Getting into real estate investing is an exciting and sometimes exhausting enterprise. Novice investors dream of quick profits by buying, repairing, and flipping houses. Many newcomers to real estate investing make the same kinds of mistakes. Here are several common mistakes made when flipping a home, to help you get into, and stay in, the real estate investing business.
Paying Too Much and Going Over Budget
New investors automatically and prematurely reduce their profits by paying too much for a home they intend to flip. Before you purchase a home to fix and flip, you must do some math. The common formula for house flippers is the 70 percent rule—never pay more than 70 percent of the anticipated after-repair-value (ARV) minus the repair costs. So if you think the house you want to buy will sell for 200,000, then you shouldn’t pay more than $110,000 for the home: $200,000 x .7 = $140,000 – $30,000 = $110,000.
The 70 percent rule obviously requires investors to know the cost of repairs before they make an offer on the house. Set a budget and stick to it. You’re not building your dream house. Fancy, high-end finishes in a middle-income area with small ranch-style houses will make your remodel stick out like a sore, expensive thumb. The idea is to bring the home up to code, install basic new appliances, ensure that plumbing, HVAC, and electric systems are in safe working order, and give the place a new coat of paint. The house should be bright, clean, and livable—but it doesn’t have to be luxurious.
Dodging Permits and Failing to Get Insurance
Both of these mistakes could ruin you in the future. Getting a building permit may seem like a bureaucratic hassle, but if your buyer finds defects and discovers you did the work off-permit, you’re looking at a costly lawsuit. Property insurance is a no-brainer to protect against mishaps that often happen during renovations. How many times have you heard about a fire in a house undergoing remodeling, caused by old or faulty wiring or someone forgetting to unplug a power tool? Protecting your investment with insurance is a must.
No Plan B
New house flippers sometimes underestimate the time it takes to fix up and sell a home and fail to anticipate market fluctuations. What will happen if the house doesn’t sell as quickly as you thought it would? Are you prepared to become a landlord and rent out the house until you can sell it? If you haven’t a clue how to screen tenants or what provisions should be included in a lease, you should research property management companies that could help you if your quick flip turns into a leisurely lease. Perhaps you were hoping to flip a vacation home on Lake Lanier in Georgia, but it appears you’ll need to hold on and rent it to visitors instead. An experienced Cumming home property management company like Excalibur Homes can help you. The same is true for homes within the city limits of Atlanta. Avoid common mistakes made when flipping a home by consulting with a knowledgeable real estate agent or property manager to help you gain a better perspective on the market you’re entering.