You’ve seen it on TV — buy a house on the cheap, fix it up, sell it for a profit and then bask in your newfound pile of money Scrooge McDuck-style. Rinse and repeat. Finally, you’ve found a way to make a lot of money and be creative without having to work a desk job. What could go wrong?
As fun and glamorous as house flipping can appear on TV, it’s not all picking out backsplashes and paint colors. Most of the hard work starts before you even step into a house, and as with any investment, there’s a considerable level of risk you’ll have to take on, which is typically greater for newcomers.
That said, there are plenty of people who have flipped and flopped before you, so take advantage of the resources and information out there to avoid similar mistakes, some of which are so costly they can sink your house flipping business in no time at all.
Here are three of the most common mistakes first-time flippers make:
1. Getting the Financing Wrong
Beware of sabotaging your own financing in the world of fix and flip loans. Money mistakes are easy for inexperienced flippers to make, but borrowing money is a necessity for most people so it behooves you to get it right the first time around.
Make sure you avoid these financing mistakes:
- Delayed financing: Great houses come and go. If your financing doesn’t pull through when you expect it to you could miss out on the property of your dreams. Additionally, waiting to get financing in the middle of a project will continue to cost you money as you pay contractors, as well as payments and interest on any prior loans. Don’t rush the process, but be mindful of timing. And never, ever set your heart on a property you don’t yet own — you never know when someone will beat you to the punch.
The wrong type of financing: When you have your eye on a property it can feel like you have to act now or you’ll lose it forever. That type of pressure can make opting for the first financing option available to you seem like the only choice, but it’s not. Explore your options and ask questions. For example, new businesses have a hard time qualifying for bank loans and might opt for a specialized startup business loan instead. Comparison shop your options, find out what you qualify for and compare to get the best rate.
Too much financing: More financing can mean more cost if used irresponsibly. If you overshoot your estimations and borrow a ton more than you truly need, interest and fees can add up. Even a few dollars a day in interest — added to all your overhead costs — can prevent you from breaking even, let alone turning a profit. That’s why opting for low- or no-rate promotions can be extremely beneficial.
- Too little financing: Similarly, underestimating your rehab budget is a common mistake first-time house flippers make, which can result in getting less financing than you actually need. The last thing you want to do is exhaust your rehab budget with more renovations to make. When budgeting for fix and flips, it’s best to assume it will you cost you more than you think, so have a contingency fund ready at all times.
2. Getting the Timing Wrong
Similar to financing, both over and underestimating how much time you need to renovate a house can be a deal killer. If you rush through a flip, sloppy mistakes will cost you more time and money when a building inspector has you redo work you thought was already done.
On the other hand, if you dillydally, your expenses will add up. Interest on financing, payment to contractors and your personal time spent dealing with the flip (instead of earning other income) will all amount to wasted dollars.
Manage your time in just as much detail as you manage your budget. Anything less could result in a flop, which won’t bode well when looking for financing or investors for your next flip.
3. Doing Everything Yourself
Successfully flipping a house takes many skills, including everything from accounting and construction to design and marketing. No matter how talented you are, you can’t do it all — and don’t let your ego tell you otherwise. Even with your fair share talent and skills, hiring specialized talent will provide major help along the way. There’s simply not enough time to do it all yourself, even if you know you’re capable. Plus, the longer you try to micromanage, the longer you’ll hold you back from expanding your business.
The Bottom Line
House flipping can be a lucrative endeavor. If done wrong, however, it can be an expensive mess. It’s up to you to plan ahead, stay nimble and try to anticipate problems so you can fix them before they sink your house flipping business for good.
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