There is no shortage of YouTube gurus and other svengalis offering a range of content aimed at young and ambitious entrepreneurs extolling the value of investing their money hook, line, and sinker into house flipping real estate, so it's no wonder that this industry is considered somewhat of a cash cow.
However, while this is undeniably true (as real estate investments can yield enormous profits), those who succeed are not those who blindly follow online advice but rather those who are willing to learn more and dig deeper into what is generally accepted by those in the know to be a decent mix of art and science.
This post will take а deep dive into this industry and explore several subjects surrounding this topic, ranging from finding the right property that meets whatever criteria you have set yourself to tackling the associated tax burdens.
Let's Start With The Basics: What Is House Flipping?
At its most basic, the term “house flipping” simply describes the action of purchasing something for a fair price determined using a number of factors, possibly performing repairs or renovations, and then reselling it for a profit.
In reality, it could refer to almost anything, from antiques to real estate, with the idea of making money from savvy investments that yield handsome profits. Nevertheless, the term is most typically associated with real estate, with buyers often searching for the best deals in order to resell at a later date.
Although it does not come without its fair share of risk, it is generally considered to be a highly profitable endeavor for those with the right mindset and ability to remove emotion from their decision-making process.
Moreover, there are numerous techniques for making your fortune that can include picking higher cost but higher potential return areas such as Summerland Key, FL, or narrowing their search down to areas of lower social status but with a high potential for future gentrification.
Almost all successful flippers will have taken time to hone their abilities in one or two styles, and those who have usually prosper.
How Can It Be So Fruitful For Those Who Have The Right Mentality?
The art of house flipping properties isn't for the fainthearted. In fact, it can be rife with issues that can overwhelm even the most agile investor. However, if you're dedicated and willing to learn, flipping can become much more than a side hustle – it can be your life's work and provide for you and your family by generating a healthy bank balance and other investment opportunities from the profits (always remember that diversification is key, but more on that later).
Once you have mastered the process, your income will essentially be generated through capital gains on a successful sale.
However, not all is as it seems and anyone who has had their fingers burned either by failing to scope out suitable properties or ignoring their tax burdens will tell you that like anything that could make you а lot of money, flipping isn't quite as simple as most gurus make it out to be.
Understanding The Industry In Order To Dominate It
So you want to become an effective house flipper and remain unfazed even after the ominous last sentence of the previous paragraph? Good for you, but before you go running to your friends and family or a loan facility with your cap in hand, consider a few things that will make the process more fruitful.
Research The Market To Identify Properties With The Greatest Potential
No successful business ever began without due diligence and a meticulous dedication to research. So, as you might imagine, that is where you must also start if you are to make а success of this opportunity. This stage requires an exploration of some of the primary things that will turn your initial investment into one that produces a return. In theory, three primary factors will influence the property you ultimately end up investing in, including:
- Location: You have likely heard the saying “location, location, location” before, but what does this actually mean? The area you invest in will arguably have the most significant impact on not only the price you pay but also the return you can expect to achieve. Most flippers search for the holy grail of cheap properties in up-and-coming areas that they can sell for a huge profit once the area finally becomes upscale.
- Demand: Demand is a qualifiable factor that requires plenty of research into the prospects of a specific location. For instance, if your research tells you that а large corporation is setting up headquarters somewhere, you might want to start checking out areas conducive to purchase and renovation, ready for all the high-flying executives that could flood the area.
- Property value trends: Contrary to demand, value trends are very much quantifiable. You should observe the direction of travel of home prices and try to choose locations with a steady upward trend. Although past performance does not guarantee future results, when combined with other factors, it can produce a high degree of certainty.
Have A Plan For Utilizing Leverage
Unless you have been blessed with a hefty trust fund that has matured nicely over the years, chances are high that you will need to look for leverage of some kind to fund your operation. Most people balk at the prospect of taking out loans, particularly these days in what has become a pretty hostile lending environment.
Nevertheless, houses don't come cheap, and unless you want to remain stuck with a dud you paid for out of your open pocket, you will need to find financing to be able to invest in properties with potential.
