Real estate has always been a volatile speculative market, as evidenced by the 2008 housing collapse. After the subprime mortgage collapse, government regulators began to clamp down on housing loans and the requirements became more stringent. For first time home flippers, this meant that barriers to the market became more expensive and flipping houses was not quite as profitable.
With higher down payment requirements among lenders and skeptical home buyers, flipping houses will be challenging, but not impossible or unprofitable. Here, I’d like to discuss five tips for first time house-flippers to help you understand the market better and increase your profit margin.
Table of Contents
Plan for the Market
First, home flipping is a lot more expensive and challenging than flipping a car or scalping sold out tickets from Ticketmaster. With high interest loans and stringent broker requirements, the barriers are much higher and the market is also not as bullish as it once was a decade ago.
Do your research and have a plan in place that accounts for trends in the local market and outline exit strategies in case the value of your property doesn’t rise as you intended. Would renting be more profitable and do you have safeguards in place to break even in case you had to make a sale for lower than you expected?
Just with every business, you need to have a business plan in place. How many houses do you plan to flip a month and what’s the expected ROI? Do you have a plan in place for properties that sit on the market longer than others? It’s impossible to be risk averse in much of the real estate market, but try and pad your personal finances as much as possible.
Do your Research
The more research you pour into local housing markets the less surprises and obstacles you’ll encounter. Know thy neighborhood. If you’re selling a house, you’ll need to know all of the local pull factors, such as schools and parks, that entice people to buy properties.
What are the local foreclosure rates like and what do other similar houses in the area sell for? What are energy rates like and taxes in the area? You really need to do your homework on the market and the property.
There’s no reason your property should ever break any zoning or electrical codes. Know your property as much as the market to make the perfect pitch. Never purchase a property without doing the due diligence first.
Financing Options
After researching the market, you’ll need to come up with financing options that position you to make the biggest profit. First, find a mortgage lender who offers low interest rates and use a mortgage calculator to see what your expected costs will be.
In today’s climate, it’s nearly impossible to get an HSA loan with a low down payment without purchasing a property that’ll be your primary residence. Beyond this, interest on acquisition is not entirely deductible and eats away at your gross sale. Mitigating these costs is key to turning home flipping into a profitable venture.
Making a Profit
The appreciation on the value of your property depends on a number of factors. Primarily, timing and renovations will improve a property’s value the most. Finding a property at a low price in a hot market is possible, but more difficult to find. The next idea most home flippers have is making renovations, although this will come at a heavy cost.
It’s important to make renovations that adhere to trends in the general market. Not all renovations are equal and you need to take personal preferences out of the equation. Look at what improvements other homes in the area have made to mark up the value. Along with the down payment and financing, you’ll also have to cover renovation costs; make sure your wallet can handle it.
Hiring Professionals
I recommend hiring professionals unless you’re truly a DIY home repair pro. Beyond this, you’ll also have to have a thorough understanding of building codes.
Flipping houses can be more profitable with a trusted team around you. This includes: contractors for home repairs, a mortgage lender, real estate agents, and lawyers to draw up contracts for home sales.
Flipping houses is a still a profitable venture, but it requires a bit more research now. The saturation of the real estate market by newcomers and crony lenders contributed heavily to its collapse. Do your research and treat home flipping like any other business model to make a profit.
