Are you thinking about flipping a house? It’s a big decision, and there’s a lot you need to know before taking the plunge. This guide will give you an overview of the pros and cons of house flipping and what you need to do to get started.
The Pros of House Flipping
There are several reasons why house flipping can be an excellent investment. For one, you can profit significantly if you do it right. The average gross profit on a flipped house was $62,000. And in some markets, like San Jose, California, flippers were making an average gross profit of over $200,000 per flip!
Another pro is that you can quickly get your money out of a flip. Other types of real estate investing, like buy-and-hold or rental properties, are where you may have your money tied up for years (or even decades). With flipping, you can usually turn around and sell the property within six to twelve months.
Finally, flipping can be a great way to start real estate investing if you don’t have much money. Unlike other types of real estate investing, you don’t need a large down payment or good credit to get started. You can often find properties that require minor repairs that you can do yourself, which keeps your costs down.
Of course, you should be aware of some potential downsides to flipping houses before getting started. Let’s take a look at those now.
The Cons of House Flipping
One of the biggest potential problems with house flipping is that it can be very capital-intensive. Depending on the property’s condition and the work needed, it’s not uncommon to sink $50,000 or more into a flip. And suppose you’re using debt financing (which most flippers do). In that case, your returns will be lower because you’ll have interest payments eating into your profits.
Another downside is that there is always the potential for cost overruns. A cost overrun is when the actual cost of a project exceeds the initial estimate. This can happen for several reasons, including but not limited to unexpected problems or delays during construction, labor shortages, or increased material costs. No matter how well you plan or how experienced you are, there’s always the possibility that something will come up that requires more money than you anticipated. This can eat into your profits or even cause you to lose money on the deal if it’s not managed properly.
Finally, because flipping involves buying and selling properties relatively quickly, there is also more risk than other types of real estate investing. Suppose the market changes or there are unforeseen repairs needed. In that case, it can be challenging to unload the property quickly enough to avoid taking a loss.
Now that we’ve looked at both the pros and cons of house flipping let’s consider what it takes to get started in this business.
What You Need to Know Before You Start Flipping Houses
Suppose you’re thinking about flipping houses as an investment strategy. In that case, you should keep a few things in mind before getting started. First and foremost, you need to have significant experience in home renovation and construction, or partner with someone who does, to be successful at this business. Select a partner or hire a team of experts, like a foreman, an architect, an interior designer, etc. They can assist you with the nitty-gritty details of the flip.
When flipping houses, there’s no room for error; even small mistakes can cost thousands of dollars. Second, as mentioned earlier, house flipping can be capital intensive. Ensure you have access to enough cash or credit lines to finance your projects before getting started. Ideally, you should also have some reserve funds set aside in case unexpected repairs come up during your renovation project. Lastly, perhaps most importantly, you must have a clear exit strategy before buying any property. Losing money on a flip is very easy without knowing how and when you’ll sell a property (and for how much). Think carefully about these things before starting house flipping—it’s not a business for everyone!
Suppose you’re thinking about flipping houses as an investment strategy. In that case, there are certainly some pros and cons to consider before taking the plunge. House flipping can be profitable—but it’s also risky and capital intensive. And unless you have significant experience in home renovation and construction (or partner with someone who does), it’s very easy to lose money on a flip. So think carefully about these things before starting house flipping; it’s not a business for everyone!
