A property flip can yield big returns if done right
Flipping a property in quick fashion for profit can be a smart move. With the right planning and wise spending of your dollars, you can earn a pretty nifty return on your investment.
Problem is, home flipping is no sure thing. There’s a lot of work involved. You have to scope out properties carefully. Sink too much money into remodeling and repair and it could put you in the red when all is said and done.
Flipping a property has its pros and cons. Before you commit to this strategy, do your homework. Learn about the benefits and drawbacks. And be prepared to take risks. If you’re careful and follow best practices, chances are this can be a great way to earn money.
The rewards of flipping a property
It’s no secret: flip the right property at the right time and you can earn some serious cash. Ideally, we’re talking about a big payday in a relatively short period of time.
“The primary reward people seek from home flipping is a profit,” says Bruce Ailion, Realtor and property attorney. “If you can average a 10 to 15 percent return on investment and you’re turning your money three to four times a year, you’re doing very well.
Real estate attorney Elizabeth A. Whitman says there’s another payoff to successful flipping.
“You get a sense of accomplishment when you see the results from a successful renovation. Plus, seeing a new owner enjoy the home you worked on can be its own reward,” she says.
You can also gain crucial know-how.
“Flipping can be a good introduction to real estate investment and construction,” adds Whitman.
“You get a good feeling knowing you’ve helped improve a neighborhood,” he says.
The risks of flipping a property
Make no mistake: There are downsides to flipping a property. The biggest is that there’s no guarantee that you’ll make a profit.
For example, you could get caught in the middle of a flip when a market downturn suddenly hits. Or you may underestimate the seriousness of a flaw in the home. This can include a sagging foundation that costs tens of thousands to fix. Perhaps you discover late in the process that the home has serious termite damage.
Another risk? You’ve misinterpreted the market. You’ve paid a pretty penny for a property with a lot of potential; but it’s in a location that you learn, the hard way, no one wants.
Here’s another hazard of the profession: You’ve borrowed money to buy and remodel the home. But you’re struggling to pay off these debts because the home isn’t selling or it sold for less than you expected.
Other pitfalls of home flipping
Additionally, you could run into construction surprises and cost overruns.
“Most older homes will need code upgrades. Those can be expensive,” Whitman cautions. “Even newer homes can present surprise. For example, one owner I knew took down dated paneling in a basement rec room, intending to paint the walls. But he discovered there were no studs and no drywall. Plus all the electric wiring had been improperly installed.”
Whitman lists other perils that can pop up unexpectedly:
- Difficulty to obtain a permit for intended renovation work.
- Disputes with your contractor or their subcontractors.
- Completion delays. “Most flippers use expensive hard money loans to finance the project,” says Whitman. “So a month or two of delay due to weather, permits, or otherwise can significantly increase interest costs. And it can reduce your return on investment.”
8 tips to make the flip a high-reward/low-risk venture
Want to improve your odds of flipping a property faster and for more money? Try these tips:
1. Devise a complete plan. “What is your strategy to rehab, list and sell your property for a profit? And what is your time frame in which to do it? Remember—the longer it takes, the costlier the deal can be for you,” says Ralph DiBugnara, president of Home Qualified.
2. Select the right house to flip. Have the home professionally inspected. The inspection should include an evaluation of required upgrades to the electrical, plumbing, HVAC and roofing systems.
3. Hunt for the right financing. Conventional mortgages typically aren’t available to buyers intending to flip. “Instead, look into short-term bridge financing or hard money lenders,” says Whitman. “They may charge higher interest rates and require a larger down payment.” In addition, consider taking out a cash-out refinance or home equity loan to tap into your primary home’s equity.
4. Consider hiring pros to update the home. “It may be cheaper to hire a professional than to do it yourself. That’s especially true if you lack renovation skills,” says Ailion.
5. Avoid lemons. “Houses with outdated electric or which require major plumbing or structural repairs should be avoided,” Whitman notes. “Don’t plan on renovation involving structural changes like moving walls. Take a pass on homes that require major permitting and inspections for things like a needed bathroom addition.”
6. Don’t overpay. “Competition for houses to flip can drive up prices. Don’t pay more than the house is worth,” she adds.
7. Check sale prices for comparable properties. “Are the renovation costs high? So high that the home will have to be sold at a price that’s among the highest in the neighborhood for there to be a profit? If so, take a pass,” recommends Whitman.
8. Keep funds in reserve. “You don’t want to run out of money before the renovation is complete,” Ailion cautions.
Consider a personal loan for repairs
So, you’ve figured out how to buy the home, but what about how to fix it up? If you don’t have enough financing via the purchase loan, consider a personal loan.
Personal loans aren’t tied to the property, so they are faster and easier to get than traditional asset-based loans. And, loan amounts go up to $100,000 in some cases, giving you room to repair the home as needed.
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How to finance the flip
One way to finance a flip is to take cash out of your current home via a cash-out refinance. Rates are low, so you might even drop your rate somewhat at the same time.
Similarly, a home equity line of credit on your primary residence could help you finance the purchase of a fixer-upper.
Get started on your home flipping finance plan below.