The single biggest misconception among new investors is thinking that all that is needed to make a profit flipping houses is to buy low and sell high. If you can buy a property at a low enough price and put some work in, you can automatically sell it for a profit – right? Anyone who has flipped houses knows this is not the case. Obviously, getting the property at a great price is a start, but that alone will not guarantee you a good deal. Regardless of price, you need to find the right property in the right location. Perhaps even more importantly, you will need to do the right amount of work to add value. Essentially, there are a few house flipping starting points that every investor should be familiar with.
There is great debate as to where you make your money in a rehab. Are profits realized on the purchase or on the sale? In fact, it is a combination of both. It all starts with finding the right property. The right property means finding a property that needs the right amount of work, given your budget. If you get the property low enough but don’t have the money to do the right work, you will not get the maximum return. Generally speaking, the worse the condition the lower price you can get the property for, but there has to be a limit. Cosmetic items are an easy fix. However, once you get into structural issues the repair costs start to add up and budgets get blown up very quickly.
After the condition, you need to look for properties in the right location. You can get the house for next to nothing, but if you cannot sell it even after you give it a facelift are you really getting a good deal? Bad properties in good locations are difficult to find, but these are the situations you should look for. Jumping at an opportunity to buy a property simply because it is a good deal does not mean it is a good house to flip. Keep the neighborhood and your exit strategy in mind when you break down every property you look at.
The immediate neighborhood is one thing, but you also need to be mindful of the bigger picture. Taxes, school systems, employment and convenience also play a major factor for end buyers. Anyone who lives in your house wants to feel safe, but they also want to feel like they are getting a good deal. This would mean buying in a town with low taxes or increased employment opportunities. If buyers are moving out of your area, demand will eventually decrease and sooner or later this will end up being reflected in your sales price. Each property you consider, you must look at the risk vs. reward factor and see if your time and money are worth the end result. There is nothing wrong with making a small profit, but if you have to dedicate a large amount of your time and funds for the next four months, it may not be worth it for you.
Flipping real estate is not nearly as easy as it looks on TV. There are many things to consider and many numbers to crunch. Start with the right property in the right neighborhood and go from there. Price is important, but it is far from the only thing.
