House flipping is a type of real estate investment where the entrepreneur seeks to buy, renovate, and sell the house. The objective is not to use the property but to do substantial remodeling work and sell it for a profit.
The house flipping industry has many opportunities for people seeking to start a career in real estate. It can also be a part-time investment for people looking to supplement the income from their day job.
However, investors should also be aware of the challenges they are likely to encounter. The venture requires a considerable amount of investment, and there are many pitfalls entrepreneurs need to watch. You will also need to have some skills, and set aside time for overseeing the remodeling work.
Like most businesses, it starts with thorough research into the venture. In this article, we look at the opportunities and challenges of the house flipping industry.
Get a License
When entrepreneurs get into the house flipping industry, the question is whether they need a license. The simple answer is, no, you do not need one. However, it could prove to be helpful in several different ways.
First, it can take you some time before you fix up the house for sale. In the meantime, a license can open opportunities to make an income. You could be selling other properties, as an agent, as you renovate a home to flip later.
Also, the licensing test touches on areas such as financial planning, zoning challenges, and homeowner’s registration. The course assures entrepreneurs that they can tackle the challenges in the house flipping industry.
Mastering the ins and outs of the real estate industry will go a long way in shielding you from risks. Most house flippers fail for failing to grasp certain intricacies of the business.
Additionally, in some states, you can take online courses, reducing the time commitment to become an agent. You should expect to pay about $1,000 to complete the process of acquiring a license.
Network with Other Real Estate Investors
Networking is an essential element of real estate transactions. The most successful entrepreneurs in the house flipping industry are the ones that work with a team. Even if you are a sole investor, you’ll need to network, or you’ll miss out on the most lucrative opportunities.
House flipping will inevitably involve considerable renovation work. If you are working alone, you can always locate a custom home builder or contractor. However, it is not advisable to put your trust in a technician you don’t know.
Also, not all house flippers can work with tools. You may need some assistance from a fellow entrepreneur. Since it is a relatively small industry, you can always get referrals for dependable contractors.
A broker can help publicize your property. Fast home sales are crucial in the house flipping industry if you are to avoid unnecessary losses. Most brokers are in contact with other agents, who can increase the accessibility unavailable to other investors.
Leverage the MLS
The MLS (Multiple Listing Service) is an essential resource for any investor looking to flip properties. It provides reliable information for houses that are on the market and those already sold.
Unlike other listings, you can rely on MLS for accurate data. It is your best bet when you’re trying to find properties that meet your flipping criteria. But there are other ways you can utilize MLS to boost your bottom line:
- Evaluate locations: You may use MLS to analyze the areas of your neighborhood where properties are selling faster. Most buyers will want a place that is crime-free and has pedestrian walks.
- Determining the Viability of properties: You can use MLS to establish which types of houses are worth your time. You can analyze the types of homes that move faster in the market. Using the data, you can establish a pattern that can boost your house flipping prospects.
- Attractive Sale Price: The sale price can also determine how fast your house will stay in the market. You can compare listings to determine the optimal selling price that will also give you the best margins.
Purchase Property
You’ve analyzed the MLS listing, and you’ve chosen an ideal property for your first investment in the house flipping industry. But before buying the property, you ought to carefully evaluate your finances.
Before creating a budget, you need to be clear about how much you can spend. What are your financing options? Will you be relying on a mortgage, and are you comfortable with the payment schedule?
Renovate the House
Making money from the house flipping industry will entail a lot of renovation projects. If you are to make a profit, you need to avoid the remodeling pitfalls that can increase expenditures.
One of the biggest problems you may face while flipping a property is ensuring you capture all the defects. There could be problems that require the service of roofing companies, or the house may have a faulty circuitry.
You can minimize the risk of expensive repairs by hiring a home inspector. The cost of inspection services is approximately $315 for houses between 1000 and 2000 feet. That may seem high, but it could save you from making last-minute renovations.
If you have a talent for fixing things, you could save a lot of money instead of hiring a professional. You may take on tasks such as installing garage door openers or lay down the carpet.
However, before starting any renovation project, it is wise to understand the building codes and local regulations. Many states require a license for performing tasks like HVAC installation, maintenance and repair.
You may end up paying significant fines for failing to adhere to the local building codes. Also, lenders may hesitate to provide financing if your house does not comply with regulations.
The following tips can help you save money during renovations:
- Take time before making a Decision: You ought to take time to evaluate the properties on the listings. Research the options and find out the kinds of renovation that are worth your investment.
