Think a fix and flip investment is risky? Think again. Although some investments carry higher risk than others, purchasing a fix and flip may not be as risky as you think. How risky is a fix and flip investment? Continue reading to learn more about this type of investment and whether a fix and flip is right for you.
Common Risks Associated with Fix and Flips
Potential to Lose Money
Like any investment, the potential to lose money is always there. That’s where strategy comes into play; your potential to lose money is determined by how you set your strategy. A good investor knows when to sell as much as they know when to buy. Consider market conditions and other macroeconomic factors when making any investment decision.
Stress and Uncertainty
As you grow your real estate portfolio, you may find yourself dealing with more stress and uncertainty. When maneuvering the market, don’t overestimate your abilities. Always consider other factors when determining to purchase a purchase like zoning restrictions, property taxes, and homeowner association fees. Before going through with a property, consider all the uncertain expenses that may gather along the way.
For any experienced flipper, having an unclear timeline can be catastrophic to your strategy. When your timeline isn’t followed, your profits are cut as it will take longer to sell the property and you will be paying more in holding costs. All that capital that is tied up could be working towards your next investment. Avoid having an unclear timeline by hiring a trustworthy contractor to do the job. To determine if a contractor is trustworthy, ask around for referrals and examples of their past projects.
Don’t let the fix and flip shows fool you, there’s more that goes into the costs of repairing a home than you think. Think about the items you can’t see in your house; those structural costs can add up quickly. A good way to avoid hidden costs is to stick to a budget and get a property inspection, that way you’re prepared when hidden costs arise.
How to Reduce Risk
Create a Budget
Like any experienced real estate investor, you should always create and stick to a budget through out any project. Unexpected costs can arise quickly; once they start coming it seems like they just won’t stop. Plan ahead when investing into a fix and flip property, that way you have a budget to refer to as you tend to the process.
In our current market conditions, prices are constantly fluctuating for appliances and building materials. The supply chain restraints have been making it hard for investors to get their hands on a lot of the materials they order. It’s important to think ahead during times like these to avoid potentially huge setbacks in your project.
Get a Proper Valuation
The thing that determines your overall profits from your fix and flip will be the after-repair value of your property. Your ARV is important when determining your profit margin because this will give you an idea of how much of a return to expect after repairing it. In real estate, the 70% rule is popular among investors who fix and flip properties. This rule states that you should never invest more than 70% of your ARV into a property, minus expenses. Following the 70% rule will generate a healthy profit margin with any property you flip.
RCN Capital offers short-term and long-term financing options for real estate investors. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs. Connect with us today to discuss your next real estate investment.