Cofounder of InstaLend, a non-bank real estate lender providing loans on single-family and multi-family properties for acquisition and rehab.
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Buying a property to rehab and resell on the market can be a very lucrative undertaking, but it does not come without its own potential pitfalls. Like any other rewarding activity, solid preparation and information will help you make the right decisions and take the necessary precautions. Moreover, harnessing the knowledge of real estate investing and building key partnerships with good lenders are bound to make a positive impact. Having said that, here are some of the advantages and disadvantages of buying property to fix and flip.
Advantages
1. Big Profit Potential
A clear advantage of buying property to renovate and resell is that some houses can be fixed and flipped very quickly, with big potential in the way of profit. The profit margin of a successful fix-and-flip can be anywhere between $40,000 and $70,000 for the average residential home, which is a big gain for the amount of work that may typically be required. Another benefit is the possibility of completing a turnaround in less than 90 days while earning a margin of around 20% on the property. The more rehab work the property requires, the more upside it usually has, but also the longer it takes to renovate.
2. You Can Select According To Your Needs
As a real estate investor, you can scout the market to find your desired flip house considering various preselected attributes like location, sale price, financing and property type. You can seek out the best deals on the market knowing properties that require lots of rehab work are often priced well below their true potential market value. In addition, choosing a property that requires a relatively small cash down payment for purchase will result in lower initial out-of-pocket expenses. The great thing about flipping homes is that you get to choose all of these factors before engaging in a fix-and-flip.
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Disadvantages
Like all highly rewarding endeavors, flipping homes does not come without its potential downsides. In order to reap the benefits of selling a house for profit, you will have to be responsible for performing a timely, on-budget and safe rehab project in order to sell the property. This will involve interacting with numerous parties like lenders, contractors, agents and buyers.
1. Cash
Securing the necessary financing to purchase a property could be difficult, unless you work with a trusted lender ahead of time. Plus, you’ll need enough cash on hand to cover all rehab costs with contractors and enough to cover all overhead costs that may arise. Don’t forget to plan for contingencies and conduct a professional inspection of a property prior to purchase. Finally, working with an experienced contractor will help you identify remodeling costs with accuracy to avoid gross miscalculations.
2. Time
Fixing and flipping properties efficiently is a full-time job, so don’t expect to do it half-heartedly. You’ll have to put in the time to build your vital relationships with lenders and contractors as well as be active in seeking new properties and supervising the completion of the entire project. Keep in mind that you will have to shoulder all unexpected costs arising out of the project, so make sure you have experienced people on team who you can ask for advice if the need arises.
Real estate investing is not without its unique risks, but with careful planning, relationship building and diligent execution, it still provides great potential for making big profits in 2021.
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