Shows like Fixer Upper and Flip or Flop might make home flipping seem like a fun, hands-on way to make a living, but these HGTV hits are far from reality.
Though many show the occasional hardships that home flipping can come with, few delve into the real difficulties that fix-and-flip investors handle on a daily basis -- things like financing difficulties, issues with selling the home on the back-end, and heck, even just finding the right property in the first place.
Are you thinking of getting into the home-flipping game like your favorite HGTV stars? Make sure you understand the true realities of flipping houses first.
Reality No. 1: Finding the right house is hard
Most flipping shows just skip right to the good stuff, glossing over the toil and trouble investors go through to even find the perfect flip in the first place. In real life, it requires striking a delicate and almost impossible balance -- one that offers a great deal, solid renovation potential, and a good, up-and-coming location to boot. Throw in that every penny you overpay eats into your profit margins, and the game gets even harder.
The truth is flipping houses isn’t as easy as hitting up a foreclosure auction or buying that run-down house around the corner. It takes knowing your market, working with the right experts, and having the ability to accurately assess renovation costs long before a deal’s on the table. If it sounds like a lot of work, well, it is.
Reality No. 2: You probably won’t get rich doing it
If you’re thinking you’ll become a self-made millionaire flipping houses, you’re probably mistaken. In fact, recent data shows that home-flipping ROI is actually trending downward. The average fix-and-flip investor grossed just 38.7% in the first quarter of this year, down from 48.6% a year ago. It’s the lowest average flipping ROI since 2011. That’s not to say you can’t make a living doing it -- just manage your expectations and don’t expect to become the next Chip and Joanna right off the bat.
Reality No. 3: It takes a lot of capital
There’s no way to sugarcoat it: Flipping houses takes cash -- and lots of it. You have renovation costs, sure, but on top of that, you also have inspections, building permits, the utilities and taxes you pay while it’s vacant, and a whole slew of other expenses. Once you add in the closing costs on your mortgage and your down payment (which is usually 20 to 25% on investments), then you’re out a pretty penny right out of the gate.
Don’t forget you’ll also owe sales commission to your agent once you sell (and capital gains taxes on the profits.) Make sure all these expenses -- as well as a solid financial safety net -- are all considerations when you’re thinking of flipping a house.
Reality No. 4: It’s a time-suck
You don’t necessarily have to do everything yourself, but you will need to put in a good amount of energy if you’re going to flip a house (or several). Even if you don’t put in a lick of elbow grease of your own, you still need to get quotes, hire and arrange contractors, handle invoicing, check in on the property, and get all the appropriate permits and inspections. And if you have a day job? That can be a pretty big load to handle. That doesn’t even include the staging, marketing, and other tasks that come in on the sales end.
Reality No. 5: Financing can be hard
Fix-and-flip investors often face issues in financing. For one, investments of any kind pose a higher risk for lenders, therefore qualifying standards are a bit more stringent. That means you’ll need a higher credit score, larger down payment, and more cash reserves. Often, you may even need proven experience as a landlord or investor.
Investment loans also come with higher interest rates and sometimes, may even come across appraisal issues due to the poor condition of the properties. Make sure you’re prepared for these hiccups and have a back-up plan just in case.
Reality No. 6: You need a lot of knowledge -- in a lot of things
Having a great eye for design is only one small piece of the puzzle when it comes to flipping houses. As a flipper, you really need to be a Jack (or Jill) of all trades. You need a basic knowledge of residential construction, real estate law, project management, business negotiations, building compliance, and even insurance. Of course, you can bring in experts for many of the more complicated issues, but remember: That will whittle down that profit margin, too, so be smart about who you outsource to (and when you do it.)
The bottom line
Are you considering flipping a house? Make sure you know what you’re getting into. Align yourself with the right partners, allot plenty of resources and time, and be ready to put your all into it -- or your profit margins might suffer.