The real estate market attracts many investors with the potential for strong returns and profits. One way to get exposure to real estate is to invest in real estate-focused investment vehicles such as real estate investment trusts (REITs) or crowdfunding. If you want to get more direct exposure, you can purchase your own property to rent out or flip.
What is flipping houses? It’s the process of buying a run-down property. It may be a property that wouldn’t pass inspection. Then, the buyer puts in the time and money to fix it. After it’s turned into a nice, liveable home, the buyer sells it, hopefully for a decent profit. Flipping houses requires a lot of time and work, but can be worth it if you achieve strong returns. Benzinga’s flipping houses 101 will help you determine whether it’s an investment for you and how to get started.
The Process of Flipping Houses
A lot of work goes into transforming a run-down property into a valuable home. Here’s a step-by-step guide on how to flip a house.
Step 1: Property Acquisition
First, the investor will identify a property that is undervalued and in need of renovation. The property will be bought at a lower price than its potential market value. Before purchasing, the investor should consider its potential market value, cost and the cost of necessary renovations. This will help the investor determine whether there’s a strong potential for profit once it’s renovated. If the purchaser can’t afford the upfront cost, they may need to take out a loan for flipping houses to cover the cost of the property and repairs.
Step 2: Renovation and Improvement
Once the investor finishes the purchasing process, it’s time to start renovations. Depending on the property and its needs, these repairs could range from small cosmetic improvements to fixing crucial structural issues. Property owners should work with inspectors and other professionals to ensure the renovations made are up to code to increase the overall value of the home. Investors can also add modern or luxury amenities that potential buyers find attractive.
Step 3: Marketing and Resale
Once the renovations are complete, the investor will list the property for sale at a price point higher than the initial cost plus the cost of renovations. The goal is to attract potential buyers and sell the property quickly to maximize profits. Then, they can pay off loans used to cover the cost of the property and renovations.
Step 4: Profit Generation
Investors make profits by selling the property at a price point higher than the original purchase price plus the renovation cost and any other expenses, such as taxes, real estate agent fees and holding costs. Investors need to consider the potential market cost before purchasing and renovating property to ensure they’ll be able to make a decent profit. Alternatively, investors could keep the property and use it as a rental property.
Pros of House Flipping
Flipping houses requires a lot of time and effort, but savvy investors may be able to make a good profit from this venture. Here are a few benefits of flipping houses.
Potential for High Profits
Many people wonder whether flipping houses is profitable, and it certainly can be, though profits are never guaranteed. House flipping has the potential to yield substantial profits in a relatively short period. With strategic renovations and a keen eye for undervalued properties, investors can capitalize on market trends and buyer preferences. This requires staying on top of trends in the housing market and constantly searching for properties in need of a little help.
Rapid Wealth Accumulation
Successful house flipping can accelerate wealth accumulation by turning a single investment into a significant return. With those returns, investors can continue purchasing and flipping properties. Eventually, their wealth will grow enough to improve their financial situation and grow their business venture.
Stimulates Local Economy
Renovating homes benefits investors and has a positive impact on local economies. House flipping generates jobs for contractors, tradespeople and suppliers, contributing to economic growth. Plus, it improves properties, which can cause homeowners to flock to certain neighborhoods. It makes more homes liveable for a wider range of families and individuals.
Diversification of Investment Portfolio
Adding house flipping to an investment portfolio mitigates risk. While stocks and bonds can be unpredictable, real estate is a tangible asset that often withstands market fluctuations. Investors will also have more control over their real estate investment and can, to some extent, control their profits.
Cons of House Flipping
House flipping may sound like a foolproof venture, but there are many risks associated with it and requirements that may not suit every investor. Learn more about the disadvantages listed below.
Financial Risks
Flipping houses is not guaranteed to generate income. There are many associated financial risks. For example, a property could need unexpected repairs and have higher-than-expected renovation costs and holding expenses. If the real estate market experiences a downturn when the investors are trying to sell, they may end up losing money on the house. Returns are never guaranteed.
Time-Intensive Endeavor
Buying and repairing houses is not for passive investors. Flipping a property demands significant time and effort. Owners need to hire contractors, coordinate renovations and oversee the selling process. This can be overwhelming for investors who can’t dedicate a large amount of time to this venture.
Market Volatility
The real estate market is volatile and impacted by changes in economic value. Property values can always change, which could affect the resale value of flipped properties. For example, if an investor bought a property expecting a certain market value but that value falls during renovations, it may be hard to make a profit.
Regulatory Hurdles
Flipping houses isn’t as easy as buying and fixing a property. Investors also must navigate zoning laws, obtain the necessary permits and adhere to other regulations. It requires a significant understanding of the real estate market and associated legal requirements. Failing to handle these could delay the flipping process and result in fines that would diminish overall profit.
Emotional Toll
Flipping houses is not for the weak of the heart and can be emotionally taxing. Unforeseen challenges, setbacks and necessary repairs are likely to pop up, which can lead to a lot of stress and frustration. Investors should prepare for the unexpected and be ready to change their plans at the drop of a hat.
Expert Tips for Successful House Flipping
If you think flipping houses will benefit you and your portfolio, follow these expert tips.
Location Matters
The location of your property directly correlates with your return potential. Choose a property in a desirable neighborhood that has a strong potential for appreciating property values.
Network with Professionals
Flipping houses requires a team of people from agents and contractors to inspectors. For a smooth flipping process, network with the professionals so you have a range of people to call on when it’s time for renovations and listing your property.
Understand Local Regulations
Become familiar with local regulations regarding construction and home renovation, especially in the areas in which you’ll be purchasing properties. These could impact your project, and understanding them or having an industry professional assist you will make this process easier.
Monitor Market Trends
Stay on top of real estate market trends and economic factors that could affect real estate. Having this knowledge will help you make informed decisions about when and what properties to buy and sell.
Quality Over Quantity
It may be tempting to renovate properties quickly so you can move on to the next one. But this will only create low-quality properties that won’t generate as strong returns. Focus on completing a quality renovation and don’t cut corners.
Flip Houses and Your Finances
What is flipping houses? It’s another form of investment that has the potential to generate strong returns. It’s important to remember that flipping houses does not guarantee profits and is subject to a range of risks. However, savvy investors who keep track of market trends and are prepared for the unexpected may be able to turn flipping houses into an additional income stream. Get started by looking into loans for flipping houses and see what opportunities you can find.
Frequently Asked Questions
How long does it usually take to flip a house?
This varies based on property size and the size of the team, but investors should expect the process to take anywhere from a few months to over a year.
Is flipping houses a risky investment?
There is risk associated with flipping houses, such as changes in the real estate market and economic environment impacting property values.
What skills or knowledge do I need to flip houses successfully?
Investors should have a thorough understanding of the real estate market, local regulations and a network of real estate professionals and contractors.
About Savannah Munholland
Savannah Munholland is an investment writer passionate about helping people learn more about accessible alternative investments. She has more than three years of writing experience, focusing on alternative and traditional investing, technology, and education. Her expertise in writing about art and wine investments is grounded in an MFA with knowledge of and immersion in a wide range of art-related topics. She uses her skills in creative writing to bring an appealing level of interest to her journalistic work, shifting even the most basic financial and investment topics from humdrum to compelling. Her work has been published on Benzinga, FreightWaves, and Study.com.