It is important for any investor to be well aware the pros and cons of flipping houses before deciding whether or not it’s a strategy they want to pursue. Flipping properties is a very risky endeavor and as isthe case with most risky investments, the rewards can be great if everything goes according to plan. Before deciding to flip a property, you need to be sure that if things don’t work out that you will be able to take a loss on the project and be able to dust yourself off and move forward. TV programs making flipping homes look incredibly easy but the fact is that it is very challenging and is a risky endeavor. Below are some of the pros and cons to flipping homes and are details you should consider.
Pros of Flipping a Property:
Flipping a property can be extremely financially rewarding and it may be one of the best investments you could ever make. Below are some of the rewards you can look forward to when you flip a property.
- Quick Profit– The main intention of folks that flip homes is to make money quickly. If done correctly, a flip can provide very large profits, often ranging from $20k to $80k if successful. Profit will depend on area, budget, purchase price, etc. These returns can be achieved in a very short period of time, hopefully in less than 6 months.
- Construction Knowledge– Through repairing, renovating or remodeling a property, you will gain insight into aspects of construction. You will start to understand the costs of materials and various plumbing and electrical repairs. You will learn how to spot big issues such as structural problems and environmental hazards like mold and asbestos. This construction experience will help you make more money on future projects because you’ll know how to best budget a deal.
- Be your own Boss– One of the biggest pros is working for yourself and being in that management position.You have a team and others you work with of course, but at the end of the day you call the shots. Even though this is a business that requires a lot of work in order to see a return, there’s some satisfaction at the end of the day involved in knowing that you’re working for yourself and not making someone else wealthy by chasing their dreams. That feeling of satisfaction is one that you should hang onto when things get difficult.
- Real Estate Knowledge– Flipping a property will help increase your knowledge of the real estate industry in general. If you are buying your first short sale and foreclosure, you will learn the ins and outs of the process as well as various financing and refinancing options available to you.
- Broaden your Network-While undertaking a flip, you will create many new contacts in the industry, including Realtors, attorneys, contractors, building inspectors, insurance brokers, and other investors. These contacts can come in handy for a future investment, so you must always remain professional during your dealings with these individuals.
- Accomplishment and Creativity– Knowing that you have the vision to create value in a home is a source of great personal pride, along with the ability to achieve financial returns that are much greater to most other investments available to folks. Once you have one successful flip the process becomes much less daunting and you begin to understand what it takes to make a profit instead of taking a loss.
Cons of Flipping a Property
Along with the advantages of flipping a property, there are also drawbacks involved. Below are some of the downsides that can come with flipping a property. Remember, any investment with great potential will usually also come with great risk.
- Losing Money – The main problem with flipping a property is when a flip becomes a flop and you lose money. There are many factors which can contribute to this loss, some of which are listed below
- Unanticipated Expenses– This includes everything from building permits, contractor delays, material delays, permit delays, and renovations and materials you had not budgeted for. These expenses quickly add up and eat into any potential profit. In a soft market, you may also be forced to offer seller concessions to your buyer, and these concessions can also eat into your bottom line.
- Over Committing yourself– Over estimating your abilities will likely cause issues with your flip, for instance many people believe they can handle more of the improvement work then what they actually can, this not only delays the project but will throw off your budget as well. You need to be realistic when it comes to the budget, time frame for completion and what improvement work you can do yourself.
- Losing Your Profit to Taxes– This may be something you learn the hard way come April 15. Any profit that you make on an investment property may be subject to capital gains taxes, and depending on whether you owned the property for less than or more than one year, your capital gains rate will vary. However, you will also have the ability to do a 1031 exchange and postpone the taxes owed to a future point in time.
- Holding Costs– Even after renovations are completed on the property, you will have to pay the mortgage (assuming you have a mortgage on the property), taxes and insurance on the property for as long as you own it. These costs take a large chunk out of the budget, and the longer you own the property, the more money you are losing. You will also have additional maintenance costs as the yard will still need to be cleaned, the grass will need to be cut, and depending on where you live, the snow may need to be plowed.
- Difficulty Selling– You are losing money every day you are unable to find a buyer for your property. Because you must pay the holding costs on the property, the longer it takes to find a buyer, the more money you are losing. In addition, the longer the property sits on the market, the greater the likelihood that you will have to reduce the price, which will eat into any anticipated profit.
- Stress– Stress is also a main drawback of a real estate flip. From finding the right property, properly anticipating the costs involved, dealing with contractors, Realtors and the town, trying to meet your deadlines and finding a potential buyer, stress is your constant companion when flipping a property.
Knowing the pros and cons of a flip will help you make an informed investment decision. The positives and negatives listed above should give you a good idea of what comes along with flipping a property. If you do your due diligence, you will be just fine as you will know which homes to pursue and which ones to pass on. Do not get discouraged if you are having a difficult time finding a property, most successful investors will turn down 95% of the deals that come across their desk. The keys to this business are to know what you are looking for, be certain that your numbers work, to never chase a deal and to be patient. Happy Investing.