Will 2021 be the year to buy a real estate investment property? If your goal is to flip a house for a big profit, you know how much work it takes. Sure, popular real estate reality shows like “Flip or Flop” and “Flipping Across America” make fix-it-and-flip investments seem like a achievable endeavor, but you know the magic of TV, right?
In reality, flipping a home can be fraught with challenges, from financial difficulties to a breakdown in communication with construction crews. Plus, low interest rates are driving properties off the market, especially in emerging areas.
So how can someone new to home flipping compete today? By learning from those with experience. We spoke to successful home flippers about what they wish they'd known before they started. We hope the tips below help you minimize your struggles and maximize your profits.
1. Stick to the maximum allowable offer amount
Our experts all agree that buying an investment with the intent to fix it up and flip it shouldn't be an emotional decision. There is a specific formula that every home flipper must calculate in order to make a profit.
“Real estate investing is a numbers business, and if you crunch the numbers and the deal doesn't make sense, you should be able to walk away,” says Hayden Lyon of Cowtown Home Buyers, a real estate investment firm in Fort Worth, Texas.
“Stick to your maximum allowable offer amount. Going above your maximum allowable amount is just asking for trouble,” says Ryne Lambert, co-founder of Sell My House, a real estate investment firm in Green Bay, Wisconsin.
The general rule for determining your MAO is to never pay more than 70% of the property's After Repair Value (ARV) minus repair estimates. For example, if a property's ARV is $150,000, subtract the costs it will take to resell it (including loan costs, repairs, and other fees) and multiply that number by 70%. This will tell you the MAO you'll get on the property.
But Lambert recommends a more precise formula. “We calculate the MAO by subtracting the renovation estimate, cost of sale, and minimum gross profit from the ARV,” he says. “Our detailed formula results in more competitive offers for sellers and a healthy profit for us.”
2. Build in a flexible renovation budget
If you've ever done any renovations to your home or investment property, you know that things rarely go according to plan. Permit delays, bad weather, and unexpected expenses can derail your plans and affect your bottom line.
That's why Lambert advises new investors to allow up to 25% buffer time in their renovation cost estimates.
3. Don’t always choose the cheapest contractor
Finding the right contractor can help keep renovation costs down, but the right contractor doesn't necessarily mean the cheapest.
“When I was new, I thought I had to go with the lowest bidder to keep as much of my profit margin as possible in flipping a property,” says Jonathan Facone of Halo Homebuyers, a real estate consultant in Bridgewater Township, New Jersey.
“You need to manage your costs carefully, but relying on the cheapest contractor's bid will end up costing you more in the end,” Facone says. “Beware of choosing the cheapest price, and instead choose the contractor who will provide you with the best quality and most professional work for your money.”
4. Define the contractor's scope of work
Experts advise that you may be able to avoid issues with contractors by making sure that plumbers, electricians, general contractors and other contractors clearly present their scope of work for your project.
“The scope of work typically includes working with the city to obtain permits, ordering materials and equipment, and reviewing blueprints for the home. This section can save a lot of time and money later in the project,” says Shawn Breyer of Breyer Home Buyers, an Atlanta real estate investment firm.
Most importantly, start building relationships with contractors in the areas you invest in so you know who you can trust with any project.
5. Provide high-quality products
Homes sell fast these days, and the market is flooded with discerning buyers.
“Oftentimes, the ultimate buyer of a resale home expects the home to be comparable in quality and value to an existing or even newly constructed home,” says Greg Kerzner, a real estate agent with ERA Atlantic Reality in Alpharetta, Georgia.
Lyon agrees: “Focus on renovations and amenities that add value. Research shows that buyers want great kitchens and bathrooms. Of course, everything needs to be functional and up to code, but you also need to create an immediate emotional connection with potential buyers.”
6. Get your finances in order before you start
Several investors pointed out the importance of running your thriving home flipping company as a business because it is. That means tracking all expenses so you can make better decisions for greater profits. Be thoroughly organized and record all purchase orders, utility bills, and closing fees involved in your project.
It's also important to get your finances in order before you start.
“If everything goes well, you'll start making a lump sum of money. Without the proper discipline, you'll end up worse off than when you started,” says Billy Ross, CEO of RFTA Properties, a residential real estate investment company in Winter Park, Florida.
7. Be prepared to spend time and money on marketing
James Fitzgibbons of Ledge Real Estate Solutions in Windermere, Florida, says he wishes he had spent more time learning how to sell homes effectively when he was younger.
“I drive around town with a wrapped car,” he says, “I've done car rides and direct mail to make money. Now I do online advertising through Google and Facebook. All of these methods have potential if done right.”
