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Posted On July 25, 2019
One of the ways to make money through a real estate investment is to buy a home to sell or “flip.” Although some flips, especially the ones featured on reality television, involve distressed or foreclosed properties, this will vary greatly depending on the property you buy. Buying a distressed property may mean a lower buy-in price but buying a livable home in an area with rapid home price appreciation could also yield a sizable profit. With the popularity of house flipping shows plus a surge in house flipping following the Financial Crisis, many potential real estate investors have false preconceived notions about what goes into the purchase and resale of a home for profit. Realtor.com contributor, Terri Williams, reveals some of the most common house flipping myths you might believe.
Flipping a House is Quick
Within the confines of a thirty-minute episode, plus commercial breaks, your favorite flippers on HGTV are able to buy, renovate and repair, and sell a home for profit. In reality, there are many things that can get delayed during the home flipping process. Damage to the home may be more extensive than initially expected, requiring longer repairs. By the time you’re ready to list, your local market may be crowded, meaning it will take longer to sell.
Before you get involved in any real estate investment, be prepared to comfortably carry the cost of the mortgage on your investment property. Depending on the scope of the project, you may own the property for months or even longer before you are able to sell, and with that comes the cost of mortgage and maintenance eating into your eventual profit. Discuss your plans with a lender before you start looking for your investment property to find the right loan that can suit your specific situation.
House Flipping will Get You Rich
After the build-up of drama with the contractor and an unexpected budget breaker, house flipping reality shows almost always have a happy ending. The stars of the show walk away with a clean profit ready to invest again. This is not always the way buying to sell works, especially when you are first starting out. Carefully consider the cost of any needed renovation and repair, plus the ongoing cost of ownership before you sell the property. Will that exceed your potential profit? Running the numbers in all scenarios may prevent you from sinking your savings into a money pit.
The other way real estate investors make money is buying to rent. In this case, the buyer retains ownership of the home and rents to tenants. This might be a good option if you are looking to earn a passive income over time. Investors can either act as the landlord themselves or hire a property management company. Depending on your skillset and your proximity to the property, hiring someone else to manage your tenants may be more convenient, even if it cuts into your profit.
It Takes Money to Make Money
Not all home renovations yield the same return on investment, especially stylistic choices. Real estate professionals agree, practical updates like a new HVAC system, plumbing, or electrical improvements have a greater resale value than a fancy tile backsplash or exterior stone veneers. Some home renovations are investments and others are just expensive.
Before you go overboard with remodeling, look at nearby homes that have recently sold. What are buyers looking for? What’s the average age of appliances? What do their kitchens look like? Neighborhood trends can help you choose your investments wisely.
Financial professionals agree, real estate is typically a good investment. It’s less volatile than the stock market and it almost always appreciates over time. How much money you make off your real estate investment depends on how you finance the purchase. Let me know if you’re considering a real estate investment, and I can help you plan your mortgage financing.