1. Not Enough Money
Dabbling in real estate is expensive. The first expense is the property acquisition cost. While low/no money down financing claims abound, finding these deals from a legitimate vendor is easier said than done. Also, if you’re financing the acquisition, you’re paying interest.
Although the interest on borrowed money is still tax-deductible even after the passage of the Tax Cuts and Jobs Act, it is not a 100% deduction.2 Every dollar spent on interest adds to the amount you’ll need to earn on the sale just to break even.
And if you use a mortgage or home equity line of credit (HELOC) to finance your flip-house purchase, only the interest is deductible. The principal, taxes and insurance portions of your payment are not.2
Research your financing options extensively to determine which mortgage type best suits your needs and find a lender that offers low interest rates. An easy way to research financing costs is by using a mortgage calculator, which allows you to compare interest rates various lenders offer. Of course, paying cash for the property eliminates the cost of interest, but even then there are property holding costs and opportunity costs for tying up your cash.
Making a profit is tougher than it used to be. In fact, 2019 saw profit margins shrink to the lowest average gross return on investment (ROI) since 2011, according to ATTOM Data. That doesn’t mean there isn’t money to made (ROI was 40.6%), but it does mean that care is required. The average gross profit on a flip in 2019 was $62,900, but keep in mind that’s gross.1
Renovation costs must also be factored in. If you plan to fix up the house and sell it for a profit, the sale price must exceed the combined cost of acquisition, the cost of holding the property, and the cost of renovations.
A $25,000 kitchen, a $10,000 bathroom, $5,000 in real estate taxes, utilities, and other carrying costs cuts that number by around two-thirds. Toss in an unexpected structural problem with the property and a gross profit can become a net loss.
Even if you manage to overcome the financial hurdles of flipping a house, don’t forget about capital gains taxes, which will chip away at your profit.
KEEP IN MIND…….None of these numbers are bad, including a high interest rate, as long as you are still making a healthy net profit! The bottom dollar is all that matters, not how much it cost you to get there!
2. Not Enough Time
Renovating and flipping houses is a time-consuming venture. It can take months to find and buy the right property. Once you own the house, you’ll need to invest time to fix it up. If you have a day job, time spent on demolition and construction can translate into lost evenings and weekends. If you pay somebody else to do the work, you’ll still spend more time than you expect supervising the activity and the costs of paying others will reduce your profit.
Once the work is done, you’ll need to schedule inspections to make sure the property complies with applicable building codes before you can sell it. If it doesn’t, you’ll need to spend more time and money to bring it up to par.
Next, it can be quite a time investment to sell the property. If you show it to prospective buyers yourself, you may spend plenty of time commuting to and from the property and in meetings. If you use a real estate agent, you will owe a commission.
Is that worth it? For many people, it might make more sense to stick with a day job, where they can earn the same kind of money in a few weeks or months via a steady paycheck, with no risk and a consistent time commitment.
The only way these things become less of an issue and make it worth your time is by being able to partner up with an experienced investor that knows all the tricks! They’ve been through all the costs of learning that you will otherwise have to pay for yourself!.
3. Not Enough Skills
Professional builders and skilled professionals, such as carpenters and plumbers, often flip houses as a side income to their regular jobs. They have the knowledge, skills, and experience to find and fix a house. Some of them also have union jobs that provide unemployment checks all winter long while they work on their side projects.
The real money in house flipping comes from sweat equity. If you’re handy with a hammer, enjoy laying carpet—and can hang drywall, roof a house, and install a kitchen sink—you’ve got the skills to flip a house.
On the other hand, if you don’t know a Phillips-head screwdriver from a flat screwdriver, you will need to pay a professional to do the renovations and repairs. And that will reduce the odds of making a substantial profit on your investment.
It’s best to team up with someone that has all of these contacts at their disposal. You’ll save yourself a lot of headaches and money!
4. Not Enough Knowledge
To be successful, you need to know how to pick the right property, in the right location, at the right price. In a neighborhood of $100,000 homes, do you really expect to buy at $60,000 and sell at $200,000? The market is far too efficient for that to occur regularly.
Even if you get the deal of a lifetime—snapping up a house in foreclosure for a song, say—knowing which renovations to make and which to skip is key. You also need to understand the applicable tax laws and zoning laws, and know when to cut your losses and get out before your project becomes a money pit.
Zillow, the real estate listing firm, is now flipping homes in select markets. The company expects to buy and flip properties within 90 days, and it has the data and knowledge to offer mom-and-pop operators fierce competition.3
Big-league lenders have also started to seek profits in the flip-loan marketplace, with global investment firm KKR joining other private investment firms seeking a piece of the action.
Knowledge is very key in this industry! Don’t go into it thinking you know everything and/or can learn it! Team up with someone that has been doing it and knows what to expect6 and what to avoid. Even if you are splitting the profits 50/50, 50% of $60,000 is better than 100% of $0.
5. Not Enough Patience
Professionals take their time and wait for the right property. Novices rush out to buy the first house that they see. Then they hire the first contractor who makes a bid to address work they can’t do themselves. Professionals either do the work themselves or rely on a network of pre-arranged, reliable contractors.
Novices hire an inexperienced realtor to help sell the house. Professionals work with experienced realtors to maximize profits. Novices expect to rush through the process, slap on a coat of paint, and earn a fortune. Professionals understand buying and selling houses takes time and that the profit margins are sometimes slim.
The Bottom Line
If you are thinking about flipping a house make sure to understand what it takes and the risks involved. Novice flippers can underestimate the time or money required and overestimate their skills and knowledge. Making a nice profit quickly by flipping a home is not as easy as it looks on TV.
Working with REC to complete your 1st 5 home flips is a great way to learn the right way from experienced partners that know the drill. Visit our Contact REC page now to learn more on how to get started!
