With the typical home selling in just 73 days, flipping real estate has become a seriously lucrative enterprise in recent years.
If you’re thinking about getting into the trade, you’ll find that both commercial and residential properties follow similar rules. If you want to make money flipping houses or buildings, you need to know some basic strategies.
Most real estate flippers struggle to make their first couple of sales.
Follow these 6 tips if you want to ensure that your first few properties flip quickly and lead to even more lucrative deals.
1. Buy Low
Buying a property at a high retail price is the best way to get stuck with something that will be more trouble than its worth. If you’re buying an expensive property and then dumping $30,000 in repairs into it, you’re not going to make a profit. Unless you get the property for dirt cheap, you need to find a place that you only need to make inexpensive repairs on.
Value can be added cheaply with a few coats of paint. If you have to make major renovations to kitchens or bathrooms, you could easily rack up a bill in the tens of thousands.
When you’re property hunting find a place that’s below market rate for a profitable flip. Your money is essentially made through the purchase price, not through the work you put into it.
2. You Need Money On Hand
If you want to get an affordable rate on your loan, you’re going to need considerable cash up front. Most lenders will ask you to have around 25% of the asking price before they give you a low rate.
A short-term mortgage lender, who won’t care about your credit but moreso the value of the property, will charge 10 to 15% interest.
While you might find a lender in your region who is invested in the market and sees the potential value in forming a relationship, those lenders are few and far between. More than likely, you’ll need to show that you either have a pattern of successful flips or cash to spend so be ready to prove your worth.
3. You Need To Know The Costs
When you’re going to be making repairs and renovations to a property, you’ll need to be able to assess costs quickly. You should be able to run through a building, looking quickly at its current state and get to know what’s needed. Skipping on the estimation will leave you stuck with a property that costs more than you can afford at some point.
When the renovations start adding up, you’ll be cutting into how much you’ll make in the end.
Always factor in extra labor as well as supplies and equipment. Know that you’ll be paying taxes and insurance on top of mortgage payments. When it’s time to flip the building, you’ll have to worry about commission and marketing costs.
Skipping any of these costs is a near impossibility unless you’ve got the time and know-how to do it yourself. Don’t take on any tasks that you don’t feel 100% comfortable with. You’ll end up stuck in the mud when you should be moving on to your next property.
4. Hire The Best Contractors
Once you start flipping properties, you need to start building a relationship with a good network of contractors. Even if you’re experienced in roofing, plumbing, or electrical work, it’s unlikely that you’re the best at all three.
Look at more than price when you’re calling up contractors. You need to have someone who you have a strong rapport with. When searching for contractors, ask for references and be open and honest with the people you call.
While you could hire just about anyone for simple, straightforward projects, you need to have someone who is flexible enough to handle complex projects. At some point, your plumbing work will encounter a snag, and you’ll need someone who is ready to pivot on a moment’s notice.
5. Know The Neighborhoods
When you get into residential or commercial real estate flipping, you’ll need to start by doing lots of research on the area where you’re investing in. Your first projects will need to be inexpensive if you want to get off to a good start. At the same time, you need to invest in a neighborhood that is growing, with properties selling quickly.
Get to know which neighborhoods are a safe bet when you’re getting into flipping by watching crime statistics. If there’s a perception that a particular community is unsafe, you might not want to invest there. A low priced property might be surrounded by properties that have seen a recent rise in crime.
Also get to know if people are fleeing an area for another neighborhood. Neighborhoods don’t stay hot forever. While real estate rarely depreciates, climbs will eventually plateau.
6. Don’t Over-Improve
There’s such a thing as making too many improvements to a property. You need to have a strong understanding of the market before you start making major changes to a property.
If there aren’t a lot of hardwood floors and marble countertops in an area, being the only one around could be a selling point. But if you make your building worth $500,000 in an area where the properties are a fraction of that, you’ll be starting at a loss.
Make improvements relative to what the neighborhood is calling for. Don’t trick it out with the latest eco-friendly technology unless that’s the direction things have taken in your area.
Flipping Real Estate Takes Strategy and Planning
The key to flipping real estate in any market is to take the time to understand what’s hot, what’s sold in the past, and where the area is heading. Real estate markets vary from one neighborhood to the next, based on schools, commercial activity, and even how many restaurants there are. The subtle nuances of real estate flipping will come to you with experience.
If you want to ensure that your next property flips faster than the last, be sure to follow our guide to sellability.