House flipping can be a very lucrative side gig. If you do the legwork ahead of time, you can minimize the risks and maximize the odds of making good money in a relatively short period of time. In real estate, good information and good ideas are worth good money.
1. REAL ESTATE MARKET RESEARCH
Some homes sell better than others. There are some general rules of thumb, such as:
- Three bedroom homes sell better than two bedrooms.
- Homes in a good school district are a hot commodity.
- Homes in family-friendly neighborhoods sell better.
However, the general rule of thumb can be wrong in certain instances. This is why it is important to know the neighborhood and research the local market.
Retirement communities have different standards and expectations than family neighborhoods, and city neighborhoods will be different from suburban ones. As the old saying goes: It is all about location, location, location.
When house flipping, it pays off to be knowledgeable about local housing trends. This can inform renovation efforts and reduce the odds of a misstep.
It is better to be more observant regarding local trends rather than national trends. Paying too much attention to national trends can lead a potential house flipper down the wrong path. Real estate is very much about local market conditions, while national averages can be misleading.
People can start by reading local listings, driving around local neighborhoods and simply paying attention to local information about the housing market. Is a big employer coming to town? Is it an area that attracts “snow birds?” Is it a tourist attraction or a vacation spot?
Demographics are another thing to research. Knowledge about population characteristics, such as age, ethnicity and lifestyle are very useful when thinking about what kind of real estate sells better in a particular area.
2. PICKING THE RIGHT HOME
The right home is one that can be sold for a profit. But you must take the purchase price, renovation and carrying costs into consideration. The larger the profit margin, the better the sale. Some general rules:
- It is better to buy the worst house in a good neighborhood than the best house in a bad neighborhood.
- Houses that need more “curb appeal” are more profitable than houses with serious structural issues.
- Fancy additions, such as swimming pools, are often not profitable.
A house with “good bones” that needs to be updated is a good bet. A house with a solid structure, but an outdated kitchen and bath is also a good bet. Bringing a house up to a community’s standards can mean more bang for your buck. For instance, purchasing a house with one bathroom and then adding a second makes a significant difference, especially if it is in a neighborhood where two-bathroom homes are considered the norm.
It is also a good idea for house flippers to buy and renovate homes near where they reside. Not only does this increase the odds of being familiar with the local market conditions, but it also cuts down on the commute to the job site. This can be a significant factor in making the project work, especially for those looking to earn a supplemental income.
Although there is a time and place for pulling out a calculator and crunching some numbers, there is a danger that number crunching alone can lead people astray. It is a bad idea to buy a “bargain house” sight unseen. The low upfront cost of purchasing it likely means there are hidden costs down the road. In this business, it is important to be hands-on and to check things out personally.
The renovations are where the magic happens. Staying on budget while creating something attractive to buyers is how house flippers turn a sow’s ear into a silk purse full of money.
It is important for house flippers to develop the right mindset. When people renovate their own home, it is often a labor of love and all about getting what they want out of life. This can torpedo the initial intended budget.
While that might sound OK for one’s personal residence, house flipping is a business. If it isn’t profitable than there is no point. So, it is important to keep the project under budget.
Following one’s heart can lead to better results in terms of making an attractive property sell quickly. As long as the renovations are handled in a budget-minded manner, with an eye on the bottom line, it is fine for house flippers to use their intuition and personal sense of taste to guide their decisions.
One way that most house flippers stay on budget is by investing sweat equity. In other words, they do as much of the work as possible themselves. It’s more economical to contract out certain jobs that require specific trade skills, such as plumbing and electrical work.
Another way is by picking the right house to begin with. Picking houses that need some polish, but are structurally sound, is one of the best ways to stay on budget. Foundation problems, black mold and other nightmare scenarios can easily eat all potential profits.
Some areas that typically pay off:
- Update the kitchen
- Update the bathroom.
- Add a second bathroom or a half-bath.
- Add curb appeal or generally freshen up the appearance and/or landscape.
4. TIME IS MONEY
There will be carrying costs. There will also be interest on capital borrowed to invest in the project. One of the secrets to making money when flipping houses is simply finishing the project in a timely manner.
Again, it can help to buy a house close to home. It helps to have a solid plan of attack in place. It helps to devote as much time as possible on evenings and weekends to the project.
But it’s also appropriate to be aware that time is of the essence and that this is a for-profit venture.
The other big area where time is of the essence is when it comes to actually selling the house. An empty house sitting on the market will bleed the owner for carrying costs, including mortgage, insurance, taxes and maintenance. Plus, the longer it sits on the market, the less attractive it will look to potential buyers.
That said, another secret to making money by flipping houses is knowing how to effectively price the house according to the current market. Overpricing a house can be a big mistake that costs money. It is better to pick a price point that will help the house sell more quickly.
If the work is exceptional, the final selling price can be bid up above the asking price. Even if a bidding war does not happen, it is better not to have profits eroded by the cost of carrying the house for several months.
It isn’t absolutely necessary to have money in the bank to flip houses because there are many ways to raise the capital needed for every project.
As long as there is enough time to do the legwork, this is a solvable problem. Real estate is one of the most solid and lucrative investments. So, as long as the renovation plans aren’t overly complex, there are some means to finance the project.
RealtyeVest is a real estate crowdfunding company that offers investors the opportunity to capitalize on residential, multifamily and on-trend properties across the United States.