Here at Turnkey Properties, we get it! Flipping a house seems like a sure thing!
I mean, what is there to do? Get yourself a house, put in a little time making a few cosmetic fixes, then throw it back on the market and rake it in! Right? I mean, look at all these shows on tv. You can flip the channels and find any one of a handful of shows with attractive, smartly-dressed investors who make it all seem easy, fast, and fun.
And don’t get us wrong, flipping a home is awesome! Residential house flips represented 10% of the total number of homes sold in the United States in Q1 2022. That’s the highest percentage since 2000, as published by ATTOM Data Solutions in its 2022 U.S. Home Flipping Report.
However, Turnkey Properties works for you, and part of that promise is ensuring you know what pitfalls and challenges there are along the way. Yes, house flipping is an art, a science, and a passion, and there are plenty of ways you’re acquisition can go wrong. Read on to learn whether it’s a “flip” or a “flop” below!
How does it work?
At its most basic level, flipping can be understood as a type of real estate investment process by which an investor (that’s you!) purchases a property with the intention of putting it back on the market for a profit.
If you’re going to flip properties, that means you’ll either be focusing on the purchase of one particular property or a group. Oftentimes, the goal is to generate a steady income by flipping continuously.
So how does it work? Well, of course, the idea is to buy low and sell high. While this seems like common sense, you’ll want to apply certain procedures to your flipping endeavor that set you up for success specific to the practice of flipping. One rule of thumb when it comes to flipping is to look for speedy transactions rather than holding on to try and maximize profit. Why is that? Well, that’s because holding on to a property accrues certain day-to-day costs that need to be minimized if you’re going to have success. That means costs such as a mortgage, utilities, property taxes, and insurance, among others.
Where you get your profit is essentially about appreciation. That is, the phenomenon whereby you see the return from a rise in price due to buying into a hot market, the return from your capital improvements made to the property, or, ideally, both!
Where do I start?
First of all, you’ll want to do everything possible to minimize risk while maximizing your potential for returns. That is to say, make sure you aren’t spending too much on your property. That means you need to go in informed on how much it’s really worth. That means doing your research! You’ll also want to go into your acquisition with an understanding of the costs associated with your capital improvements – the repairs and upgrades you’ll perform prior to the sale. With all this in mind, you can go on to find your perfect purchase price.
In keeping with the rules of thumb, you want to know about the 70% rule. That is to say, an investor (again, that’s you!) ought to pay no more than 70% of the total ARV (after-repair value), minus repairs, of the desired property. By ARV, we mean your property’s value after capital improvements.
Just like with any business endeavor, you’ll need time, money, patience, planning, skill, and effort. Flipping is not about getting rich quick! It’s about developing a valuable skillset to generate valuable offerings and then seeing the return on your time and money.
Look out for the following two pitfalls to ensure your flip doesn’t turn into a flop!
#1 – Lack of Capital
Remember, flipping a home isn’t a casual affair! It’s a serious investment of both time and money. And speaking of the money, it’s important to keep in mind your acquisition cost, any interest, potential mortgage costs, as well as credit lines. Take advantage of one of the many online mortgage calculators to make sure you’re getting in with the best deal possible.
Even in the event that you pay cash upfront, there are property holding costs and upfront costs to consider. Also, never forget the capital gains tax when it comes to calculating your acquisition.
#2 – Lack of Time.
Now for the second part of that equation. The fact is, flipping a home is not an in-and-out procedure. You’ll need to invest time in those capital improvements. In the event that you have a day job, you’ll need to figure out a schedule that works for you. Even if you pay someone else to manage the time commitments involved, that will in itself take time to work with.
You’ll want to devote time on-site to inspect everything before you put your property back on the market. It’s important to ensure that you’re in compliance with building codes. Otherwise, you’ll be unable to sell.
Not to mention, the process of sale can take considerable time. Be sure and buy in during a period when you predict a rise in prospective buyers!
Don’t go it alone!
Now that you’ve taken the time to learn a little bit about what separates a flip from a flop, here’s another big key to success – don’t go it alone! Even the experts work with a team to ensure they get their money and time in good, and chances are, you’ll want some help.
Good thing you’ve got a friend like Turnkey Investment Properties to help you along. We’re local to Memphis, just like you! And, just like you, we take pride in our good name when it comes to business and real estate investment. So go ahead, give us a call, and find out why Turnkey Investment Properties is consistently rated as one of the leading investment firms in and around Memphis and the surrounding areas.
Let’s get you flipping!