In my previous posts at BiggerPockets, I have discussed long term investments in properties that will be leased to tenants, but there’s another popular form of property investing that is making a comeback: real estate flipping.
Once upon a time, during the height of the real estate frenzy and before the downturn, real estate flipping was pretty common. People would buy a property for a relatively low price, fix it up and invest in some improvements, then sell it to someone new for a tidy profit. Many people who had never been involved in real estate investment got into it, which unfortunately contributed some to the real estate downturn.
When real estate prices went south, flipping all but vanished from the public conversation. Though there were foreclosure homes everywhere that could have easily been improved, that was part of the problem: all the cheap housing pulled down the prices of non-foreclosure homes that surrounded them. You could improve the house all you wanted but if you set its price too high compared to all the other houses on the market, it would languish. If you needed to set the price high to recoup what you invested in improvements, one way or another, you were probably destined to lose money on your investment.
Of course, now that the real estate market is improving, real estate flipping is making a comeback. The housing market has recovered enough that it’s once again possible to make a profit off of buying a home, fixing it up and selling it for a higher price. Though real estate flipping has the potential to make a lot of money for your nest egg, just as with any type of investing, it has its risks.
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3 Questions to Ask Yourself Before Trying to Flip a Property:
- What is the local market like? Real estate is highly local. Not all locations have experienced the recovery in the same way. What prices are homes selling for in the immediate neighborhood surrounding the property? How many properties are for sale in the area? How many are foreclosures or short sales? Have there been other flips nearby? The prices of nearby properties will impact the amount for much you can sell the home.
- How much needs to be invested in the property? Some places just need cosmetic updating for a good flip, while others need more intense work. The more work they need, the more money and time you’ll have to tie up in the property. Though the property might seem cheap now, you might be singing a different tune if you find yourself paying for unexpected problems down the road. The last thing you want to do is lose money on the flip by spending too much.
- What is the potential resale value for the property? How much you spend on fixing it up should be balanced by how much you think you’ll get at the point of sale. You can’t just tack on the price of the upgrades to the price you paid for the property, the price will have to be comparable to other properties. Invest too much and, depending on the local market, you won’t be able recoup what you spent. Before you buy the property, evaluate it as if you had already made the upgrades and compare this “dream home” to other similar properties in the area. This could help you decide whether moving forward is a good idea or not.
Buy, fix, sell. In it’s most basic terms, it seems so simple, but there’s so much more to successful real estate flipping, including knowing about tax implications, restrictions on how fast you can resell a property in an association, and more. These questions can get you started, but they point to the basic essence of flipping and hint to the biggest points of trouble flippers encounter. But if you have a property you in mind, but can’t get to a positive answer with these simple questions, it’s not even worth scratching the surface on the more complex issues of real estate flipping.
What are your thoughts on flipping? Let’s discuss…