Watching HGTV inspires property owners and investors across the nation. It’s fun to watch how you can completely transform a house in a matter of minutes (or so it seems). House flipping is how many real estate investors got their start before they went on to become millionaires. What you don’t see in these 30-minute slots is just how calculated and precise you have to be in order to make a profit house flipping. House flipping can be a dream come true, or a nightmare, depending on who you ask.
In order to make the most of your flip, you need to avoid these mistakes!
Mistake 1: You Don’t Know Your Budget
“It costs what it costs” and “You gotta spend money to make money” are the most dangerous words a house flipper can say. To make the most of your flip, you need to know what your profits, budgets, and fundings are before you even go look at a possible flip.
“The most dangerous thing a first-time house flipper can do is walk into a property without knowing their ROI or ARV. These numbers are crucial for setting a budget, getting funded, and making money while house flipping.”
–Loren Howard, Prime Plus Mortgages, Scottsdale Hard Money Loans.
ARV, or After Repair Value, is what hard money lenders, house flippers, and all kinds of real estate investors use to understand how much a home will sell for after the repairs are complete.
Calculating your After Repair Value is the first step to understand how to start making money with real estate investing. Here’s the formula:
ARV = (Property Purchase Price) + (Value of Renovations)
To determine the current property value, house flippers take the following:
- Location (neighborhood, accessibility, proximity to amenities, etc)
- Lot (size, corner or interior, shape, slope, terrain, roads available, etc)
- Structure (size, number of stories, type, style, etc)
Using these factors, and the current listing price, you can determine the after repair value of the property. This is useful to see what your estimated profit will be and if the repairs will add value to a home or not.
ROI, or Return on Interest, is knowing how much of a return you will receive on your flip. You can use your Return on Interest to learn just how much you can profit from a property. Here’s the formula for calculating your Return on Interest:
ROI = (Rate of Investment) / (Cost of the Investment)
So you could easily take the purchase price of a property, with repairs, and divide by the estimated ARV.
By knowing your returns and estimated profits, you can easily set a budget, and know if a property needs too many new repairs and when to walk away.
You can learn more about some house flipping strategies here!
Mistake 2: Bad Location
The cheapest houses may be a diamond in the rough or may be impossible to sell.
Location is one of the top factors for selling a home, and if your flip is in a bad neighborhood or nearly inaccessible from traffic, it may be impossible to sell. Keep an eye out for break-ins and thefts, a heavy crime area will be extremely hard to sell. Zillow has a great tool for seeing the top crimes in your neighborhood.
A safe neighborhood should have the following:
- Street Signs
- Posted Speed Limits or Speed Bumps
- Sidewalks
- Street Lights
- Curb Appeal
- Well Maintained Homes and Yards
Secondary to a safe neighborhood, having a home within easy driving distance of potential buyers’ favorite places will also help you sell your property. When house flipping, make sure you have easy access to these amenities:
- Fast Food
- Grocery Stores
- Gyms
- Parks
- Restaurants
- Highways
- Business Parks
- Schools
- Childcare
Roads should be in good condition, with easy access to freeways and main service drives. Short commutes to schools, work, daycare, and other amenities will help you sell faster when house flipping.
These great location perks will make listing easy, and with great accessibility, your flip will sell fast.
Related: The Best Cities to Flip Houses and Make a Profit in 2019
Mistake 3: Too Many Large Repairs
Everyone expects to make repairs, but knowing what repairs to avoid is a great way to save yourself from a flip gone wrong. You should expect to complete a kitchen rehab, paint, and new windows, possibly a roof! However, these red flag repairs should be avoided at all costs!
- Foundation Issues
- Water Damage
- Mold
- Plumbing
- Electrical and Gas Lines
- Pools
Foundational issues are next to impossible to fix without tearing the whole flip apart and they don’t add much value to the home. Water and mold are scary to possible property buyers. They may not believe you when you say it is taken care of. The lingering effects of water damage and mold may take years to surface.
Pools are great to have, and do add value to an investment property, but require a lot of maintenance, and are very expensive to put in.
Electrical and gas issues require very expensive repairs and should only be done by professionals. First-time flippers should avoid houses in need of this specialized handiwork.
Summary:
Is it a flip or a flop? You can follow this house flipping infographic for more tips to find the perfect flip.
To make your house flipping experience a dream come true, avoid these first time house flipping mistakes.
- Do your homework and know your ARV and ROI.
- Bad Location: Is the neighborhood safe and accessible?
- Large Repairs: Make sure that there are no underlying issues that will make it impossible to flip your home.
Don’t forget to stage your flip to make more money!
What’s a house flipping mistake that we missed?
This article has been contributed by Catherine Way.
