Real estate has long been the go-to investment for those looking to build long-term multi-generational wealth. In red-hot real estate markets, a property’s time-on-market is often single-digit days, and a “fix and flip” investment is fast becoming a tempting strategy.
But as with any business decision, you must take some precautionary measures before diving in.
A “get rich quick” attitude to flipping a home could have you ending up in the poorhouse, and your project turning into a bottomless money pit.
That being said, house-flipping profits are at a 20-year high in the US. The world over, there are those who’ve been patiently waiting for the right time to flip their first property. And they’re now making their moves. But despite what might look like ideal market conditions, flipping homes doesn’t come without its pitfalls.
So here’s some helpful advice that you’d do well to know before making your flip-move.
PREPARE TO BUDGET
Flipping homes isn’t an exact science, although it is rooted in maths. First things first, have a firm grip on your numbers. Get a valuation model up and running. There are simple back-of-an-envelope calculations that you must master.
Despite many investors’ soaring profits, the strategy doesn’t always guarantee success. Investors who don’t account for the cost of renovations, marketing, or income voids, will be missing the profit-mark. Theoretically, flipping is simply about ensuring that your exit price is greater than your purchase price. But getting there’s the trick.
DON’T OVERCAPITALISE
Over capitalising is one of the most common mistakes property investors make. It’s when property improvements are made that exceed its resale value potential. In other words be careful not to spend too much on refurbishing a property that won’t return your capital outlay.
Don’t dress mutton up as lamb. The market won’t pay you for it. The 70% rule states that an investor should pay no more than 70% of the after-repair value (ARV) of a property minus the repairs needed.
NOBODY LIKES TO PAY MORE
Traditionally, investors will try to increase their profit margins by making a low-ball offer, below the list price. But in a seller’s market, this tactic probably won’t get you far.
Markets worldwide are experiencing an inventory shortage, therefore creating a seller’s market. When inventory is low, prices rise rapidly, as buyers are competing for every available listing. In order to remain competitive, you may be inclined to offer more than others to bag the deal. Or check out our top tips on how to win a bidding war.
DON’T GIVE UP THE DAY JOB
One of the most common mistakes you could make, is overestimating your skills and knowledge. Trying to “do it all” in order to walk away with as much profit as possible sounds well and good. But as any good manager will tell you, delegate to specialists where possible.
Local real estate experts. Tradesmen. Project Managers and Interior Designers. Yes they’ll add their margins and reduce yours, but there’s a reason they exist. When managed carefully, they can add value, and save you loads of lost time and possibly cash too.
Local real estate experts. Tradesmen. Project Managers and Interior Designers. Yes they’ll add their margins and reduce yours, but there’s a reason they exist. When managed carefully, they can add value, and save you loads of lost time and possibly cash too.
Know when to get your hands dirty, and when to leave it to the experts. It most certainly helps if you’re handy with a hammer. But remember the golden rule of money….know the value of your time. Don’t waste a minute of it.
So for many flippers, it might make more sense to stick with the day job. Let the professionals step in where they can bring value. Ultimately this will avoid any major pitfalls and get those profits in your pocket.
IT’S NO TV SHOW
There’s certainly an audience for those countless, highly-addictive, reality home makeover shows. But don’t be fooled. Life is not what you see on TV. A recent Bloomberg article reported that
“There are few easier ways to make a quick buck in America today than flipping houses. The real-estate market is red hot, profits on flips are at a record high — some $66,000 on average per home — and throngs of HGTV-inspired wannabes have been piling into the business for months.”
We can thank the global pandemic for this. A post-lockdown surge in residential real estate demand worldwide has emerged as a result of supportive economic policies that made cheap money available to households that are now stacked up with cash. Many of them have spent the better part of 2020 at home, watching TV shows of those who make property profiting look easy.
There is now a swathe of buyers looking to acquire property, who simply weren’t able to 18 months ago. With buyers literally queuing up, some sellers have even taken their properties off-market, to allow its price to appreciate. That in turn has fuelled further price increases. It begs the question, is this the right time to dive in?
THE BOTTOM LINE
If you’re serious about fix and flip as an investment strategy, then do the maths. Get yourself a good team. Flipping houses is a business like any other: it takes market knowledge, planning, and a savvy mindset. And as with most things in life, it’s all in the timing. Patience and good judgment are crucial. Get all these on point and you could well be on course for some serious returns.
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