- Reusing materials: You can reuse some materials such as fence supplies to save money. But installing a fence for the property can be a great way to add value to the home for little effort. You can get tips on where to source materials from other real estate entrepreneurs.
- Renovation designs: When it comes to design, the rule of thumb is to stick to classic styles. Trendy interiors can run out of fashion faster than you can sell a house.
Sell for a Profit
Selling your house fast is crucial if you are to make a profit. If your home stays too long in the market, it will impact your ROI. Heating oil prices and market disruptions are some economic variables that can further reduce your chance of being successful.
Joining a networking group can give you valuable insights that will enable you to develop strategies to minimize losses. For example, experienced flippers use tactics such as “for sale by owner” to cut the costs of hiring an agent.
Mistakes to Avoid when Selling a House
Statistics show that 80% of SME startups in 2014 made it to the following year, i.e., 2015. Just like other upcoming businesses, you’ll need a lot of planning and research to succeed in the house flipping industry. You can increase your chances of success by taking note of the following mistakes.
Lack of Skill
There are many aspects of house flipping you need to understand to increase your chances of success. First, it would be helpful if you could be conversant with building and construction or network with contractors.
Many entrepreneurs who get into the house flipping industry were already in construction. That means they can find professionals who can assist with repairs. That way, you can significantly manage the expenses you need for your fixer-upper.
You ought to understand that the margins in real estate can be slim. Without the skill to make repairs, you can considerably reduce your chances of making a profit. A background in construction or remodeling can make it easier to get into house flipping.
Lack of Know-How
Making money in the house flipping industry requires you to learn a lot of things. You ought to acquire the know-how to determine which repairs are essential and which ones are not. Always start with the basic tasks that will give you the best return for your money.
The kitchen and the bedroom often have higher returns compared to other areas of the house. Many house buyers consider the two rooms the most critical when looking for a home. Do not be tempted to over-renovate the property, or you’ll reduce your chances of making a profit.
Besides the business side of things, you also need to understand the building code, tax, and zoning laws. By not complying with regulations, you can be subject to fines and penalties. Some flippers opt to hire a professional from a business law firm to avoid legal problems. However, that may incur additional expenses. But it will depend on the type of house and the margin you expect from the sale.
Keep in mind that there are companies that are starting to invest in the house flipping industry. They are now competing with individual flippers to buy homes and sell them for a profit. That means you will need to work harder to keep up with the new investors.
Inadequate Capital
Real estate investments are generally capital intensive. The house flipping market has become more and more competitive, at least in the last ten years. If you don’t have the financing, securing the most lucrative opportunities is going to be a challenge.
You can go for the “no money down” offers, but they are usually hard to come by. If you get financing from a lender, you’ll still need to pay additional fees. The interest you pay is tax-deductible, but often it does not include 100% of the interest.
Since the margins in the real estate industry have been dropping, you’ll need to find affordable loans. You can find mortgage calculators that can list different financing offers at the most attractive rates.
It is also advisable to be cautious with how you prioritize the renovations. You may decide to have a VOIP business phone system installation for a home office. But after fixing the kitchen and the bathroom, you find that there is no money left for flooring repairs. That’s why it is wise to start with the essential improvements that can boost functionality before considering other aesthetic features.
Poor Planning and Execution
Besides requiring a considerable amount of capital, you’ll need time to succeed in the house flipping industry. For example, when renovating the property, you will often have to be present to oversee the construction.
Your presence is necessary so that you can ensure that everything is going as planned. Contractors may require a dumpster rental to get rid of the waste on the construction site. You may choose to pay a manager to oversee the project, but that can also reduce the profit margins.
After you complete the renovations, you’ll need to carry out an inspection to give the house a clean bill of health. A home inspector will check if the construction adheres to local building regulations. If there are issues, you’ll need to redo the work all over again.
You’ll also need to set aside time to show prospective buyers around the house. You can work as a real estate agent or hire a professional. Either way, you will be spending more money, or the project will demand more of your time.
Experienced investors will take the time to find the right property. They investigate the house and find affordable ways to renovate and market the house they are fixing. They understand it takes more than buying a home and rushing to renovate.
The house flipping industry has many challenges, but there are as many opportunities as well. The key is to find a property that you can renovate and sell at a profit. That will require research and a lot of effort. It is not easy, but it is achievable. We wish you the best in your endeavors.