To the average investor, flipping houses sounds like an incredible opportunity. The basic idea is to buy a house for as little as possible, invest time and money into fixing it up, and sell it for a profit.
In many neighborhoods, this is a viable strategy—and a great way to make extra income—but before you get too excited, there are some important facts and considerations you’ll need to keep in mind.
What to Consider Before Flipping Houses
Keep these things in mind before you try to start flipping houses:
- Most first-time house flippers aren’t profitable. While it’s certainly possible to turn a profit from flipping a house, most house flippers aren’t profitable—at least at the beginning. There are dozens of factors that could compromise your profitability, including the price you pay for the home, the changes to the local housing market in your time of ownership, the costs of repairs and upgrades you need to make, the time it takes to sell the home, and more. If you make even one big mistake, it could jeopardize the integrity of the entire project. Don’t think you’ll be able to flip houses and see steady, reliable returns.
- Good deals are hard to come by. Much of your success when flipping houses will depend on your ability to find good deals. A “good” deal requires many separate elements. You’ll need to find a home in a promising location. That home needs to be very low-priced compared to its potential value. It should need some amount of care (or patience, or both), but not so much that it’s burdensome. And it needs to have a high potential upside. With so many competing investors scouting for deals like these, finding deals is incredibly tough—which is why many home flippers try to acquire their real estate license, so they can get access to more deals than the average investor. You can also look for deals by scouting auctions and looking for foreclosures.
- It’s almost impossible to make accurate estimates. Your estimating skills will be put to the test when flipping houses. When calculating the potential value of an opportunity, you’ll need to factor in the costs of repairs. How much will it cost (including supply costs, labor costs, and the time you’re going to spend) to get this house in sellable condition? If you make a bad estimate, it could ruin your chances of success—and many new house flippers underestimate their expenses. It’s easy for unseen damage and surprisingly complex repairs to get in the way of your project’s profitability.
- Experience is everything. The most successful house flippers making active investments are the ones with the most experience. The more time you spend, the better you become at estimating, and the better you are at finding good deals. If you’re new, you won’t have this experience, but there are ways to make up for it. For example, you could try to find a mentor or advisor to help you on your journey. Even so, it’s important to invest time into learning more, so you can be a more effective investor.
- Loans are difficult to acquire. If you’re getting a loan for a primary residence, or even an investment property, you shouldn’t have trouble getting the loan if you have a decent credit score. But getting a loan to flip a property is usually much harder, especially if you’re flipping multiple properties at once. If you want to be successful, you’ll need an abundance of cash, or some other way to get a loan.
- Repairs are costly—but can be reduced. One of your biggest expenses when flipping a house will be repairs and maintenance when you’re preparing the property for sale. However, there are many ways you can reduce these costs. You can look for good, trustworthy contractors. You can learn more skills yourself. And you can also negotiate for lower prices.
- Negotiation can help you everywhere. Speaking of negotiation, negotiating is going to be one of your most important skills. You’ll be able to negotiate almost anything, including the purchase price of the home, its sale price, prices for contractors, and even loan rates.
Should You Flip Houses?
Even if you’re interested in becoming a professional real estate investor, there’s no guarantee that flipping houses will be a good strategy for you. It may be wiser to invest in rental properties, which allow you to generate more consistent monthly cash flow, or focus on long-term investments. As with most investment strategies, the more time you spend researching the possibilities, and the more you hone your skills and experience, the more likely your chosen strategy will pay off for you.