In real estate investing, “money” is the name of the game. And while no strategy offers a better opportunity to walk away with fast profits than house flipping, it’s also one of the riskiest investment options for a newbie Austin investor who doesn’t understand what he’s getting into.
Unfortunately, this often leads to costly mistakes that lead to financial disaster. Knowing what they are ahead of time can prevent you from ending up in a similar situation.
The Appeal of House Flipping
Thanks to a slew of HGTV shows, blogs, YouTube channels, and best-selling books, house flipping has become an attractive real estate investing option. Benefits include:
- Quick profit. Most real estate investments provide gradual returns over many years. And while they generate a nice cash-on-cash return, it can take several years to recoup the initial investment. (That’s fine for most investors, but can prove to be too slow of those wanting quick gains.) House flipping, on the other hand, provides the allure of an immediate return. Depending on the investment, you could generate tens of thousands of dollars in a matter of months. That’s pretty enticing!
- Formulaic. Once you figure out how the house flipping game works, you can pretty much boil it down to a formula. If the numbers work, you know that the investment will be lucrative. That can be reassuring when you have such a large amount of money tied up in a deal.
- Rewarding. There’s something rewarding about taking a property that looks like a dump and turning it into a shiny diamond. If you’re someone who likes to work with your hands and see a project through from start to finish, you’ll find a great deal of satisfaction in house flipping.
The benefits are alluring – and often result in profitable paydays for savvy investors – but they aren’t guaranteed. In fact, there are plenty of risks associated with house flipping. And the only way to fully protect your downside risk is to avoid making costly mistakes.
5 House-Flipping Mistakes to Avoid
If you want to enjoy a successful house flip, you have to approach the investment correctly. This means avoiding costly mistakes that could sink your investment from the start.
Here are a few of the top mistakes we see Austin house flippers make – avoid them at all costs!
1. Overpaying for the Property
You make your money when you buy. If you overpay for the property, you’ll hamstring your efforts from the very beginning. Unfortunately, in a rush to buy a property with potential, this is exactly what many newbie Austin investors do.
To avoid overpaying for real estate, you should use the 70 percent rule. This rule of thumb states that you should pay no more than 70 percent of the after-repair value (ARV) of the property minus the repairs needed.
Here’s a sample illustration: If the home has an ARV of $200,000 and needs $25,000 in repairs, the 70 percent rule instructs you to pay no more than $115,000. This ensures you leave enough margin for unforeseen issues, commissions, taxes, etc.
2. Poorly Planned Repair Budget
Many house flippers make the mistake of being too rigid with their budgets. They do a good job of accounting for everything, but their numbers have no flexibility. In other words, they assume the costs will be precisely as planned. Unfortunately, this is rarely true.
As a general rule of thumb, you should always leave a 10 to 15 percent cushion in your budget. If you expect the repairs to be $25,000, it’s good to earmark $27,500 to $28,750. This gives you some wiggle room for things that you aren’t expecting.
On top of this, you have to consider the possibility that you don’t sell the property right away. If your calculations are based on an immediate sale, a month or two of additional holding costs could really eat away at your profits. Keep this in mind and always be conservative with your numbers. (You want the investment to still make sense even if the worst-case scenario happens.)
3. Inefficient Process
Every single day you hold a property costs you. And though you don’t want to rush through the flip and do a shoddy job, time is of the essence.
Newbie house flippers often take weeks or months longer than they should, simply because there’s no established process. This is why it’s a good idea to partner up with an experienced flipper on your first go-round. Yes, it’ll eat into your profits, but you’ll get an idea for how to manage the process and keep the project on target.
4. Over-Improving the Property
Did you know there’s such a thing as “over” improving a property to the point that you actually lose money on the upgrades and additions?
Real estate isn’t a dollar-for-dollar game. In other words, you can’t assume that you’re going to get the same return on $100,000 worth of upgrades as you would on $25,000 worth of upgrades. If you aren’t careful, you can price yourself out of the neighborhood. (Nobody wants to buy a $400,000 house in a neighborhood where all of the other homes are worth $275,000. The comps simply don’t support it.)
This is why it’s important not to buy the most expensive house in the neighborhood. Instead, look for the cheapest homes, because they have the most upside.
5. No Exit Strategy
You must go into an investment with an exit strategy. This includes a timeline, a checklist for processes, and strategies for multiple outcomes. Contingency planning is a must. Know what you’ll do if you come in under budget vs. over budget. Have a strategy for what to do if you hold the property for longer than you thought you would. Always remember that a failure to plan is a plan to fail!
Work With Green Residential
At Green Residential, we take our clients’ investments seriously. Whether you have a single Austin investment property or a portfolio of dozens of doors, we can help you manage your real estate with less stress and fewer wasted hours. Contact us today to learn more!