, among other smaller tasks.

Unless you have a solid grasp of the market, avoid making expensive customizations that the potential buyer may not like. Increasing curb appeal and staying within your budget are the two objectives.

Resell or Rent?

Having the option to convert a home flip into either a sale or long-term rental is a good way to place additional security on the risk of a large investment property like a house. While the challenges of being a landlord can be many, the upside of steady, incoming cash flow over the years is worth examining as a Plan B if the home doesn’t sell quickly enough or the market crashes.

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