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When it comes to real estate investing, the Fix and Flip strategy is a tried and true method for turning a profit. But with more and more people investing in the industry every year, it’s important to know what makes a good decision and what doesn’t. This is especially true if you’re new to the game and lack the experience that an established investor may have. And even if you are experienced, it’s always important to look out for some common pitfalls. In this article, we’re going to go over 4 things to avoid when investing in your next Fix and Flip property.
#1: Spending too much on renovation
The first step of the Fix and Flip strategy is to fix, and it’s easy to go overboard on renovations if you don’t know what you’re doing. You could get carried away with a certain look or focus too much attention on one room and before you know it, you’re over budget and cutting into your profit margin. It’s important to realize that you won’t be living in the property that you’re renovating, meaning you shouldn’t try to tailor everything to your personal tastes. Instead, focus on cost-effective upgrades with broad appeal that will maximize the ARV (After Repair Value) of the home. It’s also important to remember that time is money, so you’ll need to be mindful of your timeline when performing renovations as well.
#2: Spending too much on the purchase of a property
Calculating the profit of your Fix and Flip is usually just a simple matter of subtracting the purchase price, renovations, and fees from the final sale price of the property. Therefore, most people focus on the final sale price or ARV of the home. However, it’s equally or maybe even more important to get a good deal on the purchase price of a property, and here’s why: you can’t be certain of the sale price of a property until you actually receive an offer for it. If you end up spending more than expected on renovations (which can easily happen if you don’t follow #1), and then receive offers lower than you expected, you could be eliminating most of the profit from the deal. The purchase price won’t change after you’ve bought the property, so you can see why it’s important to get a good deal on your initial purchase.
If you want to help ensure a flip will be profitable, a good method is to use the 70% rule. Take 70% of the market price for homes in a specific area, subtract estimated renovation costs, and then use that number as the maximum offer price for a purchase. For example, let’s say the average market price for homes in a certain neighborhood is $300,000. Then 70% of that would be $210,000. Now let’s say you find a home in this neighborhood that will need about $30,000 in renovations. $210,000 - $30,000 = $180,000, which means you shouldn’t offer more than $180,000 on that property for a Fix and Flip. This rule is useful because it helps create a large enough profit margin for any given property.
#3: Bad locations
Location is always an important factor when buying or selling a home, and this is even more true when flipping properties. A good location can be the difference between a very profitable deal and a barely profitable one. If it’s a neighborhood that people don’t want to live in, you may have to lower the final sale price until a potential buyer appears. Be sure to do your due diligence when researching a home, and that means looking into the surrounding neighborhood, how safe it is, and whether people like living there in general. You should also look at the average value of homes in the surrounding area, to make sure your property isn’t too over or underpriced.
#4: Delays from inexperience
Even if you’re an experienced home investor, you likely won’t have all the skills necessary to facilitate a house flip. You may be tempted to manage things like the budget or renovations yourself to save on costs. However, this opens you up to errors, especially if you don’t have experience with these tasks. And even simple mistakes can be very costly or time-consuming when you’re flipping a house. Instead, you should look to hire established contractors, accountants, and real estate agents to assist you with the process. This can also save you a lot of time, which means you can close the deal faster and move on to your next investment.
RCN Capital
RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. RCN Capital also has flexible and competitive loan options available. Connect with us today to discuss your next fix & flip investment.