However, just as you would take your time to investigate potential homes, you should take your time to research possible financing options. In real estate, leverage typically comes in the form of a mortgage loan, but you have other options at your disposal if you want to avoid costly loan fees (or if your credit isn't up to snuff).
Have A Clear Understanding Of Current Market Trends
When it comes to taking real money and putting it into property, the news will be your best friend. You must constantly have your finger on the pulse of what's happening locally, regionally, nationally, and globally if you want to preserve your wealth. This includes knowing all of the real estate agents, like Williams & Goodwin, The Property People, as you'll likely need to work with them when finding properties.
- Local: In most cases, this is where you will begin your search for a quality property, so keeping an eye on local news is vital to stay abreast with events that could result in price fluctuations, both good and bad.
- Regional: In some cases, regional events can impact the price you pay or resell at. For instance, you will need to consider this if a state passes new legislation governing sales or real estate taxes and how it might impact your investment.
- National: The most obvious example of national news affecting your nascent flipping business is that of rising interest rates, which could make it more challenging to purchase and flip your properties.
- Global: Although the impact of international events might not be as apparent as the previous three, they can still have huge consequences. For instance, a global shortage of the materials required to make concrete could increase the cost of home construction, driving up the price of existing homes.
Flippers Must Pay Taxes And Keep Accurate Records Or Face Penalties
Nobody can escape the taxman, not least of which is the humble flipper! The IRS views flipping houses as a business, meaning that any profits made from flipping houses are subject to both federal and state taxes. Moreover, pretty much all countries outside of the few loud and proud tax havens like Monaco and Singapore will have some form of capital gains tax based on the profits you receive from selling something.
Most take а particularly aggressive approach to home sales if they deem it a business since homes are generally treated as a hot topic for most states (due to inadequate government policy or the demand for affordable housing, which tends to be antithetical to flipping).
So get your records straight, never try to evade paying your fair share (although lowering your burden is permissible if you know how to play the game), and you should be in the biz for a long time to come!
Have An Exit Strategy In Place For When You Want To Cash In And Move On
The final point to creating a successful flipping business is to remain flexible and always have an exit strategy. Because of the high cost of entry into this industry, it's almost guaranteed that most, if not all, of your capital, will become tied up in an asset until you offload it.
Thus, in the event of a downturn, you should be prepared to quickly sell off your assets or have enough cash on hand to tide you over. This is especially true if you anticipate a recession in the near future, which, according to most pundits, seems likely.
Investing in and flipping real estate is a highly lucrative venture…albeit not without its risks. However, by following the tried and true methods as espoused by successful flippers over the years and laid out in the post, you should reduce these risks and enhance your profits.
Frequently Answered Questions
How long does it take to flip a house?
While most of you reading this will want a solid answer, the only truthful answer is the ubiquitous “it depends.” Flipping a house depends on a variety of factors, ranging from how much work is required for renovations to how you go about finding customers.
What are some of the most important factors to consider when deciding to purchase a property for flipping?
Your budget, location, and how much you want to leverage yourself all play an important role in choosing a property.
How can you estimate the potential profit of a house flipping project?
In order to estimate the potential profit of a house flipping project, you'll need to take into account a variety of factors, such as the purchase price of the property, the cost of any necessary renovations or repairs, and the projected resale price of the property after it has been remodeled.
What are some strategies for marketing?
In reality, the world is your oyster, and as long as you have experience using the internet and social media, you will always be able to find potential clients. Moreover, you can use a professional real estate marketing agency to assist you with finding potential customers willing to buy your investment.
Peer-to-peer lending involves connecting with individual lenders via a dedicated platform, explaining why you need а loan, and coming to an agreement vis-a-vis repayment and interest. Another option outside the more conventional mortgage route is looking for other investors to share the burden.
This is a fantastic method to reduce your exposure to bad investments, but it also results in lower profits due to having to split the pie with others. Nevertheless, many savvy real estate investors have taken this path and seen fantastic results.
