The first opportunity to make money on an investment property can be exhilarating, but these money-losing landmines can be a real disaster for investors
You’ve found a home or property with potential that you plan to flip. Now it’s time for the hard part!
The amount of time spent preparing investment properties to be renovated and sold doesn’t necessarily correlate with the amount of profit that an investor will receive, especially for a rookie investor who is renovating and selling a property for the first time. While there is no amount of advice or preparation that will guarantee profits, Civic Financial offers some helpful advice on how to avoid missteps with that very first home flip.
- Don’t hang on for too long.
Flipping homes should be seen as a short-term process for professional investors. A smaller profit in a shorter period of time is often better than a marginally bigger profit over a longer period of time because it can interfere with your year-end goals of making more money on flipping other properties. If your money is tied up in a project, you can’t invest in a new one.
- Avoid over-renovating.
The quicker you can make the property look good enough to sell, the better the return on investment. Over-renovating—adding more costly features and finishes than the local market can bear—can cut the bottom line, so it’s best not to choose top-of-the-line finishes. Another thing to keep in mind is some of the extra upgrades and design features require additional time and labor to install, and the longer it takes to sell a property, the more potential revenue is lost. Research the neighborhood where the property is located and make sure that the property fits in with comparable properties in the neighborhood, following local trends.
- Don’t get stuck without an emergency fund.
Homeowners and investors alike can benefit from this top in House Flipping 101: make sure to have plenty of cash on hand for emergencies. What if you find out your property has asbestos or there’s a foundation issue? Once the walls come down anything can happen (and rest assured, something will happen). Without an emergency fund, your project could be derailed and end up in the red. Civic offers a handy equation to find out how much you need: Add your overhead payment (mortgage, taxes, insurance, your lawyer, leasing agent, accountant, etc.) and multiply by six for at least a six-month cushion.
- Be careful to not price yourself out of the market.
Don’t hold out for higher sale prices. Get in, get out, and get onto the next deal.
“The main reason houses sell fast is because they’re priced right for the market they’re in. That’s why it’s important to look at the comps in your neighborhood and speak to local real estate agents when deciding on a price for your investment property,” Civic writes. “Many new investors try to get $5,000 to $10,000 more than they should on lower-end homes. When it doesn’t happen, they spend the rest of the time chasing the market.”
In other words, price right in the beginning and get it sold. Work with a great agent that can help advise you at the beginning of your flip, which will help set expectations for both your budget and your profit when it’s time to put it on the market.
