House flipping is a popular real estate investment strategy because it works. Those that have found success at it make it look exceedingly easy. You buy a distressed property, perform a few quick fixes and sell it for a significant gain, right? Though it's true that there are many people making careers out of fix and flips, it is not as surefire a bet as is commonly thought. For every successful investor, there are many more who tried and failed at house flipping. We've taken the time to put together the most common reasons why people fail, and how you can overcome these obstacles as you start your fix and flip journey.
What is House Flipping?
Generally speaking, house flipping is when you purchase a real estate asset with the intent to sell it at a higher price point a short time later. This differs from other similar strategies such as buy-and-hold, BRRRR, or rentals because the majority of ROI is achieved through property improvements and inefficiencies in the market, rather than appreciation or rental income.
Investors will typically buy a distressed asset for a low price before investing in renovations and repairs that ultimately improve the value of the property. They will then sell it for the newly established price and realize the gains on their efforts. Though simple, this process has a number of potential pitfalls for inexperienced investors.
Lack of Capital
Real estate is expensive even at the lowest levels and there are costs associated with each step in the process. When you're just getting started, it's unlikely that you will have the available capital to get your project off the ground, so you will rely on other financing options. All loans will require some form of interest which will eat into your profit potential, and there are always associated closing costs or fees that will put you in the red before you even begin.
Common Financing Options
Hard Money Loans
Other People's Money (OPM)
Home Equity Line of Credit
Take the time to research what financing options may be available to you, as well as the pros and cons associated with each. This decision could have residual impacts further on in your projects such as the project horizon, the need for additional funds, and more.
You should have a clearly defined plan of action for your flip, including exactly what fixes are necessary, how long they will take, and how much they will cost. With these figures in hand, you can begin to make the decision on which form of financing makes the most sense. This will allow you to avoid dead-end projects that run out of capital and are unable to recoup their costs.
Lack of Time
We can tell you with confidence that your fix and flip project is going to take more time than you anticipate. Even if you ignore the time that goes into upfront research, your projects will be measured in months or years.
It can take quite a while to find and buy the property best suited for your skillset. Then, once you own the house, you still need to invest time into fixing it up. If this is your first fix and flip effort, you'll likely be doing this on a part-time basis on your nights and weekends which inherently limits the amount of time you have to begin with. You might elect to hire someone to do the work, but then you're on someone else's schedule. Managing contractors or employees requires effort as well. Ensuring that they arrive when they say they will and complete their work to a satisfactory level means that you often have to be on-site even if you aren't physically doing the labor. Once the work is done, you may need to have the repairs validated by an inspector to ensure they are code compliant.
When it comes time to sell the house, you have to make a decision to hire help all over again. While you might be able to market or show the home yourself, a professional real estate agent has experience and contacts that you may lack. They can make the process easier, but again, they will have different timing considerations than you do.
The whole time the clock is ticking and you are responsible for interest payments on your financing. If you do go past your initial term, you can incur additional fees while you refinance and the clock just starts over again. Time is money in the world of house flipping, and you need to have a tightly managed timeline to achieve success.
Lack of Skills
Many people who decide to get into home flipping have the requisite skillset already. They are electricians, plumbers, or carpenters that have the talent and time to take on projects of their own. It’s a great way to make side income in a way that aligns with their professional work. This is where the real money is made. Your ability to convert your own labor into margin on the sale of the property. They can avoid paying contractors to do the work and are able to knowledgeably assess the scope of work before the project begins.
If you don't have the ability to do the work yourself, you can still find success in the business, but your profit margins are going to be tested. Finding reliable, competitively priced labor will make or break the flip.
Lack of Knowledge
The real estate market values experience, which is hard-earned through many iterations of trial and error. You can consume every piece of educational material available, but you will inevitably run into unforeseen issues with your project. And it's not just the technical knowledge that you need either. While having a strong grasp of the math surrounding loan terms, taxation, and budgeting, it’s the knowledge that can only be earned through experience that is truly the most valuable. It’s the ability to look at a house and immediately recognize where your value is going to come from. A comprehensive understanding of your flip will ensure that you're extracting the maximum value from your efforts. More importantly, it will help you avoid mistakes that plague so many projects.
Lack of Patience
We understand that you're eager to start your fix and flip journey, but patience is absolutely essential in finding success. If you jump into the wrong property because of impatience, it could be a very expensive mistake. The absolute best of the best wait for the properties that will give them the most room for profit. Its exceedingly likely that that property for you isn't even on the market right now. Take your time in your research and if necessary, wait out a bad market before you pull the trigger on a home.
Even once you've acquired your asset, you still need to maintain patience through the repair and resale efforts. Rushing can mean a major sacrifice in quality that will hurt your bottom line. If you elect to hire contractors or realtors to get the job done faster, this will eat into your profits as well. Doing the work yourself will slow down the process, but it will result in a higher yield for your time.
These seem like contradictions
You could accurately point out that many of the suggestions made in this piece are at odds with one another. This is because the fix and flip is a tight-rope that needs to be deftly managed. At every turn, you need to weigh the costs and benefits associated with your decision. A little too far in either direction can hurt your chances of success. The ability to walk straight down the center will only come with experience, but knowing the considerations you need to navigate will set you on the right path.