There are more and more investors getting into the game of home flipping these days. Why? Because with interest rates increasing, rental investments make less financial sense while flipping still offers solid returns for investors. It can also be a great way for a newbie investor to get into the world of real estate and understand all the different parts of the deal process. Home flipping is indeed one of the best ways to make a quick return in real estate and when done correctly can be a very lucrative investment strategy. In this piece, we want to cover some of the most common pitfalls in fix and flip investing, and the paths you can take to avoid these pitfalls and still have a profitable investment.
The Research and Planning Stage
In the world of real estate, there is no substitute for due diligence. Market research and planning are what really make or break a deal before any investment decision are made. By making use of modern data aggregators, you can analyze trends in a target market to get a better understanding of supply and demand. Then you can use this information to identify specific areas that would make for a profitable investment.
Along with market research, carefully planning your deal out will help your project stay on track and under budget. It starts with finding accurate numbers for your acquisition and renovation costs, which you can then use to determine the home’s After-Repair Value (ARV) and ROI for the project. Afterwards, you should create a detailed business plan that outlines what you plan to do with the project. This plan will help you stay on schedule and can also be beneficial when it comes to acquiring financing.
There is a certain level of financial preparedness that will be needed to successfully complete a home renovation project. Along with setting aside funds for a loan down payment, there are also other costs to consider. Fox fix and flip investing, you will need create a budget for renovations that covers material and labor expenses, unless you secure a loan that also covers renovation costs. On top of this, you will need to have a contingency budget to cover unexpected costs that may arise throughout the project. The rule of thumb is about 10% of the project’s total expenses.
Selecting A Good Property
The next most important thing is to make sure you choose the right property to flip. Ideally, your will be looking for a lower-cost or neglected property in a great neighborhood. The nicer the area it’s in, the more valuable the property will be once it’s renovated. Your goal is to make the home grow in value so it can match the value of surrounding properties. If an area has good access to amenities like restaurants, entertainment, or shopping, it may be worth more. Developments in a particular area can eventually raise the price of nearby properties.
One thing to make note of is to avoid properties that may have major issues that are hidden upon first glance. Certain repairs, like structural damage or flooding, are costly and will eliminate your profit margins. Be sure to hire a property inspector to uncover these issues and determine a property’s real value before making a purchase.
Choosing Effective Renovations
The one thing you want to focus on when it comes to the renovation stage is value. Make sure your renovations add the most resale value to the home while costing you the least amount. Avoid over improving by focusing on key areas of the home. Updates to the kitchen, bathrooms, and living room are great since these rooms see a lot of traffic, and updates to the exterior can also have a big impact. Regardless, be sure you have vetted you contractor to ensure quality work, and stay involved in the project to ensure that things go smoothly.
Marketing and Selling the Property
By planning and following an effective marketing strategy, you can extract the most value from the sale of the property. There are a few ways to maximize resale value, and one of them is staging. Staging refers to furnishing a property (and then capturing it in your listing) in such a way that it helps potential buyers picture themselves in a home. When you combine staging with a detailed listing, it can attract more attention and lead to a higher sale price. You can also utilize offline channels, like open houses, to help drum up attention.
One thing to note is to be sure that you’re priced competitively in the market. Market values tend to fluctuate, so stay on top of current trends by looking at sales for comparable properties. You will also want to adjust pricing quickly so you can avoid paying more in monthly holding costs.
There are some legal aspects of fix and flip investing to be aware of before jumping into a project. First, know that most renovations will have to be approved by the local jurisdiction, which means building permits and following code. You may also want to work with an attorney or other legal professional to handle contract review for work throughout the renovation stage. Finally, consider hiring an accountant or another tax professional as they can help you maximize business deductions and keep as much of your return as possible.
The easiest way to save on your next investment is to obtain financing from a real estate lender that can get you the best leverages and rates. 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 has competitive loan options available if you are looking to finance a home flip. Connect with us today to discuss your next real estate investment.