Maybe you have watched shows on TV about flipping houses and making tons of money in a very short amount of time – seems like a great way to create capital so that you can then invest in the tried and true Buy and Hold or other sustainable scenarios. But is it?
Flipping is not near glamorous and sexy as it looks on TV. Its hard work that is very hard to predict, hard to control and even harder to time….both project wise and what the market needs or wants. Unfortunately, this has also been a sure fire way to lose before you begin for many investors.
Lets not be Debi Downer fully though, what are some good things about flipping?
- Potential profits that are large and relatively quick. Those who flip properties as a sole source of income, can make in a few months what the average worker in this country makes in an entire year. The potential profits are great in this line of work for the successful veteran house flipping team.
- Being your own boss. This is within certain limits of course as some areas have strict zoning ordinances and code requirements that must be respected and adhered to when working on a house. Even so you maintain a large degree of control over all the decisions having to do with the flip.
- Getting to work with power tools. There is that little kid in most of us that really loves the idea of playing with power tools. In fact, that is the deciding factor for many who have gone into this particular field of real estate investing in the past. They love the work and the gratification of seeing a job come together and shine when completed.
- It’s hands on and seeing the fruits of your labour can be so gratifying. There are all kinds of different investments that you can put your money into but very few allow you to pour your heart, soul, blood, sweat, and tears into them the way that flipping a house does.
- Risk. Real estate is a risky business in its own right. When you add the skills that are needed in order to flip a house, the wide variety of things that may go wrong during a flip, and the volatility of the market in general, there is so much that can go wrong when it comes to flipping a house. If you can’t afford to lose the money, you can’t afford to start the flip.
- No easy out. If you invest in stocks that go bad it is possible to pull your money out of that stock and go somewhere else. It is a little more difficult to do this when it comes to a house flip. You need to be prepared to see it through to the finish if you begin flipping a house.
- Expenses. It’s expensive to flip a house. You will need to come up with no small investment of your own in order to do this. It will take careful planning and diligent adherence to those plans in order to successfully flip a house but the rewards for your significant financial investment are most often well worth the effort.
- Physical labor. Not everyone is as skilled as the next guy when it comes to physical labor, carpentry, painting, installing floors, hanging cabinetry, and countless other skills you will be called upon to perform while in the process of flipping a house. It looks so easy on TV – but it can be a totally different story when you’re doing it yourself. You will occasionally need the help of skilled professionals and on occasion need large doses of your favorite muscle ache ointment.
Despite all the pros and cons many people around the world embark on their first house flipping adventure each and every day. The allure of quick rewards often outweigh the need for cautious prudence. If you do decide to go for a flip, here are a couple of ways to mitigate that high risk;
- Anaylze the property for long term holding. Though the initial idea of flipping is to buy a place, and quickly get your money back, this is not always how things turn out. We always recommend that you analyze the property’s ROI and especially cashflow, AS IF YOU ARE KEEPING THE HOUSE. If you can buy, renovate and sell it with a profit – excellent – mission accomplished! But lets say the market shifts and you aren’t able to sell it…can you make it into a great revenue property? So counting the money you put in (down payment AND reno costs etc), if you had to keep it, would the property cashflow? Would there be money in the bank after the rents come in and the expenses are paid? If so, in the worst case, you have bought yourself a very nice rental property that has been updated so will attract a great tenant, and pay you every month. That isn’t a bad outcome from a ‘failed’ flip. If however, it does not cashflow and will be costing you money every month, it could be enough to take you out investing, never having realized the true power of it.
- Partner with someone who has the experience or knowledge that you don’t. Especially with our first flip, or even our 10th flip, if we are going into a new market, there may be nuances that can make or break us. Taking on a partner may mean that you will split profits, but without a partner that knows the things that you don’t yet, there may not be any profits to split. This doesn’t take away your risk, but it does mitigate it. There will always be a next one that you can do on your own to maximize profits, but until you know what you are doing, its always a good idea to have a partner with a vested interest in seeing it succeed.
- Be very clear with your contractors, if you are using one. And while you don’t want to micro manage, remember that you do still have to manage them. You have to move things along and know whats happening. Ask your Realtor®, Mortgage Broker and friends for recommendations. But don’t leave it at that, do your own due diligence even on those that are recommended to you. Make sure they are licensed if required in your area. Ask for testimonials and then call those people. Sign a contract. Don’t leave things at a handshake, no matter how well you know them. A bad contractor can make or break your flip, so take the time to vet them thoroughly, even if it delays your job (though this should be something you’ve done before you even have the property), a delay can be made up, having a bad contractor often cannot.
In truth, we always recommend getting to know your market through a long term by and hold, or two, before venturing into the more complicated, higher risk investments like flips. But if you must, (and we know some of you just have that bug for it 😊), then do whatever you can to mitigate that high risk. And then have a blast building and learning and creating your own Investor Life.