Is 2021 the year you’re going to buy a real estate investment property? If you have your sights set on flipping a house for a big profit, you likely know how much work is involved. Sure, popular real estate reality shows like “Flip or Flop” and “Flipping Across America” make fix-and-flip investing look like a feasible endeavor, but you’re wise to the magic of TV, right?
The truth is that flipping a house is rife with challenges, from financial setbacks to breakdowns in communication with your construction crew. Plus, low interest rates mean properties are flying off the market, especially in up-and-coming neighborhoods.
So how can house-flipping newbies compete today? By learning from those with more experience. We spoke to successful home flippers about what they wish they had known when starting out. Hopefully their tips below will help you minimize pain and maximize profits.
1. Stick to your maximum allowable offer
Our experts all agree that buying a fix-and-flip investment should not be an emotional decision. There are certain formulas that every house flipper needs to calculate in order to make a profit.
“Real estate investing is a numbers business, and if the deal doesn’t make sense when you crunch the numbers, you should be able to walk away,” says Hayden Lyon of Cowtown Home Buyers, a real estate investment firm in Fort Worth, TX.
“Stick to your maximum allowable offer. Going above your MAO is just asking for trouble,” says Ryne Lambert, co-founder of Sell My House, a real estate investment firm in Green Bay, WI.
The general rule when determining your MAO is not to pay more than 70% of the property’s after-repair value, or ARV, minus repair estimates. For example, if the property’s ARV will be $150,000, you would subtract the costs to flip (including the cost of a loan, repairs, and other fees) and then multiply that number by 70%. That will give you the MAO you should make on the property.
However, Lambert recommends a more exact formula: “We calculate MAO as ARV minus rehab estimates, selling costs, and minimum gross profit,” he says. “Our detailed formula makes our offer more competitive for sellers while still providing us a nice profit.”
2. Build a buffer into your renovation budget
Anyone who’s undertaken repairs on their house or an investment property knows things rarely go as planned. Permit delays, bad weather, and unforeseen expenses can all throw a wrench in the works—and revise your bottom line.
That’s why Lambert advises new investors to build a buffer of up to 25% into their rehab estimate.
3. Don’t always go with the cheapest contractor
Finding the right contractor can help keep renovation costs in check—but right does not always mean the least expensive.
“When I was new, I thought in order to keep as much profit margin in the flip as I could, I needed to choose the lowest contractor bid,” says Jonathan Faccone of Halo Homebuyers, a real estate consultant in Bridgewater Township, NJ.
“You do have to manage costs prudently, but going with the lowest contractor bids usually end up costing you more in the long run,” says Faccone. “Be cautious about choosing the cheap price and, instead, go with the contractor who offers the best quality and most professional work for your money.”
4. Make sure the contractors have a clear scope of work
You may be able to head off issues with contractors—including plumbers, electricians, and general contractors—by ensuring they present a clear scope of work for the project, experts advise.
“The scope of work usually includes working with the city to obtain permits, ordering materials and equipment, and confirming the house plans. This section will save you a lot of time and money on the back end of the project,” says Shawn Breyer of Breyer Home Buyers, a real estate investing firm in Atlanta.
Most importantly, start building relationships with contractors in the areas where you invest, so you know whom you can trust for any project.
5. Provide a quality product
As fast as homes are selling today, the market is filled with many discerning buyers.
“Often, the ultimate buyer of a flip expects the home to compare with existing homes—or even new construction—in quality and value,” says Greg Kurzner, a Realtor ® for ERA Atlantic Reality in Alpharetta, GA.
Lyon agrees: “Focus on value-add renovations and amenities. Research shows buyers want a nice kitchen and bathrooms. Of course, everything should be functional and up to code, but you want to create an instant emotional connection for potential buyers.”
6. Get your own finances in order before you start
Several investors pointed out the importance of running your blossoming home-flipping company as a business—because it is. That means tracking all of your expenses so you can make better decisions for greater profits. Be extremely organized, and document every purchase order, utility bill, and closing fee that’s involved in the project.
It’s also important to have your own financial house in order before you start.
“If all goes well, you’re about to start making money in large chunks. If you lack proper discipline, you’ll wind up worse than when you started,” says Billy Ross, CEO at RFTA Properties, a residential real estate investment company in Winter Park, FL.
7. Expect to put time and money into marketing
James Fitzgibbons of Ledge Real Estate Solutions, in Windermere, FL, says he wishes he had spent more time in his early years learning how to market homes efficiently.
“We have a wrapped car that we drive around town,” he says. “We’ve driven for dollars, and we’ve used direct mail marketing. Today, we advertise online through Google and Facebook. All of these methods have potential if done right.”