You've seen the successes of people just like you on those reality TV shows Flip This House and Flip That House. With home prices the lowest they've been in years and mortgage rates at multi-decade lows, you might be thinking of trying your hand at flipping houses. But how easy is it to buy, remodel and flip a house for a profit, or at the very least, not lose your shirt in the process?
Before jumping into this new business venture, you'll want to pause and think for a moment about what you are trying to accomplish with this home purchase. Flipping is not the "get rich quick" formula it was just a few years back. In fact, you can easily lose your hard-earned money if you're not careful and do not know exactly what you are getting into.
However, if you think through your purchase and are disciplined in your approach, residential real estate may be (no guarantees) a way for you to build your wealth over time.
Tips to get you started
Specialize: Otherwise, "you're always hunting and the learning curve is constant," says Denise Evans, a Jemison, Ala.-based real estate broker and author of several books on real estate. Focus on one type of renovation or home, and you'll become an expert at estimating the cost and time required to complete that particular renovation. What's more, you'll be top of mind when others in your market come across a house within your specialty area.
Begin with what you know: Start where you know the market best, advises James McClelland, president of Mack Companies, a redevelopment firm based in Tinley Park, Ill. You'll have a better understanding of the types of homes that are most in demand, and thus have the best shot at getting the highest return on your investment.
Have a plan B: What will you do if the house you bought and renovated doesn't sell? Renting is one obvious solution, but not all homes--say, those in remote areas, for example--make viable rental properties. Other options include occupying the property yourself until it sells, or cut your asking price (which unfortunately will cut into your profits).
Work with a Realtor: Sure, they will make money on your transaction, but "you need 'em" all the same, says McClelland. When it comes time to sell your property, a good Realtor can be invaluable in attracting potential homebuyers. Many Realtors also have contacts with experienced trades people who can help during the renovation process, says Elizabeth Mendenhall, a Realtor and broker, and chief executive officer with RE/MAX Boone Realty in Columbia, Mo. The hardest part for you will be factoring in the Realtor's costs.
Start with the end in mind: Before buying a house, get a good handle on its likely value, post-rehab. From this, subtract the costs you will incur to renovate it, the Realtor's commission (if you choose to work with one), as well as the profit you would like to make. The resulting figure is your purchase price. If you cannot get the house for this price, and you do not want to cut your profit margin, find another property.
Be modest: Honestly assess which projects you can tackle on your own, and those which will require outside help. Keep in mind that while you may be able to handle some projects and save on the out-of-pocket costs, prospective buyers will be comparing your work against that of professionals, says Mendenhall.
Don't quit your day job: Keep your day job, at least when you start. To earn a living at flipping, you'll need to have about a half-dozen projects going at once, McClelland estimates. It is better to start small so you can gain some experience and grow steadily. It is certainly worth mentioning that many "professional" flippers either lost their businesses or they took a serious hit when the housing downturn struck. Even a slight negative blip on the economic radar could spell trouble for less-experienced flippers.
Mistakes to avoid
Overlooking costs: If you would prefer not to lose money on a project (presumably, that is the case), you have to identify every cost you are likely to incur. Some, like permit fees and the cost for waste disposal, are easy to overlook, but add up to an amount you need to factor in.
Going outside the box: Looking for cute or unique properties "can kill you on the remodeling costs," says Evans. Instead, focus on the basic house that is most in demand in your market. It may just be a three-bedroom, two-bath ranch house in a neighborhood with decent schools.
Being impatient: Assuming (and thus budgeting) that the process will go more quickly than it will can really hurt you. Allow yourself at least six months from the day you close to sell the home, McClelland says. That gives you three months to redevelop the property, another few to market and sell it, along with some time for the sale to go through.
Missing the target on the renovation: You need to know which features are the most popular in your market, notes Mendenhall. In some areas of the country, hardwood is the flooring of choice. In others, it is carpeting. The key is to identify and try to incorporate features most likely to attract the most buyers in your neighborhood.
Above all, keep in mind that "real estate is not get rich quick," McClelland says. "It never has been and never will be." However, if you do invest and renovate intelligently, it can be a viable way to build wealth over time.
During the time you're building your wealth, you can also play a role in helping to redevelop a community that has vacant homes in need of some improvement. "It's more than just money. It's the right way to do business," McClelland adds.
Karen Kroll, a member of the American Society of Journalists and Authors, has been reporting on topics such as money, business, corporate and consumer finance since 1994. Karen's work has appeared in AARP: The Magazine, American Way, Bankrate.com, Business Finance, Christian Science Monitor, Woman's Day, and many other publications.