They make flipping look so easy and fast on TV, but this is not precisely so in real life. When it comes to real estate investments, the road to success isn't all about profitable deals and the industry's polished appeal. If it were so simple, masses of people would be millionaires by now, having made their fortunes by flipping houses. So, let's take a look at the basic mistakes that house flippers tend to make and how to avoid them.
Mistake #1: Buying Wrong Residential Real Estate
It may seem like common sense, but the real estate industry’s essential thing is to buy right. Inexperienced investors, excited to get in on the action, might jump on the first deal without having research in place even if the deal offers a lower ROI. But if the margin is too thin, there is no room left for mistakes, and if something goes wrong, your entire profit could go up in smoke.
When evaluating a rehab deal in terms of ROI, California Investors would be prudent to aim for a minimum of a 10% ROI to make a deal commercially viable. Sure, some investors with a long time of experience may have a bigger appetite to invest or, based on their experience and volume, can take on deals with slimmer margins. But if you're just getting started with real estate investing, that's a good rule of thumb to go by and look for data first and then determine the value.
Mistake #2: Not Having Enough Money To Flip A House
It goes without saying that you need to plan all your expenses before taking on a deal carefully. But even this may still not be enough. Rarely does anything go according to the plan; however carefully laid, Leaks happens in the real estate industry. The weather may stop you from building; the property may end up sitting on the market longer than you hoped. You will always need reserves for unforeseen expenses, and in case you don't have the necessary financing, that's when things can get ugly.
If you're lucky, you may have friends or family to borrow from or a line of credit to cover the extra costs for properties. If not, you may find yourself out of money and looking for additional funding. Second or third trust deeds can be extremely pricey and will take extra time to secure – and, like in any other business, time is money.
So, before you take on a deal in the real estate market, make sure you've got a cushion to cover any unpleasant surprises that may surface.
Mistake #3: Biting Off More Than You Can Chew In Real Estate Investing
Serious management risks can also come from not having enough time, enough experience, or enough knowledge.
When people first start flipping houses, they do it as a side business while continuing to work their day job. They may not realize how time-consuming and demanding flipping is and how thin they may be spreading themselves to get both their side gig and their full-time job done. Or what effect the situation may have on their daily life and work. House flipping may call for attention every day, on weekends, at 6 in the morning, or even in the middle of the night.
Even having all the time in the world won't help if you decide to go the DIY route and want to make a profit out of it unless you have serious construction experience. If you don't, better leave it to professionals. Amateur work is liable to take more time, and the results will likely show that you don't quite know what you're doing, making it harder to sell your rehabbed property.
Anyone, not just newbies, could get burnt if they take on a project that's over their head. You need to know certain secret skills to become the successful house flipper you want to become. Even if you've done multiple flips, that doesn't mean you're necessarily ready for the ground-up construction. Constructions & repairs are on an entirely different level of complexity, much more involved – it encompasses higher risks, longer build times, more complicated permitting processes, greater costs, more people involved, harder to finance, etc. For this type of investment project, you also need a very experienced contractor, and those are in huge demand.
In California, construction projects are especially tricky due to the costs, the complex and lengthy permitting processes, the legalities, etc. Even an experienced investor and general contractor (GC) can't always predict timelines, so it would probably not be wise to embark on a new construction project unless you have sufficient knowledge, patience – and, again, money.
Mistake #4: Overbuilding Or Overrehabbing The Property
When people get passionate about a project (and you can't flip a house without passion & interest!), it's easy to get carried away and start remodeling or building according to personal preferences. A great many flippers go into a project intending to do a simple rehab but then get too involved and start changing their sensible original plans to update the property to their own tastes, letting their likes and dislikes cloud their judgment.
This sort of over-personal attitude can often lead to going over the budget, which in turn cuts your profits. Likewise, extra work requires extra time, and every day costs more in interest on your mortgage loan unless you do an all-cash project. And just like that, there you are – going into the red, losing money instead of making it, unable to do another rehab any time in the near future. Most first-time investors can't stomach that kind of blow, which causes them to get discouraged and quit.
The most important point to keep in mind is that as an investor, you're not going to live on this property – the house & land will never be yours. Don’t forget you have commercial purposes on the properties, and there’s no need to pay extra effort on it. So as much as you like it (and you should if you take pride in your work!), you'd do best if you make it neutral enough to appeal to the general contemporary tastes – not only will it save you unnecessary, potentially unrecoverable financial expenses but it will also widen your pool of prospective buyers (again, saving you time and money).
Mistake #5: Underbuilding Or Under Rehabbing The House
Yes, that's right! Under can be just as bad as Over. Let's say you are a pro at doing $500K homes, but then you pick up a $3M property, thinking you'd just do your usual rehab. That would be a colossal mistake! Know your market. Know your target clientele. You can't put low-end finishes on a higher-end property. The type of discerning buyer purchasing a $3M property will not accept cookie-cutter Home Depot finishes on their home. If you go cheap, you will likely learn this hard truth when you try selling the house, waiting forever while it sits on the market, and then probably losing money on the deal when you have to discount the price. So get started on the buildings & development of at least some necessary parts of the housing.
Mistake #6: Skimping On Staging In Case of Investment
Even though you buy a property as an investment and look, first of all, at the numbers, remember that when you go to sell it, your typical client will be a homeowner who will be living there. For them, a house needs to feel like home – cozy and inviting. Buying a home is an emotional purchase. So you want people to walk in and think, "Wow! This feels like MY home! I would love living here!"
Stagers are pros at making a home look beautiful, highlighting its best qualities, making it appealing, warm, welcoming, and allowing buyers to be able to "picture" themselves living in this home having the ownership feeling. Otherwise, it's just a shell with walls and floors. Staged homes generally sell higher than non-staged. It's a really smart thing to do.
House flipping can be exciting and profitable if you do it the right way. Make sure you avoid those common mistakes, and your work will be so much easier.