You come home from a long day at work and while channel surfing, you come across a show in which guys are buying run-down houses, fixing them up and reselling them for huge profits before the first mortgage payment is due. Wow. What’s more, they claim they make as much money on this one house as you have in the last year. They don’t look or sound any smarter than you are and they’re raking in the cash. You start crunching numbers and before you know it, you’re thinking about a career change. Before you quit your day job, read on.
Flipping of real estate is primarily used in the United States. It refers to a practice of purchasing a property below the market value, making the required improvements in it for e.g. repairs etc., and reselling it for a higher price (generally near market value), thus making a profit.
Though it sounds quite easy in real world, it is extremely cumbersome and risky. Flipping is the latest subset of the nothing-down movement. The salesperson makes flipping look as if the person concerned gets something for free. However in reality it is just a misconception.
Some experts believe that the practice of flipping started during the real estate bubble in the U.S. during 2004 -2005. Although the practice of flipping existed long before the real estate bubble, it became more rampant and popular in those years.
The process of flipping a home seems like a simple enough premise. buy a home for a low value, add some value to it through various improvements and finally sell it for a handsome profit. However, that formula simply does not work every time and there are flips every year that become massive flops, some big enough to discourage those investors from getting back into the business. This is a bit of a shame given that a few failures are common in any profession, whether it be house flipping or not.
The fact is, some investors have a weak stomach for the business and such a deal could send them out of the business all together. While you may not be able to avoid landing at least one failure over the course of your career, there are some traits and aspects of potential projects that you can look out for to minimize your risk of ending a flip attempt in a miserable flop.
One mistake early investors sometimes make is renting out a home when it does not sell for the price they want it to right away. The logic behind the move is to get something out of the refurbished home that will add to the profit margin and make selling it for a lower price not quite as rough on profit. While that can seem like a great idea and indeed works in some instances, never underestimate what kind of wear a renter can put on a property.
The worst case scenario would entail having to rehab a home a second time after the security deposit does not cover what a renter did to the property. Indeed, hanging on to the property and marketing it differently or pursuing a staging company for better showings might be a better use of an investor’s time and money. While the lure of gaining rental income can be tempting, those not experienced in being a landlord are best left to more conventional means of monetizing a property.
While no investment career is without its failures, there are some steps you can take to not only protect yourself, but keep yourself out of further trouble if things look momentarily bleak. Do not abandon ship too early or your chance for even a small amount of profitability might sail along with the hole your renter just put in the wall. Investing in a property only to flip it can be risky at times, but to those that commit to it, research it well and execute a solid plan, flipping can be a steady way to accumulate personal wealth.
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