If you turn on the TV, chances are you can have your pick of house flipping and rehab shows to watch. Many of them acknowledge complications, but eventually end up making money in the end. In fact, they make earning profits look easy. The reality, however, is that while there is tremendous amounts of money to be made, there is also tremendous risk. One out of every ten shows will actually show the flipper breaking even or flirting with a loss. If you think that you can simply make an offer on any property, put some work in and walk away from the closing with a check, the house flipping business may not be for you.
For every investor that makes money on a property, there is someone else out there scratching their head wondering what went wrong. There is a lot more that goes into the business than finding a property and fixing it up. Put simply, you need to be able to find the right property, in the right location at the right price. This usually takes the help of an established realtor or a fellow investor whose relationship is cultivated over years and many deals. You may think that having money and making cash offers will give you a dramatic advantage, but in this market, these actions are the norm rather than the exception.
If you do acquire a property, you need to put the right work in at the right price. Every property in every location is completely different. If you spend too much money on a property you will not maximize the value when you sell and if you spend too little you will not have enough interest to drive up the price. The people that you see on TV make it look easy because they have been doing it for years and know the market and every remolding option available for every kind of house. Putting a fresh coat of paint and replacing the kitchen cabinets may be a nice start, but it is only just that – a start. The experts will know which walls to knock down and which places to leave alone. Access to capital can provide you with a good advantage, but it can quickly be wasted if you don’t know what you are doing.
Even those with deep pockets have to adhere to a budget. You can keep spending and spending, but eventually you will have to recoup this money to make a profit. If you do not have the right team of contractors, electricians, plumbers and painters around you, any work you do may end up costing you more in the end. These relationships work much the same as your realtor, in that you can probably find a competent one just by searching online. However, it won’t be the same as one you have worked with for years. The quality and style of the work you have done will define your projects over time and will separate you with every other investor in your market.
Once you have completed your rehab, you have to sell it to make money. This is where a good realtor will earn their keep. They will advise you on whether or not to stage the property, what exterior items add appeal and where to list your property. The initial listing price is a critical step in realizing a profit. If you list too high and think you will get offers just to start the process, you may be waiting a very long time. If you list too low, you will leave some money on the table. You can shoot for the moon, but this may drag the process out another 30-60 days, or even longer. Every day that your house goes unsold will cost you money.
So, you have reached closing day and are very excited to take a vacation with all of the money you made. Before you do that, you need to factor in insurance, taxes, interest, utilities, commissions, closing costs and more. After all is said and done, the amount that you thought you made is most likely much less than you really did. All the while you are the one that took all the risk in the purchase and walked away with a nice profit, but far from one you can retire on. This is the nature of the investing business, particularly if you focus on rehabs. You are much more likely to hit a series of singles than the occasional home run. Those are left for reality TV and on very few occasions in your investing career.
If you make flipping the focus of your business, you can make it a career. The fact of the matter is that between finding houses, sticking to tight budgets, staying on top of the work being done and selling for maximum value house, flipping is hard work. It is only when you can keep a steady cycle of deals coming in and closing that you will start to realize the potential of the real estate market. The best investors know that buying real estate is not a get rich quick scheme.
