Flipping houses is a term used when a real estate investor buys a property with the sole purpose of reselling it in the short-term to make a profit (“flip it”). Usually, it involves renovations to increase the value of the home, but it’s not mandatory.
If by any chance you happen to be a Discovery Home & Health regular, surely, you’ve seen lots of shows about this topic and you probably are an expert by now; if you are not, then this article will delve into the subject from an investment point of view. You should not take this as financial advice and always consult an expert before making any decisions.
The usual scenario we find in the flipping market is straight forward: an investor buys a property that needs some renovations, and after the work is done, he sells the house for a profit. Sounds good right? Well, it involves a little bit more than that.
The first step is to find a good property!
Obviously, you want a good location to begin with because no matter how good of a renovation you can pull-off, location is still of paramount importance in the real estate business, so keep this fact in mind when you are analyzing potential investments.
When assessing properties to flip, you want to buy a house with the “perfect amount of problems”, what does that mean?
Well, you don’t want to buy a turn-key house that doesn’t require any work because there would be no significant way for you to increase the value of the home, and without that, your profit margin would be cero. That being said, always be on the lookout for undervalued homes! You can stumble on a property that requires minimum to no work, listed below its value, but this is quite rare.
On the other hand, you don’t want to buy a house with too many problems. Remember that your profit lays in your ability to increase the value of the home with your renovations, but if you over-spend, it will eat your profits away. To be sure of what you are getting into, you should perform all the inspections possible before buying any property.
A rule that some investors use when looking for a house to flip, is the “70% rule”, which implies that you should pay 70% of the AVR (after renovation value) minus the estimated renovation costs, to turn a profit. This is not set in stone but is something to use as a reference in your assessments.
Renovations are key!
Now that we have established the sweet spot between too perfect and too damaged, it is time to talk about the other important factor about this investment, the renovations! First of all, if you are not an experienced contractor, get one! Time is money, the less time you spend on renovations, the faster you can list your property and get your money back.
You should try to stick to the renovation budget, because every penny you over-spend, is a penny less that will come out of your profit. Of course, the reality is hard to estimate, and some unexpected expenses may arise, that is why you need to be smart about what areas are the selling points in your property.
Usually, you should focus on maximizing profit, so increasing the square footage of the home would drive the value of your home off the roof, providing that it is possible to do so within the budget. Another aspect to take into consideration is the number of rooms! The more rooms the more you can get for your house, so creating a new bedroom or expanding a master suite, could be a smart choice.
As always this is something to be discussed with your real estate agent because they can give you the metrics regarding other properties in the neighborhood that could give you a competitive advantage.
Let’s talk about numbers and facts!
More than 40.000 single-family homes or condos in the US were flipped in the first quarter of 2019 which is an increase of nearly 2% compared to the year before.
The average gross profit was 60.000 USD, which translates into a 38.7% ROI (return on investment), down from a 48.6% ROI in the previous year.
You should know and take into consideration all the costs regarding your investment, such as financing expenses (loan payments), property taxes, insurance, 3% average realtor commission plus any other closing expenses and property maintenance (landscaping, utilities) to mention a few.
Bottom line, flipping houses comes down to finding a good property for the right price, sticking to the renovation budget (don’t forget the extra expenses), and having a good real estate agent to maximize your investment.
At the Coto Group, we are happy to provide you with expert advice from our team of real estate agents. With over 40 years of experience, we know the market like the palm of our hand.
If you are interested in booking a consult with one of our realtors, please feel free to contact us at the 305.422.9286 and don’t forget to follow us on our social media accounts for more quality content regarding real estate investing at @thecotogroup on Instagram, Twitter, Facebook, YouTube, and LinkedIn.