Flipping a house, meaning buying a property to fix up and sell, can be very profitable. Without careful planning, it can also lose a lot of money. If you’re thinking about buying a property to flip, these rules will improve your odds of ending up with a profit.
Don’t spend too much
New investors most often get into trouble by putting so much into a property that there’s little or no profit left.
A common guideline is the 70% rule. Your total investment in the house should be no more than 70% of its after-repair value. Total investment means everything:
- The purchase price
- Materials and labor for repairs
- Utilities and insurance while you own it
- Every other cost of buying, holding and renovating
For example, if a house should sell for $300,000 once it’s renovated, the rule says to keep your all-in costs at or below $210,000.
If things go to plan, that leaves a healthy profit. If they don’t, and they often don’t, the cushion means you should still come out ahead, just by less than you hoped.
Be prepared for unexpected costs and delays
Renovation has a way of uncovering problems nobody knew about. Once walls and floors are opened up, workers may find:
- Mold
- Damaged insulation
- Electrical or plumbing faults
- Insect infestations
Any one of these can set a project back by weeks or months and add thousands of dollars to the bill. Leave room in your budget for surprises, and build some slack into your timeline. A schedule with no margin is a schedule you’ll miss.
Set a realistic asking price
Naturally you want the highest profit you can get. But the list price has to reflect what buyers are paying. Base it on recent sales of comparable homes in the same area.
Ask too much, and buyers will pass. The house then sits for months while you keep paying to own it, and you usually end up lowering the price anyway. A realistic price from the start tends to produce a faster sale and a better result.
Get financing for your fix-and-flip project
Most investors don’t have enough cash to buy a house outright. And in a competitive market, you may need to act quickly to avoid losing a property to another buyer.
Sachem Lending is a private lender that makes short-term loans to real estate investors for fix-and-flip projects. For more advice, read our 3 loan tips for fix and flip properties, or contact us to learn more.
