By Bailey Carson, Home Care Expert at Angi
Buying homes to flip and sell is a popular way to invest in real estate, providing a reasonably quick turnaround with an excellent return on investment – when successful.
House flipping involves buying a property then adding value through renovations before selling. The money spent renovating the property is ideally recouped when sold, with the additional value added onto the property, creating a profit. However, property flipping isn’t an ‘easy’ investment by any stretch – it requires time, effort, skills and money to get right.
If you’re thinking about investing in properties to flip, here are a few things to consider.
Decide whether property flipping is the right investment for you
Property flipping is like any other business investment – you need experience to be successful. You should have a thorough understanding of real estate renovation and valuation if you’re considering investing in property.
Property flipping requires initial capital to buy the home and carry out repairs, so assess carefully whether you have the funds needed to complete the project to a standard you’re happy with. You should also have money in place to cover anything that goes wrong during repairs and renovations, as unexpected delays may mean you lose opportunities in a hot market.
Many property flippers work with partners: one may have the capital or time covered, while the other is a contractor who understands the expenses of the project and details of the repairs needed.
Beginners in property flipping often underestimate the time and money required while overestimating their skills or knowledge. Having good judgment and realistic expectations are key before you make any large investments.
Consider the area you’re buying in
The neighborhood you buy in makes a huge difference to the final selling price of a home. It makes sense to choose an area you know well, so you can accurately assess the demand for homes in the area.
Research comparable homes nearby to ensure going rates are realistically aligned with what you’re expecting to sell for. Selling costs can be brought down by low-value areas: if you flip a home in an area where there are no comps, you may struggle to substantially increase the worth of the home. For example, if you buy a run-down property for £100,000 in an area where sales cap at £150,000, you will struggle to sell for £200,000 – no matter how much value you add. Adding value to a home with nearby comps closer to what you’re hoping to sell for is a much safer option.
Understand the 70% rule
The 70% rule helps flippers and investors work out the maximum price they can pay to turn a profit on a property. The 70% rule states that you should pay 70% of the After Repair Value (ARV) of the home, minus the cost of repairs. The allows for a 30% profit.
You need to be confident when calculating ARV, so knowledge of real estate valuation is vital – consult with experts if necessary to determine an accurate ARV.
Of course, the 70% rule only acts as a rough estimate when you’re first assessing properties and may vary in lower or higher-end markets, so you should always carry out a more extensive analysis of expenses once you take on a project.
Examine the property before buying
It is imperative that you fully understand the scope of work when investing in a property to flip for profit. There may be hidden issues that will cost more than expected to fix, which will ultimately eat into your profit. When considering a project, you need a clear idea of exactly how much work is required and how much time and money it will cost.
Before investing in a property, go through all the necessary home inspections and ensure you’re fully aware of the work that needs completing. You may not notice problems such as low water pressure or poor drainage when first assessing a property – but they could lose you money along the line if caught by a potential buyer during their own inspections.
Assess repairs and estimate costs
When you know exactly what needs fixing, determine whether it’s something you can fix yourself or whether you’ll need to hire professionals. This will make a lot of difference when it comes to costs. Be aware that you shouldn’t try to cut corners or save money by carrying out work yourself if you’re not qualified to do so – a poorly done job will cost you more in the long run, as you may ultimately need to bring in a professional to fix the work.
Accurate estimations for costs are key, as what may seem like a quick and easy job may be much bigger once you get started. To make a profit, you need extensive knowledge of home repairs at a minimum, if not the skills to carry out repairs yourself.
Be smart when selling
Once you’ve successfully renovated a house, you need to tackle the most important part – selling for a profit. You need to market your property well for a quick sale, as homes that sit on the market for a while tend to decrease in value.
Home staging is one example of property marketing that can decrease time spent on market and improve profits. Staging is huge in the US and is increasing in interest in the UK too, with searches for ‘home staging’ growing by 50% over the last five years. Home staging involves interior designers preparing the home with décor and furniture to highlight its best aspects to potential buyers, which can increase the value of a home by up to 5%.
Property flipping can be a lucrative endeavor, however, you need to fully understand the scope of the work and the risks involved. Knowledge, research, and planning are key. It is vital you stick to a budget, research your market, and consult with professionals for your best chance at property flipping success.