The fix-and-flip strategy is a profitable strategy for experienced investors, but plenty of things could go wrong for new investors. Starting with the right foot can prevent you from running into problems. Here in this blog post are ten mistakes to avoid when flipping.
1. Not Understanding Your Market
Not understanding your market before investing your money will reduce your chances of investment success. Performing market analysis of the area you decide to invest in would help you understand the market better. Apart from knowing your market, it allows you to understand the risk involved when investing in a particular property and will help you decide the right time to dive in.
2. Failing to Plan Your Financing
The most important thing in real estate investment is money. This is why it is wrong to go into real estate without financial planning. Learn to plan your spending and stick to your budget. Avoid over-spending, you have a long way to go and you don’t want to invest in a money-pit. When you realize the property is above your budget, back off! Avoid jumping into a do-or-die flip that will eat up your finances without a significant return on your investment.
Over-leveraging occurs when you borrow more than you need against your property. The inability to make payments due to over-leveraging can lead to foreclosure. Never borrow more than you need on an investment property. Avoid the rookie mistake of not focusing on the rehab project and planning your finances before applying for a mortgage. Someone may offer you more financing, but that does not mean you should take it. Always use leverage to your advantage, not your disadvantage!
4. Forgetting to Purchase Property Insurance
If flipping a home is all about getting a return on your investment then an investor should do anything to protect money invested. One of the important things to protect your investment is to buy property insurance package. Property insurance repays an investor in case of unforeseen circumstances like a fire accident, theft or flood occurs. It reduces the risk of running into problems. The fix-and-flip strategy is very risky, so it is important to do all the necessary things to prevent losing your investment.
5. Doing Unnecessary Improvement
Over rehabbing is a common mistake among first-time flippers. Of course, the fix-and-flip strategy allows you to carry out some rehab work on the investment but it does not permit you to over-fix. The overall goal of fixing property is to attract buyers and to profit from the investment. Carry out a cost analysis on the property before you start spending unnecessarily.
6. Not Screening Contractors Thoroughly
A contractor can decide whether a project will be successful or not. This means that an investor needs to spend more time in the contractor’s screening process. Before entrusting your project into a contractor’s hand, ensure he or she is experienced and capable of working on this project type. Check previous works of the contractor, read reviews, verify their licenses and ask questions. Since you are entrusting assets worth thousands of dollars into their hands, you should do everything to keep it safe with them.
7. Ignoring the Neighboring properties
The neighboring properties can make or mar the desirability of your investment to buyers, so you should never ignore the neighboring properties. After all, nobody will be interested in buying a property in an area full of unrepaired properties. To prevent your listed investment from staying on the market for a long time, do a market analysis, familiarize yourself with the locality before finalizing your purchases, and never ignore the surrounding structures.
8. Ignoring the 70-Percent Rule
The 70-percent rule is a general rule for the fix-and-flip investors. The rule states that you must not buy a property above your After-repair-value (ARV) i.e. multiply your ARV by 0.7 and subtract your repair cost from the answer – that should be your base purchase price. Of course, it is a tried and true formula but most experienced investors do not always follow the rule. Our advice to investors (especially new investors) is not to forget the rule. It is a sacred point and it always prevents you from overpaying for a property.
9. Not Enough Time
Timing is also an essential factor to a flipper. Flipping houses consumes time more than any real estate strategies. All stages of flipping (i.e. finding properties, closing, renovation, inspection, and listing) take time; so, a property flipper needs to draw business strategies and adopt the efficient ones.
10. Not Planning Your Exit Strategy
Exit strategy for the fix-and-flip investment is the price point at which you listed the property. It is very important, especially with this strategy, because it decides your success in the venture. Work with an experienced real estate agent to determine the listing price that is profitable and sell your property as soon as possible.