Pros and Cons of House Flipping
Flip or Flop. Flipping Out. Masters of the Flip.
Thinking of flipping houses as an investment? Shows like those named above feature both encouraging stories and cautionary tales! It’s not as easy as an hour-long show makes out, and there’s a lot to consider before you flip – so you don’t have a big flop on your hands. Let’s take a look at the pros and cons of house flipping so you can make the best choice for your portfolio and investment goals.
The Benefits of House Flipping
When you flip, you have the opportunity to:
Make a return on your investment. This is the point, right! If you can catch the right property at the right price and find the right buyer, flipping has the potential to help add some coins to your coffers. Another plus: you can do so quickly in the right market conditions.
Gain invaluable experience. House flipping is nothing if not a learning experience. You’ll get an education in:
- Real Estate. You’ll learn the ins and outs of the process as both a buyer and a seller, including the critical aspect of financing.
- Your Local Market. Scouring the neighborhood for properties is just one step. You should be talking to realtors, investigating comparable sold properties, gathering demographic data, and more.
- Construction. Flipping involves rehabbing, renovating, or remodeling, and this is another area in which you’ll learn more than you ever wanted! From costs of various components and systems to structural issues, you can leverage this knowledge to make solid decisions around budgeting and property selection in the future.
- Budgeting. You will almost inevitably run into unanticipated costs, but this too can be a plus as you learn to accommodate for issues like construction delays, contractor disputes, holding costs, etc.
- Connections. As you go through the flipping process, you will build your network of industry professionals, including realtors, lawyers, building inspectors, insurance agents/brokers, other investors, contractors, and others. You never know when you can embark on another project together or when you can leverage each other’s insights.
Sounds good! But let’s take a look at the drawbacks of house flipping.
The Risks of Flipping
There are a few to consider:
Losing Money. It happens. You may have bought at an unfortunate time for your local market. You may run into costs that sap any profit that you’d hoped to gain. You could be left with a pricey flop.
Unanticipated Costs. Yes, we mentioned this as a benefit in terms of learning. But delays, permit costs, renovations and materials… this can all add up if you’re not prepared. As well, in soft markets, you may have to make significant concessions to buyers, which decreases your profitability.
A Tax Hike. There, you’ve done a beautiful job renovating this property! The city/municipality takes notices and raises your taxes! Not only do you have to shoulder this tax until you sell, it can turn off potential buyers. And speaking of taxes, yor profits may be subject to capital gains taxes. They’ll get you coming or going!
Holding Costs. You’ve still got to pay the mortgage. You’ve still got to pay the insurance and taxes. You’ve still got to pay for maintenance or get handy with DIY. The longer you sit on a property, the more it costs you – and you may have to reduce the price in the end to attract a buyer.
Stress. This isn’t a hard budget line, but stress is a very real part of the flipping process. There are a lot of details to attend to. From researching the market and working with a real estate agent to dealing with contactors and city inspectors, you’re investing a great deal of time, energy, and money. If the property doesn’t sell as quickly as you’d hoped, that adds a tremendous burden of anxiety.
Real estate investment alternatives such as turnkey properties can often alleviate these risks while boosting your benefits. If you’re interested in avoiding the flip and flop of your nerves and opting for another opportunity, contact our team today.