For those looking to build a real estate portfolio, there can be an appeal to picking properties to keep in your portfolio for the long haul. However, you might also identify a few properties in areas where it would make sense to flip them, simply because your repairs and upgrades would force the property’s value upward.
The process can look fairly easy, especially with all the television shows focused on flipping properties in various markets. Today, plenty of homes are getting flipped. ATTOM Data Solutions reported that more than 200,000 properties in the U.S. were bought and resold within 2017. However, it can be so easy to make mistakes that end up costing you any potential profit.
When it comes to flipping properties, there are six pitfalls that you need to avoid in order to be successful.
Limit Your Financial Risk
Part of limiting your financial risk involves understanding the real estate market where the property is located. One of the reasons this benefits you is because you can avoid paying too much for your property before the flip even starts. The rule of thumb is to pay no more than 70% of the ARV (after repair value) for the property. It is also important to have an idea of what repairs are necessary.
Although you might know what repairs and upgrades need to be completed, the truth is that once you are inside the home, you may stumble across surprise problems. Therefore, part of limiting your financial risk includes having an emergency or contingency fund built into your repair budget.
Create a Budget and Stick to It
One of the biggest mistakes that flippers make is spending more than they planned, thus finding themselves out of money before they finish the project. Creating a budget for the renovations is key to keeping yourself on track regarding the money and keep you from being in a position that you can’t finish the property’s repairs and renovation.
Find the Right Financing
For many real estate investors, part of the journey of flipping is finding the financing to pay for the purchase of the property and any repairs. You might be planning for a quick flip, but delays or other issues could impact your ability to sell the property as quickly as you intended.
As part of your budget, you need to plan to cover debt payments, interest, and taxes. These are known as the holding costs. Therefore, you need to make sure that you have accounted for all the potential costs that could quickly eat up your budget.
You might also struggle to find a traditional financing option for the purchase of your property. Hard money lenders in San Diego could be a viable option. These hard money loans or private money loans provide a variety of benefits, especially when your time schedule is critical to your flipping business being profitable. Here are a few of those benefits:
- Application process is easy.
- Obtaining the funds is faster.
- Stronger financing makes your offer more appealing to buyers.
What Are Your Skills?
One of the ways that you can go over budget is assuming that you can do the work yourself and then finding that what is required is beyond your skill set. The real money in house flipping often comes from the sweat equity that you put into the project.
If your regular job is carpentry or contracting, then you likely have the skills to put in that sweat equity. On the other hand, if you don’t know a Phillips head screwdriver from a flat one, then you might find it harder to make a profit.
Not Having the Right Knowledge
Along with not having the skills, a lack of knowledge can also negatively impact your ability to pick the right property, determine the right repairs to make, and the laws that might impact the property. Plus, more experienced individuals may have been in this business for a long time, and if you are a rookie, then you might be unable to beat out those experienced individuals.
Additionally, you need the right knowledge of the market and neighborhood. If you purchase a property for $60,000 in a neighborhood where homes traditionally sell for $100,000, then you can’t expect to sell your home for $200,000. Pricing your home right means the difference between a quick sale and a house that sits on the market for much longer.
Knowledge also helps you to determine when to cut your losses and get out of a project before you end up losing more than you can afford to.
Not Having a Business Plan or Property Insurance
As you determine your holding costs for a project, do not forget property insurance. It can help you to recoup your losses if the property is significantly damaged due to fire or other disaster. A business plan is also part of the process. That will help you define the repairs you want to make, a price list, and a schedule to keep you on time and budget.
There are a variety of things to consider when you choose to start investing in a real estate flipping business. Finding a financing partner, such as a San Diego private money lender, can help you to grow your business effectively. They can also provide guidance to help you avoid the six pitfalls above. Contact us today to learn about the hard money financing that we offer.