Thanks to reality TV shows, the concept of flipping a home has become enticing for many people. We’ve all seen the shows where smooth real estate agents and investors swoop in, then make an obscenely low offer on a home that needs a little work. They spend a few weeks rehabbing the property, stage it with rented furniture, and make a killing in profit when it sells to some sweet new family. Sounds like a really easy way to make money, right?
My experience in flipping real estate is limited to one house in Ohio, which was a project with my sister. While we did make a profit, I can honestly say that I would never again flip a property.
After expenses, realtor fees, and taxes, it just wasn’t worth the trouble or risk for me. However, just because it wasn’t my cup of tea doesn’t mean that fixing up and selling real estate wouldn’t be a good idea for you. Before making your decision, here are ten things you should know about house flipping, and why you should consider each one before ever jumping into that deal of a lifetime.
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1. Turn off HGTV
My number one rule is this: ignore the TV shows. I don’t care how enticing that family of flippers looks or how much money some brothers say they make. It’s reality television. Please, please, PLEASE do not make your financial decisions based on the edited, often-staged shows. They’re for entertainment purposes only. Remember that.
2. Work with someone who knows what they’re doing
The idea of finding some cute, foreclosed home to flip with your spouse sounds like fun. But the reality is that it’s more of a recipe for financial disaster than anything. If you want to give yourself a good chance at success (and making a profit!), you’ll need to find someone who knows what they’re doing in the area. Then, work with them.
Your best bet may be a realtor who has a strong grasp of what sells in the area. They will know what properties are worth, as well as be able to snag good deals when they first become available. Even better, they may have bought their own rental properties in the past and even flipped their own homes.
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You may also want to work with a contractor or someone who is very heavily into real estate. They can tell you what repairs a house will need before you ever commit to the property. Otherwise, you could very easily find a problem (or many problems) later and spend tens of thousands of dollars above budget.
The initial assessment before buying a property is where your money is really made or lost. Trying to guess what repairs a home will need if you don’t have experience in that area, could be a VERY costly mistake. Not knowing the area, the market, or how much a home could sell for once it’s rehabbed could be an equally costly mistake. You absolutely must work with someone who knows what they’re doing.
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3. Let deals pass you by
Don’t fall in love with the first home you find. In fact, I think you should look at a minimum of ten homes before you ever make the choice to buy.
Don’t feel like you need to make a decision on the spot because it’s the deal of a lifetime. It’s not. There will be many other deals of a lifetime that come around. Jumping into a property too soon, or without looking around a bit first, can mean the difference between a quick profit and losing your nest egg.
One way to find potential deals is by looking at HUD foreclosures. Many states will even have websites showing available properties. Depending on how the economy is doing in that area, the length of the list may vary but it’s one source.
Regardless of where you look, just be sure to do some looking before you commit to anything. Get to know what’s out there and how the market in that area is doing. Then, you can make an informed decision when finding your own deal.
4. Don’t overpay
This should go without saying, but I’m going to say it anyway: don’t pay too much for your property.
The day that you settle negotiations and buy the property is the day that you either make or you’re your money. This may mean that you decide now is not the right time, or that a property you fell in love with really isn’t the best financial decision.
Don’t let your emotions get the best of you. Also, keep in mind that if the market isn’t in a good place right now, maybe you need to wait a little while until it favors the buyer again. Just as you wouldn’t buy an overpriced stock, don’t buy an overpriced house.
While there aren’t many people who can completely rehab a house on their own, you should try to do as much of it as you can.
Maybe you come in with the sledgehammer and bust up tile or tear down a wall. Get in there and pull up that old carpet on your own. The sweat equity that you personally put into the property is what’s going to really boost your profit margins.
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There are things that you’ll probably need to call in the professionals to handle, electrical work in the attic, for instance, or replacing a roof. Those are worthy of hiring a crew. But painting, demo, and seeding the lawn? These are things that you can easily do yourself to save on costs.
This is also where partnering up with someone else can help. If you can find someone who is either great at renovating a house or has enough connections to know who the good (and cost-effective) contractors are, you’ll save even more money.
6. Pay with cash
This isn’t going to be possible for everybody, but I would highly recommend paying in cash for any home you plan to flip. Of course, this is a much larger investment in some areas of the country than others, but it’s worthwhile if you can at all make it work.
Paying with cash will save you both time and money. You’ll save on transaction costs and interest on a short-term loan. You’ll save time on the application process and disbursement of funds for closing. Being able to pay in cash may even be a great tool during the negotiations process, allowing you to talk the seller down even further (more money saved!).
7. Keep records of EVERYTHING
This is a tough one, for me included. You’ll need to keep impeccable records of everything throughout the flipping process for tax purposes.
If you use a contracting company for the repairs, you’ll likely only have one or two big invoices to keep track of, so that’s easy. When my sister and I flipped our house, though, she managed much of it herself. This meant that I ended up with a messy shoebox full of receipts from those twice-daily trips up to Home Depot. (I still have them, by the way, in case of an audit.)
From day one, categorize your receipts and keep them ordered. Keep every single copy and update your records as you go along. You’ll be glad you did, in the end.
8. Consider becoming a real estate agent
If flipping houses is something you plan to do long-term, you should consider making it official. Becoming a real estate agent will allow you to find your own great deals as soon as they come on the market. You’ll also be able to buy and sell homes without the 6% realtor fees, saving a lot of your profit. Being in the business will allow you to get to know local contractors who can help you estimate repair costs and provide services on the homes you renovate.
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Putting in the time and effort to become a real estate agent is a great move if fixing up and selling homes is something you plan to continue for many years.
9. Extend the flip
If you really want to boost your profit, consider renting the property out for a year before selling. You’ll make a little bit of extra money from having a tenant in the property, but the real benefits come from taxes.
Flipping a property can kill your tax bill. Buying, rehabbing, and then selling a home a few months later is considered a short-term capital gain. As such, it’s taxed as ordinary income and you’ll be paying your normal, marginal rate.
Sure, renting out for a year or so will tie up your cash. But if you can manage it, the tax savings are well worth the extra time.
10. Remember that flipping is a job
There is nothing passive about flipping a house. It’s a job often an intense, demanding, and stressful one. It’s a ton of work and you need to know that going in.
If you’re looking for a more passive form of income, go the long-term rental route. Sure, being a landlord isn’t without stress or risk. Pipes burst, a/c units need replacement, tenants are unable to pay on time some months it’s not without its own issues. But it’s much more passive than flipping.
Between taxes and the amount of work involved, I can honestly say that flipping is something I will never do again. It’s just not my thing. There are a lot of people who do it, enjoy it, and make a lot of money, though. Just be sure you know how much work it entails before you make the leap.
If you have the right connections, resources, and patience, flipping houses can be a great investment venture. These ten tips can help make sure the process is as successful as possible and that you (and your wallet) are fully prepared.
Have you ever flipped a home? What was your experience and would you do it again?