Lives of most real estate investors are not exciting enough to become a story line for reality television series. House flippers are proud exemption of this rule, since there are several popular reality TV shows that follow their quest for profits. Of course, reality series like Flip This House, Flipping Vegas or Flip or Flop, aren’t always realistic as the name of their genre would implicate, but they still attract a lot of interest from people who would like to enter the flipping game. Since watching reality TV is definitely not the best way for investors to learn about this business practice, I decided to compose this short guide that will explain basic house flipping principles.
House Flipping Challenges
Most real estate agents agree that this practice is much harder than it looks on TV. House flippers need to factor in: time, effort, labor and money, all at once. Besides that, some of the major challenges of house flipping include:
- Finding a property with low enough price;
- Finding reliable and affordable contractors;
- Finding enough funds to finance the deal;
- Finding the right buyer, who is willing to pay the price that will cover all house flipper’s expenses and earn him/her a sizable amount of profit.
Amateur home flippers calculate only two major expenses for potential flip. These include the cost of buying a house and the price they will pay to contractors for its renovation. Of course, there are many other hidden expenses that you need to calculate in order to keep your business profitable. These include:
- Unexpected renovation costs- House plumbing may be rotten, or some additional walls need to be teared down;
- Cost of borrowed money- Interest and legal fees can be very high, especially if you finance your flip with mortgage loans;
- Holding costs- If you don’t sell your house immediately after renovation, you will need to pay maintenance, insurance and utility costs, as well as property taxes;
- Transaction costs– In most cases you will pay from 3 to 5% when you purchase a house and more than 10% when you sell it.
All of these costs need to be calculated together with purchase price, renovation costs and profits in order for you to determine a realistic price that will repay all the money and work you invested in the project. Without doing your math, you can invest lots of money and several months of work and end up flat-broke.
What else you should take into consideration?
Same as in regular real estate business, location is still the most important parameter for doing a successful flip. For that matter, investors need to study the market and determine what kind of properties are being sold in the neighborhood. Real estate agents are usually very successful in house flipping, because they have good connections with various authority figures, which enable them to get insider information from city government meetings.
Fast gentrification of residential areas across United States and current real estate bull market represent an ideal atmosphere for house flipping business, but only to flippers who are able to follow current property trends and conduct expert market analysis. For example who would have thought that Williamsburg, Brownsville and Bed-Stuy would become the trendiest New York City neighborhoods? Only the big real estate businesses, who have top industry experts in their teams.
Agents that are flipping houses on TV get significant profits from production companies and advertisers. They don’t need to worry whether the house they purchased has a rotten installation or a leaking roof, because their property sales and purchases are mostly theatric. House flipping definitely is a rewarding business, but only when you understand all processes and costs that are hidden behind a profitable flip.