Written by Jaymi Naciri
Turn on HGTV or any number of other channels almost anytime during the day or night and you’re bound to find at least a couple of shows about flipping houses. If you’re getting ready to plunk down cash for your own flip, here are a few things you need to think about.
- Make sure you’ve got the money
Sounds obvious, but…do you really know the financial stakes involved?
“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, that means you’re paying interest,” said Investopedia. “Every dollar spent on interest adds to the amount you will need to earn on the sale just to break even.”
If you’re planning to pay cash, you won’t have to worry about interest, but you will have carrying costs including utilities, property taxes, and HOA fees.
According to Auction.com: “If you don’t have enough cash to purchase a home, the next cheapest source is a home equity line of credit (HELOC)…You need to put the HELOC in place before you bid on any homes; then you can bid on the home as a ‘cash deal,’ rather than as a ‘financing deal.’ Many investors use hard money loans or other conventional mortgages to finance their flips. Because of the higher interest rates and points paid at closing, both will reduce your net profit considerably, and are not recommended for flips unless absolutely necessary.”
- Buy in the best location you can
“Expert house flippers can’t stress this enough,” said MoneyCrashers. “Find a home in a desirable neighborhood, or in a city where people want to live.” And keep in mind the convenience factor—for the potential buyers, certainly, but also for you. “You will work on this house daily in the weeks and months to come. .. Don’t invest in a house too far away from where you live; you will spend more money on gas, and it will take longer to fix up the house.”
- Work with a Realtor…
Tying to maximize profit by selling a flip yourself rarely works out well if you don’t know what you’re doing. The money you spend on a Realtor commission can be well worth it for the ability to concentrate on other things and know the sale is in good hands.
Beyond getting the home sold, “they can help you find great deals, get you comps, help you connect with lenders or contractors, and a lot more,” said BiggerPockets. “Don’t settle for an average agent though – find a great investor-friendly agent.”
- Check the comps. And check them again
Speaking of comps…you can’t make a smart decision on buying, fixing up, and flipping a house if you aren’t aware of the prices in the neighborhood.
- Make smart updates
Knowing where to spend your money is key to a successful flip. You don’t want to leave key areas untouched but you also don’t want to over-improve for the neighborhood.
“Home improvements that increase the value of a home might include upgrading kitchen appliances, repainting the home’s exteriors, installing additional closet storage space, upgrading the deck, and adding green energy technologies,” said MoneyCrashers. “On the other hand, avoid home improvements that won’t increase the selling price, like installing a pool, installing a whirlpool bath, or adding a sunroom to the house.”
- Use good products
Scrimping on construction costs may seem like a good idea if it means your financial commitment is lower, but low-end materials might not get the home sold or fetch the sales price you want.
- Work with good people
Partner with those you can trust, and don’t forget to make sure they’re qualified for their role. A bargain basement subcontractor that does a shoddy job on your floors can end up costing you thousands when you have to have it redone by a professional.
“The real money in house-flipping comes from sweat equity,” said Investopedia. “If you’re handy with a hammer, enjoy laying carpet, can hang drywall, roof a house and install a kitchen sink, you’ve got the skills to flip a house. On the other hand, if you’ve got to pay a professional to do all of this work, the odds of making a profit on your investment will be dramatically reduced.”