If you’ve decided that 2021 is the year you’re going to invest in a real estate property and then sell it for a big profit, consider this: Flipping a house can bring many challenges, from financial setbacks to breakdowns in communication with your construction crew.
Low interest rates also mean properties are flying off the market, especially in up-and-coming neighborhoods. So, how can those who are new to the house-flipping game compete today?
By learning from those with more experience. Here, some successful home flippers share what they wish they had known when starting. Hopefully, these tips will help you minimize pain and maximize profits.
1. Stick to your maximum allowable offer
Most experts agree that buying a fix-and-flip investment should not be an emotional decision. There are certain formulas that every house flipper should calculate to reap a profit. The general rule when determining your maximum allowable offer (MAO) is not to pay more than 70 percent of the property’s after-repair value (ARV), minus repair estimates.
For example, if the property’s ARV will be $150,000, you would subtract the costs to flip (including the cost of a loan, repairs and other fees) and then multiply that number by 70 percent. That will give you the MAO you should make on the property. A more exact formula: Calculate MAO as ARV, minus rehab estimates, selling costs and minimum gross profit.
2. Build a buffer into your renovation budget
Anyone who has undertaken repairs on their own house or an investment property knows things rarely go as planned. Permit delays, bad weather and unforeseen expenses can all throw a wrench in the works—and revise your bottom line. That’s why experts advise new investors to build a buffer of up to 25 percent into their rehab estimate.
3. Don’t always go with the least expensive contractor
Finding the right contractor can help keep renovation costs in check, but right does not always mean the least expensive. You must manage costs prudently, but going with the lowest contractor bids often can end up costing you more in the long run. Be cautious about choosing the inexpensive price. Instead, hire the contractor who offers the best quality and most professional work for your money.
4. Make sure the contractors have a clear scope of work
You may be able to head off issues with contractors, including plumbers, electricians and general contractors, by ensuring they present a clear scope of work for the project, experts advise.
The scope of work usually includes working with the city to obtain permits, ordering materials and equipment, and confirming the house plans. Most importantly, start building relationships with contractors in the areas where you invest, so you know whom you can trust for any project.
5. Provide a quality product
As fast as homes are selling today, the market is filled with many discerning buyers. Often, the ultimate buyer of a flip expects the home to compare with existing homes—or even new construction—in quality and value.
That means focusing on value-add renovations and amenities. Research shows buyers want a nice kitchen and baths. Of course, everything should be functional and up to code, but you want to create an instant emotional connection for potential buyers.
6. Get your own finances in order before you begin
Several investors stress the importance of running your blossoming home-flipping company as a business—because it is. That means tracking all of your expenses, so you can make better decisions for greater profits.
Be extremely organized and document every purchase order, utility bill and closing fee that’s involved in the project. It also is important to have your own financial house in order before you start.
7. Expect to put time and money into marketing
Consider spending more time early on learning how to market homes efficiently. Some examples include direct mail, and advertising online via Google and Facebook. All of these methods have potential if done properly.