Do you enjoy watching renovation shows on HGTV? Seeing the neighborhood eyesore turned into someone’s dream home? Ever contemplate trying a rehab yourself?
With many busy buyers looking for ready-to-move-in (“turnkey”) homes, there is a market for purchasing and renovating dated, neglected, or damaged houses for resale.
Flipping an asset refers to the purchase of a commodity and quickly reselling it at a higher price. The term “house flipping” is used in real estate to describe the process of buying, improving, and selling properties for profit.
You’ve heard the real estate adage, “Location, location, location!” Well, it couldn’t be truer for investment properties. The best deals for flipping may often be found in up-and-coming neighborhoods. You’ll need to do your homework to be sure you’re choosing a safe neighborhood, both physically and for your investment. Here is where the input of a knowledgeable realtor or experienced investor will be invaluable.
An obvious initial question might be, “How do I find a good deal?”
Foreclosures are bank or government-owned houses usually selling below market value. These purchases can be financed, so can be a good way to get started without a lot of capital. Houses at auction are purchased in cash, usually without inspection, so they present more risk and need more investment. Another way to find potential deals is to drum up your own by driving around target neighborhoods, taking down addresses of empty or neglected houses, and sending the owners your information with offers to buy their properties.
Another good question might be, “Where do I get the money for this?”
The short answer is to find an investor. You’ll put in the work, they’ll put up the cash, and you’ll both split the profits when the final sale is complete.
Profit windows tend to shrink with time in a flip. It’s quickly depleted by paying out monthly mortgage and insurance fees, rehab costs, and labor expenses. There’s also an ever-pending risk of losing money on the investment if housing prices should fall, so speed is of great importance in house flipping. Having a good team of reliable contractors is vital to a successful project.
Another factor in keeping profit margins high is the quality of finishes used in the renovations. Many buyers out there are wary of flipped houses because of the flippers who use the cheapest materials available or do shoddy work. If you take on a flip, by all means turn a good profit, but not at the expense of your reputation or your incoming buyers. It will not usually be in your interest to use high-end finishes, but do not go to the extreme of choosing whatever is cheapest. A nice middle-of-the-road approach will provide both durability and aesthetics, and will be mutually beneficial for all parties. Another consideration with finishes, style, and color choices is to keep things neutral and timeless to appeal to the broadest field of potential buyers.
Although not authentically “flipping,” another way for novices to get a foot in the door of this scene is to purchase a fixer-upper as their primary residence and update the property one project at a time as their timeline or income dictates. This slower flip offers a few benefits, including getting to know and work with multiple contractors and gaining experience with the details of renovation such as codes and permits. This method alleviates the time pressure of a traditional flip since there is only one mortgage payment for this primary-residence scenario. It also allows flexibility in the timing of a sale if housing prices should fluctuate, and if the sale of the house happens at or past the two-year mark, some capital gains taxes can be avoided, allowing a larger profit from the sale to roll into a subsequent fixer-upper property.
Whatever avenue you head down in your flipping adventure, a knowledgeable realtor is an important asset on your team. Contact me if you need help!