New property investors often gravitate toward the idea of property flipping, because it sounds very enticing. The idea is to buy a house that’s either in poor condition or is being offered at an extremely attractive price, fix it or improve it in some vital ways, and then sell the home again, sometimes mere months after buying it, for a profit.
It all sounds good on paper, but the realities of property flipping are much more complex.
Condition One: Buying a House for Cheap
To flip a house successfully, you first need to find a house worth buying that’s available for a low price. These opportunities tend to be rare, because low-priced homes tend to be in a bad state of disrepair, and homes that are in good condition and priced low tend to get purchased immediately by watchful real estate investors.
Still, there are some opportunities to be found here. Foreclosures, auctions, and inherited properties are all good chances to find a property in decent condition that’s also being sold for a reasonable price. Before buying a property being offered for a suspiciously low price, you’ll need to do some heavy inspecting, ensuring there aren’t fundamental flaws that would make the fix-up more expensive than it’s worth.
Condition Two: Renovating the Home With a Positive ROI
Next, you’ll need to be able to renovate the home in a way that increases its fair market value by a dollar amount higher than what you invested in the repairs. This is extraordinarily difficult, because even the home renovation projects with the highest ROI tend to cap out at less than 100 percent; in other words, you might pay $5,000 for a kitchen renovation, and only see an increase in the property value of $4,500. This is good, but not inherently profitable.
Most experienced home flippers are able to conquer this hurdle by utilizing key strategies to cut costs; they buy materials in bulk or from a specialized seller, and do most of the work themselves or with the help of friends and colleagues. Average homebuyers are not able to meet these criteria, and therefore have no avenue for issuing high-ROI repairs.
Condition Three: Marketing and Selling the Home Successfully
After all the improvements are made successfully, home flippers still need to sell the home, and in a timely manner, for more than they paid (including the total cost of the property as well as the costs of repairs). This can be challenging for several reasons, especially in a market that favors buyers. However, most experienced property flippers target properties in rapidly growing areas, so they can reap the benefits of a month or two of property value increases to add to their eventual profit.
This isn’t a guarantee, of course. The property needs to be listed appropriately and priced perfectly to attract the right types of bids—and not be stuck in market purgatory indefinitely with no one to buy. If you end up holding the property too long, it could cut into your profits.
Why Property Flipping Is So Hard
It’s easy to see why property flipping is so hard; it requires both lots of skill and lots of luck. It’s borderline impossible for someone inexperienced with property investing to flip homes successfully, at least without the aid of a professional advisor. Even if you do have years of home buying and selling experience, you need to wait for the perfect opportunity—and then compete with other home flippers like you to secure the deal.
How Rental Properties Are More Consistent
If you’re interested in investing in property, but house flipping sounds too complicated, you might consider managing a rental property. Here, the idea is to buy a valuable property in a high-growth area, then occupy the property with tenants so you can collect income, ideally in excess of your expenses. There are several advantages to this over flipping houses:
- Property value growth over time. Investing in rental property is usually a longer-term play than investing in a home for the purpose of flipping. Rather than spending a few weeks to a few months fixing up the property and getting ready for a resale, you can hold the property for years. This is advantageous even in slow-growth markets, because the accumulated growth in value will eventually result in an impressive ROI.
- Immediate cash flow. With rental properties, as soon as you get a tenant in the building, you’ll be able to start collecting revenue, which can start offsetting your costs immediately. Screening and accepting a tenant can be difficult and time consuming, but once you have someone in the property, your financial risk is lowered. You won’t have to wait until the home is sold to start seeing the financial benefits, and in many cases, you’ll even see a monthly profit.
- Wider buying options. The criteria for what makes a “good” rental property are much more forgiving than the criteria for what makes a “good” property to flip. In other words, if you’re interested in buying rental property, you’ll have far more opportunities and less competition than if you’re trying to find the perfect property to flip.
- Friendliness to newcomers. Becoming a successful property investor does take time and experience, but in general, rental property investing is much friendlier and more forgiving to newcomers than property flipping. You’ll be exposed to less financial risk with every transaction, and you’ll have a wider margin of error for your profitability calculations. It’s still a good idea to work with more experienced advisors, but your personal risks will still be lower.
If you’re interested in buying a property, whether you’re interested in generating rental income or turning the property around for a profit, you’ll need the help of a skilled buying agent. If you’re trying to get your rental property in good shape to attract more tenants, you’ll also want the help of a property management firm. Either way, you can contact Green Residential for more information; we have buying agents, property managers, and other experts to help you make the best possible decisions.