In recent years, flipping a house has been rekindled as a key for some to fund the American dream of homeownership and independent wealth. The shockwaves of the Great Recession, largely fueled by unwise lending practices in the mortgage market and bad decisions by Americans hungry to have a home of their own, have largely worn off.
House-flipping can be a great investment for those who have the skills, the money and the wherewithal to complete a labor-intensive renovation, and in areas of the country where real estate is either hot or affordable, it can be tempting to snap up distressed properties with the intention to fix and quickly resell.
But while house flippers on TV shows and Instagram may make it seem their endeavor only has upsides, it’s not a decision that should be entered into lightly. Before you decide to flip a house, consider these important tips.
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.
If you plan on doing a fancy loan like interest-only with the intention of refinancing once the work is complete, it’s also helpful to understand the various fees involved with a refinance—including additional closing costs—which can run in the tens of thousands of dollars.
It’s rare for a new homebuyer to qualify for a loan that not only finances the purchase but also the repairs, so be prepared with a healthy cash budget for bankrolling the upgrades yourself unless you already have an established relationship with a lender. Bank-financed improvement projects are relatively high-risk loans for financial institutions, and hard-money loans from private lenders can creep up to 15 percent in interest rates.
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.
There’s also the personal question if you intend to inhabit the house during the renovation process: Can you live in a construction zone, albeit temporarily, if it means a roof over your head and a potential payday down the line?
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.
Skip on fancy customizations that the next buyer may not like unless you have a firm understanding of the marketplace. The goal is to increase curb appeal while simultaneously keeping your budget in check.
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.