House Flippers Must Have 5 Things!
So you’ve watched enough house flippers shows on HGTV to know the ins and outs of flipping houses and you’re ready to give it a shot yourself. However, many first-time house flippers run into trouble when they realize it’s not as easy to flip a house outside of a 30-minute, well-edited television segment. Below is a list of things first-time house flippers must have to make sure that they are successful with their investment in real estate.
- Money.Like the old expression, you need money to make money. This may seem like a no-brainer, but first-time home buyers often underestimate how much money they are going to need to take on the endeavor of flipping a house.
Just how much money you will need depends on several things. The first factor is how much you are willing to spend on a property. If you buy a fixer-upper that is listed on the market, you may expect to spend a little more than you would if you bought a property at an auction or estate sale, or if you bought a foreclosure. Auctionzip.com and Auction.com are two good places to find real estate that is being auctioned off in your desired area.
Another factor is if you are borrowing money, or paying cash. If you are borrowing you will spend less up front in the form of a down payment, but may end up paying more in interest on your mortgage if you are unable to sell the property quickly. Paying cash will help you save money on paying interest for a loan.
The cost of labor and building materials will also factor into how much money you will need. Labor costs and building materials vary from region to region. Find a contractor you can trust and find out what he charges for more common services, such as painting, roofing, and putting in new floors. If a contractor is willing to look at a prospective property with you, then even better. The contractor would likely be able to give you a more detailed bid on your home improvement projects before you even purchase the property.
Also, you will owe taxes on the property while it’s in your possession, and you’ll likely want to carry insurance on it as well. The longer you hold onto the property, the more these costs add up. As a rule of thumb, consider all the possible costs of buying and fixing the property, and add 20% to have in reserves. If you don’t tap into that extra 20%, then enjoy your miniature windfall.
- Skills. So, about that contractor we just talked about. Wouldn’t it be nice if you didn’t have to pay anyone for working on your house? That’s possible if you have enough DIY skills to do much of the work yourself. Some of the more necessary skills to have are painting, laying new flooring, hanging drywall, and patching cracks and holes in walls. Having these skills will save you a lot of money on labor costs. If you are competent in plumbing and electricity, then that’s even better. But House Flippers know that if you aren’t confident in your skills, or up to date on local codes, it’s best to have a licensed, insured, and bonded contractor perform those tasks.
- Knowledge of the Real Estate Market. successful house flippers have a keen insight into the real estate market. House Flippers need to know what a house is actually worth, what it could be worth, and what it could realistically sell for. It’s also helpful to know what other houses in the neighborhood are selling for and how long they are on the market before they sell. It’s wise to build a relationship with a real estate agent who can help you determine if a particular neighborhood is worth investing in or not. If you are already very knowledgeable about real estate, consider getting your real estate license. This could save you a lot of money in fees and commissions when you take your real estate to the market.
- Patience. House Flippers know Patience is a virtue. Don’t be in a hurry to get your house to the market and end up taking shortcuts in your restoration projects. Prospective buyers will see these shortcuts and be scared away. Make sure you have enough money in reserve to pay for insurance and taxes on the property for at least 12-18 months, in the event that the property doesn’t sell right away. There is a benefit to taking your time. Real estate that is bought and sold again for a profit within 90 days is considered a short-term investment and is taxed at a much higher rate than if the property is held for longer than 90 days.
- A Backup Plan. House Flippers also know that If your real estate doesn’t sell like you had planned, you may need to take another course of action. You may have to consider renting the property, even if you don’t desire to be a landlord. Another option is to consider contract for deed. A prospective buyer would lease the property for a specified length of time with the option to purchase the property when that time is up. The rent payments would be used as equity in the final purchase. Another option is to auction the house using a minimum reserve price to assure that you at least get your money back out of the property. If all else fails, you may have to resort to selling the property to break even or take a loss to prevent paying more in taxes and insurance costs.
Flipping houses can be a great way to make supplemental income and create financial security. However, there are pitfalls that many first-time house flippers fall victim to. With careful planning, patience, and a bit of luck, House Flippers can enjoy the work and be very successful in real estate. If you are thinking of getting into house flipping business in Hagerstown, give me a call, I can help!