So you’re zeroing in on your very first real estate investment purchase: a home with potential that you're planning on flipping. Congrats! But now it's time to get to work.
Just be aware: Even if you spend weeks, or months, getting your investment property ready to sell, these efforts don't necessarily guarantee profits. To give yourself a greater chance of making money off of your flip, you'll want to avoid the following mistakes.
1. Hanging on for too long
For professional investors, flipping a home should be seen as a short-term process.
“I'd rather take a shorter profit in a shorter period of time than a marginally bigger profit over a longer period of time,” says Joshua Jarvis, CEO of Jarvis Team Realty, in Atlanta. Why? It can interfere with your year-end goals of making more money on flipping other properties. If your money is tied up in a project, you can’t invest in a new one.
“A 10% per annum return on a three-month investment is fantastic, but that same return doesn't look so hot if it takes three years to come to fruition,’ says Nick Schlekeway, founder of Amherst Madison Legacy, in Boise, ID.
Time is of the essence when flipping a home, and the quicker you can make it look good and sell it, the better. Any additional time spent on over-renovating it or obsessing over minute details can cut into your bottom line.
Patrick Freeze, owner of the Bay Management Group, in Baltimore, advises investors to “make the necessary repairs to your property but don't over-renovate."
The longer it’s not getting sold, the more potential revenue you miss out on. Plus, sinking money and labor into additional features can also mean you'll make less money at the end of the deal.
So to make sure your house will fit in with comparable properties in the neighborhood, look for trends. In your neighborhood, are there McMansions stuffed with high-end appliances, or are most of the houses from the '70s with modest updates? Figure it out, and play it close to the medium.
3. Not having an emergency fund
Experienced investors will consider this house flipping 101, but we cannot stress enough how important it is to have plenty of cash on hand in case of emergencies. What if your contractor finds asbestos and you have to pay additional money to eradicate it? What if there's a downpour on the day you're supposed to paint? Not having an emergency fund set aside can badly derail your project and put you in the red.
“The larger the fund, the better you are and the longer you can handle any risks,” says Jeff Tomasulo, CEO of Vespula Capital, an investment firm in Greenwich, CT.
To figure out how much you need, add together your overhead per month—mortgage, taxes, insurance, your lawyer, leasing agent, accountant, etc.—and multiply that by six for at least a half-year cushion, Tomasulo recommends.
4. Pricing yourself out of the market
Are you holding out for a higher sale price? You’re doing it wrong. The main reason houses sell fast is because they’re priced right for the market they're in. That's why it's important to look at the comps in your neighborhood and speak to local real estate agents when deciding on a price for your investment property.
I've seen many new investors try to get $5,000 or $10,000 more than they should on lower-end homes. When it doesn't happen, they spend the rest of the time chasing the market, Jarvis says.
His bottom line? "Price it right in the beginning, and get it sold.”