In recent years, individuals have been looking at more varied options for investments. The internet has allowed trading apps to proliferate, and cryptocurrency to exist. It has never been easier to buy stocks, and gold, or to get involved in property investment. As long as the necessary finances are in place of course.
One way that many individuals have entered the world of real estate investing is through fixing and flipping. This generally involves buying a property that is in a state of disrepair and making improvements so that it can be sold for a profit.
During the pandemic, there were sizable increases in the amount of fix and flip projects in the US. In 2021, 323,465 homes were flipped, which was 26% up from the previous year. And the practice continued to grow through 2022.
What Must You Never Forget When Setting Out On A Fixing And Flipping Project?
Real estate investment can be highly profitable when it is done right. However, what many newcomers forget to realize is that every acquisition comes with a certain amount of risk.
Many first-time investors sabotage themselves by not carrying out proper inspections. This can result in additional repairs being needed which cuts into profits. Other people involved in fixing and flipping fail to see the importance of carrying out comparables, or researching the location they are investing in.
Below are three fundamentals to fixing and flipping that should never be ignored, or underappreciated.
1. Have Your Finances In Place
Ideally, you will be self-financing your project as this will bring maximum rewards. However, bringing in a partner can minimize the risks involved too.
Many first-timers will need to find outside finance to purchase their first property for fixing and flipping. Many banks will be wary about approving loans for houses that are in distress, but there are options for house flippers out there.
A visit to https://dfw-hardmoney.com shows that hard money lenders are willing to help with construction projects including house flipping. Private money lenders are generally willing to take more risks than banks, but you will have to leverage property to secure this type of loan or some other form of collateral.
These loans usually require no credit checks and are approved quickly. This is very useful to house flippers who find their finances running out before the project is completed.
Hard money loans tend to have elevated interest rates, but they are fixed and won’t be subject to inflation changes. And they are intended only as short fixed-term loans.
2. Understand The Scope Of Your Investment Project
It is all too easy to enter into this type of project without fully understanding how much work is needed. The more work you have to carry out, and the longer it takes, the less profit you will make.
You need to fully assess what renovations and repairs are needed so you can calculate your potential ROI. If you are only just starting to get into house flipping, you will no doubt be interested to see what that ROI might be.
Profits from house flipping have been dropping. While property prices remain high, inflation has also gone up, meaning materials and labor can cost more. In August 2022, a house flip made a 25.9% profit. Yet, the year before it was nearly 31%.
Common mistakes are taking on too much work, too many projects at once, failing to inspect the property properly, and not having enough money in place for completion.
You also need to consider other aspects of your project such as what permits are needed in your area. You don’t need a license to flip houses in Texas for instance. But, you will need to visit Texas city applications for a building permit if you are making certain structural changes such as adding windows, doors, or moving electrics.
3. Have A Workable Exit Strategy In Place
You should understand what to do when the house-flipping project is finally complete. You can expect to spend 3 to 6 months fixing up a home, and maybe longer if you have a full-time career elsewhere.
An important aspect of your exit strategy should be knowing what your break-even point is. Not every project will see huge profits, but you must know where you break even.
You will also need a plan in case you cannot sell the property easily. If the market stagnates you may have to hold the property for a while. Or, you can decide whether to sell for a loss.
If you have heavy loans attached to the project, selling for a loss may be better than incurring penalties and interest costs.
Another part of a successful exit strategy is understanding how to rent a property. It can sometimes be wiser to rent out a home you have fixed up instead of leaving it on the market for weeks on end.
You can maximize rental revenue with smart upgrades, so consider what is important to renters when you fix up the home. And research your responsibilities as a landlord in case you are put in a situation where renting is better than selling, especially if it means taking a loss.
Summary
To successfully complete a house flipping project means having a proper understanding of the fundamentals. Failure to have enough finances to complete the project can mean taking out further loans, which will dent your profits. Not understanding the work involved can also have financial implications. And an exit strategy made in advance is vital to help sell the home, or to gain revenue from renting.
While the profits from house flipping appear to be dropping, this is still a valid way to enter the real estate market. Plus, some lenders are willing to assist house flippers when traditional banks are warier making these projects accessible to anyone willing to put in the research and work.
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