You buy a house for cheap, settling on a final purchase price of $80,000. You spend $20,000 and many hours of your time fixing it up. Then you turn it back on the market and sell it for $150,000.
That's a clean profit of $50,000, giving you even more capital you can use on your next purchase.
Countless people have become wealthy by using this strategy, but flipping houses isn't as reliably profitable as you might think. In fact, many people lose money flipping houses because they don't know how to approach this strategy.
If you want to be successful flipping houses, there are several big challenges you'll need to overcome first.
The Biggest Challenges
These are some of the most important challenges you'll need to address before you can start making money flipping houses.
1. Inexperience. Most people fail to flip houses successfully simply because they're inexperienced and undereducated. They don't understand how to appropriately value real estate, nor do they know how to rehabilitate homes.Getting your estate license is a great place to start if you have no education, giving you the knowledge and experience necessary to start identifying good deals. It's also important to work with a mentor or advisor to learn even more.
2. Lack of inventory. What if there aren't enough houses to buy? If inventory in a given area is limited, prices are going to be driven up and it's going to be less likely for you to find a good deal on a reasonable home. How are you going to compensate for this?
3. Competition. Lots of people are flipping houses out there. How are you going to contend with a competing bidder who's willing to spend more than you?
4. Unseen damage or problems. Are you confident you fully understand the condition of each property? One piece of unseen damage or one unforeseen repair can immediately compromise your budget. Double down on your due diligence.
5. Government regulations. Certain government regulations may also get in your way, making it more difficult or more complicated to flip houses. For example, the federal housing administration dictates that an owner must have the home for 90 days or longer before selling the home to someone using an FHA loan. Make sure you speak with a lawyer to better understand and navigate these laws.
6. Renovation cost efficiency. Your renovation needs to be as inexpensive as possible to maximize profit, so how can you keep costs down? You can do the work yourself, if you have the time, but it's usually better to find inexpensive yet reliable contractors.
7. Timing issues. Timing your home flips can be risky, since buying or selling at the wrong time can eliminate your profit – and if you sit on the house too long, your costs are going to increase. Set a strict schedule and stick to it.
8. Marketing and advertising. Once you list your house, you'll want it gone quickly, but you'll also want to attract a reasonable purchase price. That means you'll need to invest in proper marketing and advertising to achieve your goals.
Creating a Backup Plan
Even if you feel you've adequately prepared for all these problems and challenges, it's a good idea to have a financial backup plan. Flipping houses isn't consistent or predictable, so it pays to diversify your portfolio. If you're interested primarily in real estate, you can focus on:
· Rental properties. Rental properties generate income for you on a monthly basis, while simultaneously appreciating over time.
· Properties for long-term appreciation. You can also choose to invest in properties you feel have the greatest chance of appreciating over the course of years or decades.
· REITs.function like ETFs for real estate, allowing you to invest in many properties at once without having to do any due diligence yourself.
You should also diversify your portfolio with the following:
· Dividend-paying stocks. The stock market works differently than the real estate market, and choosing dividend-paying stocks can help you establish a steady stream of revenue for yourself.
· ETFs. Exchange traded funds (ETFs) are a great way to invest in many stocks at once, distributing your assets to minimize risk.
· Bonds. Bonds have historically been a very safe investment, offering minimal returns but excellent groundwork for a stable portfolio.
· Alternative investments. There are plenty of other alternative investments to consider as well, such as cryptocurrency, precious metals, and even collectibles.
If you can overcome the biggest challenges to flipping houses, there's a good chance you can make money with this strategy. Just make sure you do your research and are prepared for the risks before you spend any money or time on this path.