If you watch HGTV, flipping properties may seem like a great investment. The transformation of rundown houses into beautiful modern homes is fun to watch and for many, tempting to try. However, flipping an investment property isn’t always as effective as it might look on TV, and if you’re not careful, it can land you in a world of financial misery.
So, if you’re considering flipping a property, here are some tips to help you determine whether or not it’s the right option for you.
Why NOT to Flip a Property
It might seem like any older property that you remodel will automatically become more valuable, but that’s not always the case.
Landmark properties, properties on a historic register or even properties with historic architectural features could all see their value decrease due to a remodel. Those properties have value because of their unique place in history. So, for instance, removing a cast iron clawfoot tub in order to update a bathroom would detract from the historic feel of the home and make it less desirable on the market.
When TO Flip
Ultimately, you have to weigh the cost of your renovation project against the profit you stand to make from the sale, but that is often easier said than done.
A loose formula for estimating the cost of a flip would look something like this:
Acquisition cost + taxes, insurance, closing costs + holding costs (mortgage) + carrying costs (holding the property before sale) + construction budget + 15% contingency = X
When you’re comparing the number X above to comparable sales in the area you need to 1) make sure that you’re erring on the side of caution when it comes to that estimate, and 2) make sure you’re getting an accurate read on those comps; use nothing more than .3 miles away and no sale more than about three months prior. You might want to be optimistic about the sale price you’ll fetch in the end, but when it comes to budgeting, it pays (literally!) to be more conservative.
Is Flipping Right For You?
Here are some things to ask yourself if you’re considering a flipping project:
- Where is the property located?
- Is it in an area with high sales velocity? How many other properties in the area have sold in the last few months?
- Are there good schools or other neighborhood features that could boost the sale price?
- What is my profit potential? After calculating the formula above, does my estimated profit seem worth taking on a project of this scale?
- Do I know anything about construction or design? Do I know anyone who can help me?
I can’t stress enough how important it is to work with knowledgeable professionals. For example, if you have little to no knowledge of the ins and outs of construction, you can lose a lot of money working with shady contractors or ending up with shoddy workmanship that has to be fixed. Sure, a lot of the fun of a remodeling project is doing some of the work on your own, which can work out fine as long as you have trustworthy people on your side and you know when to step aside and leave the work to the pros.