You have to spend money to make money, right? So when you start out in real estate and purchase your first buy-to-sell house, you are going to find yourself rather cash poor. But that’s OK! In the long run, you are going to be making huge profits. It can be hard to see at first because your bank accounts may appear depressingly empty. Signing that contract, laying down that cash, and then paying for all the repair work… Ouch! But keep your eyes on the prize — the profit will be worth it in the end, and if you persevere, you will see green.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Why Choose Flipping Over Rentals?
Although rentals are in many ways an easier, safer, longer-term investment, I like to take my chances and invest in buy-to-sell properties. This is also called flipping houses, a process through which you buy houses, improve them (either aesthetically or structurally), and sell them on for a higher price. Alternatively, if you’re really in the know about the market, you can simply buy a property at the right time, hold onto it for, let’s say, 6 months, and sell it when the market peaks for a tidy profit without any renovating (keep in mind that this is a very high-risk game, and I strongly suggest against investing this way). Personally, I find the former a more enjoyable, more interesting, and more rewarding tactic. Before the housing crisis of 2008, house flipping was a very popular way of making money in real estate, but once the market plummeted, many people backed away from this style of real estate, deeming it too risky. Now, however, with our markets stable and strong once more, flipping houses is regaining popularity across the globe.
Why? Because it works! Yes, the first few purchases and rehabs might force you to eat Vegemite on toast a few nights. But that won’t last if you are good at what you’re doing. Remember, for every house you turn a profit on, you’re earning cold, hard cash. This is cash you can either keep, effectively making it profit, or invest in more properties to flip. The most important part of any house flip is that you are buying the right property for the right price. Keep an eye out for houses that have been on the market for a long time where you might be able to strike a deal with the seller. But don’t buy places so dilapidated that you have to spend tens of thousands just making the space live-able again. (Leave this type of property for when you have quite a few deals already under your belt). And remember that no matter how beautiful the finished house is, location always matters! Think about good districts in terms of employment, schools, and amenities when looking to buy any property.
Some real estate investors choose to buy and rehab houses for renters. This is fine if you have a large amount of money sitting in your bank account, but for those of us who don’t have this luxury, selling is always the best option. Although tenants will hopefully provide you with a monthly lump sum, the collected rent is unlikely to cover your personal expenses, and you will need numerous such properties in order to gain financial freedom. Now, for the vast majority of real estate investors, when it comes to flipping houses, the properties are renovated to be sold immediately, rather than waiting decades for the trickle of rental income to finally turn into a profit.
Low-Cost Housing Flips Reap the Biggest Rewards
Lots of cheaper house flips are more profitable than one large house flip. Although you can successfully flip a large house for significant cash, the time and energy spent renovating is usually equivalent to completing three or four low-cost flips. Therefore, I would recommend that anyone new to house flipping start out at the lower end of the market. Plus, these properties cost less in the first place and you’re more likely to be able to secure any financial backing you need. As the market improves, deals are harder to come by, but if you take the time to look and research, you can find them.
Once you’ve found your property, there are some types of renovation work that are guaranteed to increase the value of any house. These are:
- Adding square footage. This doesn’t mean tearing the entire property down. Don’t! Invest in a structurally sound house that you can simply improve by converting the basement or even the attic.
- Changing floor plans. Improving the functionality of any house layout is bound to add value and increase its market appeal (meaning, adding or removing walls).
- Adding bedrooms and/or bathrooms. This is simple math The more people who can live comfortably in the house, the higher market price you will be able to achieve.
Related: 4 HGTV-Level Upgrades to Make Your Flip Stand Out
You might be able to buy a run-down 2-bedroom house for $60,000, but once you’ve extended the kitchen and made a large, open plan living room and put another bedroom and bathroom upstairs, you should be able to sell the property for close to $200,000. Yes, this sort of work requires more labour, more initial outgoings than just a lick of paint and re-landscaping the garden, but the profit you will see at the end of the day is more than worth the investment. (The above numbers are an example of a suburb on the outskirts of Toledo, Ohio).
Remember, it’s OK to be cash-poor at times. In fact, it’s positively a good thing. Not only does a lack of cash force you not to spend and therefore minimize the costs of a house-flip, but it also spurs you into action. If you really want to get into real estate, you’re going to have to take the hands-on approach. You’ll be a better, smarter, more intuitive investor if you have some knowledge yourself when it comes to how construction works. Learn how to plaster a wall, tile a bathroom, install basic electrics. All these skills will keep costs down and give you the upper hand when you do have the money to hire professionals. But learn how to do all these tasks well if you’re expecting to sell your house for a significant sum of money.
The first house you buy will be a gamble. But flip it right, invest the profit in the next property, and soon you’ll be well on your way to achieving significant profits every single time. But it is not as easy as all the television shows make it look — it takes a lot of hard work, time, and quite literally blood, sweat, and tears. Oh, and money. Don’t forget to carefully budget your renovation works before you purchase the property. Overestimate how much everything will cost, have a contingency plan, and make sure you have enough money in place to see the project through from start to finish. The last thing you want is a property half completed, unsellable, un-rentable, and draining money from your accounts. Think carefully, plan ahead, and you will succeed at making profit. Desperate times call for desperate measures so be desperate!
Do you choose to flip for profits, or do you prefer to hold for the long run?
Let me know with a comment!