The public perception of a real estate investor is someone that buys houses, fixes them up and quickly sells them. In reality, this is only one of the ways an investor can make money. In the past five years, flipping TV shows have made the prospect of a quick buck more enticing than ever. The lure of fast money is exciting, but is not always possible for every property. Many factors make a property a poor flip candidate. Rehabbing and flipping is a viable option, but it may not always be the best plan of attack. Hard to flip properties do exists, and it is important to know how to identify them.
With the increased attention to house flipping, there is also increased competition. More investors are going after the same inventory. This demand drives up prices and can make an attractive deal appear less than average. There will always be houses to invest in, but not everyone makes a great flip. Like any other deal, you want to buy low and sell high. If you are buying above the floor, there is less room to make a profit. With rehab deals, you need to spend money to make money. However, even if there are potential profits to be made, they may not justify the expense. The name of the investment game is to get a return on your money. Making money is great, but some rehab deals may not be worth the risk, and it is critical that you can distinguish them.
Buying a property and flipping it quickly means that there has to be an end-buyer. Even if you produce a high quality product, there may not be buyers in your market. Reduced buyers often lead to reduced demand, which will lower the sales price. One of the things that rehabbers do when they consider a property is estimate the end sales price. If this is lowered, the bottom line is reduced as well. Getting a lower than expected sales price is not as bad as not having a sale at all. The longer your property sits on the market without activity, the lower the price you can expect. Eventually you will hit a breakeven point where you are willing to take the best offer and move on. All of the work you do on the house is essentially for naught. Rehabbing takes a good combination of the right property and the right market. If you can’t sell your property, nothing else matters.
Most investors have limited resources. They need one closing to happen before they can move on to their next deal. When you get involved in a rehab deal, your cash is tied up for at least a few months. Getting your money back only happens when you sell the property. If a better deal comes along before you can sell, you will be forced to pass. Some rehab deals can take under 30 days, but most are at least 60. As mentioned before, there is no guarantee that you will find a buyer even if you price the property to sell. There could be delays in the rehab work and you could have trouble finding buyers. This has to be considered before you make an offer.
Rehabbing is not easy. It requires you to have patience and knowledge of the craft. Even if you have a contractor in place and a good team around you, there will be critical decisions to make. Many investors think that they can buy any property and with the right work, see a profit. There are always hidden expenses that sneak up on new rehabbers.
Rehabbing is a great way to earn a living in real estate, but not every property is a candidate. Some properties are much better buy and hold candidates. Instead of taking a minimal profit in the short term, you can consider renting and waiting for your market to turn. Many investors find that they prefer getting monthly cash flow and adding to their portfolio. You can always sell down the road, but in doing so, you can get a much higher sales price. Your money will be tied up for a longer period of time, but the return may also be greater. Another alternative to a rehab is to wholesale the property out. If you have a deal that you don’t see enough value in, you can assign it to a fellow investor. They will take on all the risk and pay you a fee at closing. The profits will be much smaller, but it is also far less risky. This way you can take what you can get and move onto the next deal.
One of the keys to being a successful real estate investor is knowing which trends to follow and which to avoid. Flipping houses is in no way a trend, but you have to be careful not to do what the next investor is doing. Every house requires a different approach. Evaluate every property individually and make the best decision for your business. Sometimes this means doing a quick rehab. Other times it means renting for a few years. Rehabbing can lead to great wealth, but not every property makes a good flip.
