House flipping reality shows have caused an epidemic. In the last few years, every new real estate investors including school teachers, business owners, and doctors have jumped into fix and flip. However, in reality, many people are finding it not as profitable as it is perceived to be and only few investors seem to be profitable in this strategy.
Fix and Flip
This real estate investment strategy involves an investor purchasing a property with the intention of fixing and renovating it for value appreciation and selling it for profit rather than long term buy and hold strategy.
Fix and flip strategy can be risky and rewarding. This is not as simple as buying a cheap property, fixing it and selling it within a few months. There are many things to check so that your project is on budget on time.
- Profit: If your fix and flip stay on budget on schedule, you can make good profit
- Experience: fix and flip exposes you to every aspect of real estate investing ranging from but not limited to finding the property, negotiation, financing, budgeting and scheduling, contractor management, advertising and selling the property.
- Network: fix and flip exposes you to many professionals in real estate business. You will make connections with the realtor, mortgage broker, and contractors.
- Losing money: the main risk with flipping a property is when a flip becomes a flop and you lose money.
- Unexpected expenses: this includes everything from permits, construction delay, material cost and building or equipment defect that were not identified. These expenses quickly add up and eat up any potential profit.
- Holding cost: during the renovation and after the renovation, you will have to pay mortgage, tax, utilities and insurance unless you bought the property without any loan. These costs take a large chunk out of the budget, and the longer you own the property, the more money you are losing. Depending on the season and your property, you may need to hire a contractor to look after your lawn and plowing snow on your sidewalks.
- Market change: any change in the economy, financial market or real estate market can quickly change the market condition from seller's market to buyer's market.
For Successful Fix and Flip
- Inspection: an inspection is necessary to assess the condition of the property and budget for a flip. This will help you create a detailed and accurate budget so that you get a clear understanding of how much funds you will need to ensure that the project will be completed successfully. If you are working with a contractor, make sure your contract covers all the details of repair work that has to be done.
- Know your market: Understand your buyer so that you are spending money on things that will add value to the property from the buyer's perspective. Look at other flipped property up for sale. Once you start to see the difference between what gets sold first and what stays listed, you will gain even greater insight into what buyers in the area are looking for. Take notes on what they like and don't like so you can make the necessary adjustments.
- Multiple exit strategies: you never know what will happen in the real estate market. Any change in fiscal policies, politics, regulations, trade barriers, immigration or economic situation can easily change the real estate market.
- Presale the property: sophisticated advisor will help you to find a buyer before the construction is complete so that you can minimize the carrying cost and maximize your profit
- Buy in the best neighbourhood: make sure you study your neighbourhood and buy in the neighbourhood that has high demand for the type of property you are building but only a few are in the market.
- Contingency fund: no matter how meticulously you craft your budget, there is a good chance that a problem might come up which will make an added costs to your project. You don't want such unexpected things to break the project. Build a contingency in your fund
- Minimize holding cost: various financing options are available for your fix and flip project. Talk to your advisor for the best possible financing options available.
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