Anyone who’s watched a house-flipping show on TV knows that it seems easy to buy a cheap property and turn it into an instant asset. However, the reality is much different.
Unless you’re paying cash, the renovation costs and carrying expenses quickly cut into your profit margin. Here are some tricks to maximize your profits when flipping properties: 1. Know the Market.
1. Know Your Limits
Flipping houses is a risky business that requires a lot of knowledge and time to master. If you’re just starting out, it’s a good idea to focus on one or two properties at a time. This way, any mistakes you make won’t eat away at your profit potential too much.
The best flips are those that require only cosmetic renovations and don’t have any major structural issues. However, it’s easy to lose track of costs and over improve a property in a quest to deliver a wow factor.
Knowing your limits means understanding how much you should pay for a home and how much it will cost to renovate it. Use calculators like the BiggerPockets House Flipping Calculator to get a sense of what you should expect to spend and make.
2. Know the Market
Many beginner flippers are surprised to find that a profitable flip does not always come easy. This is largely due to the fact that many beginners get so wrapped up in the project that they go over budget in an attempt to deliver a certain wow factor for their buyers.
The key to maximizing your profits is knowing the market. This means finding properties in a neighborhood that is growing or will grow soon and avoiding those in need of major repairs that will detract from your potential profit margins.
To do this, it is common for house flippers to use real estate websites like Roofstock and other online marketplaces that connect homeowners with contractors who can perform home improvement work. Seasoned flippers can even line up a buyer for their property before they start the renovations!
3. Know the Renovation Costs
It’s important to know the average costs of renovation in the area you plan on flipping houses. This will help you stay within your budget and keep the project on track.
It will also allow you to estimate the amount of profit you will make when you finish. A budget should be built in for unexpected repairs and fees that can eat into your margins.
If you are new to house flipping, it is a good idea to build a network of contractors, realtors, home inspectors and material suppliers before starting the project. Having a contact list will help you find properties more quickly and reduce the time it takes to complete the project. It will also give you a leg up on lining up buyers for the house as soon as it is finished, shortening your holding time.
4. Know the Renovation Time
The longer it takes to renovate and put a house on the market, the less profit you’ll make. This is why it’s important to develop a realistic rehab schedule during due diligence.
This should take into account the length of time you’ll spend searching for properties, inspecting them and negotiating prices. It should also consider how long it will take you to hire contractors, complete the work and stage the home.
In some cases, it may be easier to flip houses quickly if you find one in an up-and-coming neighborhood that doesn’t require much renovation work. This could be a profitable strategy for your business. But don’t buy a house just because it’s cheap and needs little to no repairs. It could be a costly mistake in the long run.
5. Know the Contractors
If you are flipping houses, it’s vital to know the contractors. The right contractor can save you money on renovations, keep projects on time, and make the entire process much easier.
Real estate investors can find great contractors by asking other real estate investors for referrals or attending local REIC meetings. You can also search online for contractors that specialize in certain areas of home remodeling.
You can even try sending out direct mail to homeowners in neighborhoods that you’re interested in buying properties in. If you’ve seen “we buy houses” signs (also known as bandit signs) in your area, that’s a sign that it’s a good market for house flipping. You can find a lot of homes in these markets for sale on sites like Roofstock.