Common Mistakes Beginner Home Flippers Make
Flipping homes can be a great primary or secondary source of income, but it’s not without significant risks. If you’re planning to enter into this area of real estate investing, get acquainted with the common mistakes beginner home flippers make to help reduce your risk. Above all, understand that it takes some homework and effort to become a successful home flipper, and there will be a learning curve. It may look simple enough to buy a property, fix it up a bit, put in some upgrades, and sell it again for an easy profit, but making the mistakes beginner home flippers make is a sure way to cut down on those profits—and even negate them altogether.
This is a common mistake that can lead to not making any profits or even losing money on the flip. A good point of reference, though by no means a hard and fast rule, is the 70% rule. If you intend to flip a home, spend less than 70% of its projected after-repair value, minus repairs. For example, if the home is projected to be worth $400,000 after your fixes and upgrades, and your contractor estimates that it will cost you $20,000 to get it there, you don’t want to spend more than $266,000 buying the property (that’s 70% of $380,000, or $400,000 minus $20,000).
Along with the previous entry, this is one of the most common and most detrimental mistakes beginner home flippers make. It’s so important to choose a reliable contractor who can give you an accurate cost and time estimate. Even still, always count on the work costing more than you expect. And it’s smart to get a few estimates. Also, on a related note, many new home flippers overestimate their DIY abilities. If you intend to tackle work yourself, be sure that you really know how to do it right and that you have the time for it.
Of course, not only do you need an accurate idea of how much you’ll spend fixing up the home, you also need to spend that money on things that provide an ROI. Don’t make assumptions. You’ll never recoup the $40,000 you spent adding an in-ground pool, for example. Bathroom and kitchen upgrades, on the other hand, are generally considered some of the best for increasing home value.
Some changes don’t let you recoup your investment, and others just make it much harder to sell the home. Highly stylized design elements and landscaping are generally off-putting to prospective buyers. In fact, if they remain interested, they’ll often be calculating what they’ll have to spend to undo this work. Stick to classic, relatively simple looks.
A home is more than just the building and its property; it’s also the neighborhood and surrounding area. For example, if it’s a family home, the quality of the school district matters. There’s a lot more to look at in the vicinity than just comparable home sale prices. For more about this, take a look at these factors when evaluating the location for a home flip.
When you’re just starting out, stick to homes that mostly need cosmetic changes and minimal rehabilitation. Buying an old home that needs extensive electrical or plumbing work or a complete gutting, and having no experience with that type of project, is just as detrimental as not having enough experience. It's best to start small and work your way up to more complex projects.
Another common mistake for new home flippers is not having enough cash on hand to cover unexpected expenses. Even with a detailed budget and accurate cost estimates, unexpected expenses can arise during a flip. It’s important to have a cushion of cash to cover those expenses and not have to go into debt.
Before you even start a flip, you need to have a solid exit strategy in place. Having a plan on how to sell the property and at what price will help you to make better decisions throughout the flipping process. Without a solid exit strategy, you might end up with a property you can’t sell.
One of the most important things to understand when flipping homes is the local market. Understanding the local market conditions, including the current housing market trends and the target buyer demographics will help you to make better decisions about the properties you flip and how you flip them.
Flipping homes is not a one-man show. You need to have the right team in place to help you. From real estate agents, contractors, and engineers to accountants and attorneys, having the right team in place will help you to avoid mistakes and ensure your flipping success.
Flipping homes can be a great source of income, but it's not without significant risks. Understanding the common mistakes first-time home flippers make is the key to reducing those risks. By paying attention to things such as the local market conditions, having a solid exit strategy, and having the right team in place, you can minimize the chances of making mistakes and increase your chances of success. As with any business, do your homework and be aware of the common pitfalls, and you'll be well on your way to a profitable flipping career.
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