Pros and Cons of Flipping a Property
It can be profitable to purchase a house to renovate and resell it on the market, but this strategy is not without risk. Like any other rewarding activity, making the right choices and exercising caution will require preparation and information. Using real estate investment knowledge to your advantage and forming essential alliances with reputable lenders will undoubtedly have a positive effect.
There are only so many optimal ways to invest in real estate. Therefore, it is difficult to say whether flipping, purchasing, or holding are the better options. It would help if you used a clear strategic plan that considered your overall aims to decide which strategy to use instead of the other. Here are some pros and cons to consider before investing in house flipping to avoid errors.
Pros of Flipping a Property
- Profit Potential
The ability of some homes to be swiftly patched up and sold for a profit, as opposed to others, is a definite benefit of purchasing real estate to fix and sell. For the typical residential home, the profit margin of a successful fix-and-flip can range from $30,000 to $70,000, which is a substantial gain considering the potential amount of work needed. Another advantage is completing a turnaround in less than 90 days while making a 20% margin on the property. The more renovation work a home needs, the more potential it usually has, but it also takes longer to restore.
Because they are typically priced far below market value and require renovations, fixer-uppers appeal to investors looking for cheaper properties. For investors who want to enter the rental property market but cannot afford move-in-ready homes or those simply looking for a great price, a property that requires remodeling is usually a superb option. Discuss with a private hard money lender if you plan to fix and flip a project.
However, you can budget for the cost of the home repairs and upgrades over time. As a result, more investors can access these properties due to the smaller initial financial outlay, saving the investor money.
- Flexibility Based On Your Needs
As a real estate investor, you can scour the market to find the flip house of your dreams while considering several pre-selected factors like location, sale price, financing, and property type. In addition, knowing that properties that need extensive rehab work are frequently priced much below their total potential market value allows you to shop around for the best prices.
Additionally, choosing a house that requires a modest cash down payment for purchase will mean reduced upfront costs. The best part about flipping houses is that, before starting a fix-and-flip, you get to decide on all of these elements.
Cons of Flipping a Property
Don’t expect to work part-time at efficiently fixing and flipping properties; it takes a full-time commitment. You’ll need to invest the time to establish crucial connections with lenders and contractors. You’ll also need to proactively look for new properties and oversee the project’s completion. Remember that you will be responsible for paying any unforeseen project expenses, so be sure your team includes knowledgeable individuals to whom you may turn for guidance when necessary.
- Costly Home Improvement
Flipping a property will cost you more in the long run than just buying a furnished home. It would help if you did an extensive study before deciding on a house that needs work. This entails making a list of the necessary upgrades and repairs, investigating the associated costs, and contrasting those costs with the price of a house ready for immediate occupancy.
Buying a home that requires work could cost you more in the long run than your initial savings, even though this is uncommon. Fixer-uppers let you be creative, save money, and maintain a slight edge in the rental property market regarding positive income flow. However, they present plenty of additional dangers and are challenging to manage.
There is no getting around the fact that flipping houses requires a lot of effort and stress. Everything goes differently than planned, and things always take longer than intended. There will be errors on your part. Deliveries are bound to need to be more accurate. There will be deadlines that you miss. However, experience only comes with experience; thus, the more experience you have, the less likely you are to veer off track.
How to Calculate the Potential Profit of a Flipped Property
- Select the price you want to sell at
It’s a good idea to start by determining the price you intend to sell the finished project for when considering an investment in a restoration project. If you start with the end in mind, you can compare prices and ensure that the area and market can easily support that price.
- Costs associated with rehabilitation
The hardest part of the calculation is this step, but knowing how much it will cost to renovate the area will allow you to gauge whether there is enough room for error in your calculations to justify looking into the property. A good guideline for repair costs is $50 per square foot if you can’t visit the location or would like to utilize more exact numbers.
- Figure out the purchase price
The purchase price can be ambiguous if the property is up for foreclosure or will soon be sold at auction. As a result, you should be clear on the purchase price you are happy with. It is best to have less than that. If a house is for sale, you should also know the price range you would accept and negotiate for. Generally, an expected purchase price should be 70% of your anticipated sales price minus repairs.
For the investor prepared to devote the necessary time, money, and effort to ensure the success of their project, flipping a property can be profitable and offer many advantages. But on the other hand, there are drawbacks to accepting them that may discourage many investors from flipping houses.
These projects might be riskier, more challenging to budget, and can quickly accumulate unanticipated expenses. Of course, not all home flips are profitable. Still, the ones that provide the investor with significant earnings quickly teach them helpful tips and tactics for future flip projects and expand the investor’s network of other real estate professionals.