I frequently talk about investing in real estate at different events around the country and, during my travels, I’m almost always approached by new investors who are frustrated with how things are going. The last conference I spoke at was no different. As the weekend drew to a close, an ambitious young man named Reggie sought me out for advice. He hadn’t been buying, rehabbing, and selling property for very long. But, he’d been doing it long enough to know that something was off. He wasn’t making a living. To his credit, he’d decided to start investing in real estate at a young age, hoping that would put him ahead of the curve. But, like investors of all ages before him, he’d gotten into it with the wrong idea of what to expect.
The problem, as I see it, is that reality television shows, banner ads on websites, books, and infomercials all give the impression that getting into real estate investing is easy and highly lucrative. It’s a line of thinking that’s tempting to believe, especially when you hear about how well others seem to be doing. But, how much money you can actually make flipping houses depends on a variety of factors, the majority of which you will never see advertised. Like I told Reggie, it is possible to make a good living by investing in real estate—even a very good one. The key to successful investing, however, starts with knowing the truth about what it takes.
Here’s How Much Money You Can Really Make Flipping Houses
Generally speaking, in order to make decent money flipping houses, you have to have a system in place to find properties that fit certain criteria, buy them at a good price, perform key repairs within budget, then sell at a number that provides good returns. That magic number is somewhere above your costs but within reason of what the market will bear. And, you have to be able to do these things many times over since you will rarely make a killing on any single deal. Unfortunately, most of what you see, hear, and read about how to become a successful investor seems to indicate that there is a magic formula for making big money fast. But, even the best books on real estate investing won’t provide you with everything you need to know to make any real money at all.
To get an accurate idea of what it takes to successfully buy, renovate, and sell houses for profit, think carefully about each of the steps below. And, keep in mind that for every project you hope to take on, the majority of these steps needs to be repeated, and nearly perfected, so that all of your successes have a chance of building upon the ones that came before. It’s only then that you might just have yourself a well-paying career. Here are the key aspects of making good investment decisions that you need to be on top of for every single opportunity that comes your way.
Knowing Your Local Market
What is happening in your local real estate market does have an impact on how well your real estate business will do at any given time. Though real estate investors rarely have to ride the kind of extreme market fluctuations that investors in the stock market do, the usual highs and lows are still hard to navigate when you aren’t prepared. It could be a sellers’ market, for example, in which inventory is low and median home sales prices are high. Buying during this time often gets competitive, driving prices even higher. And, if you’re not diligent or resourceful, you could be driven to overpay on a deal. So, keeping your finger on the pulse of what’s happening locally can help to keep your head clear and your impulses steady.
Luckily, there are several ways to get and stay informed about your area’s real estate market. You don’t have to acquire a real estate license to stay in the loop, either. Although, it may help to develop relationships with local agents since they have exclusive access to tools that offer detailed information about asking and selling prices, like the Multiple Listing Service (MLS). But, you’ve got other resources, too. Most real estate sections in local newspapers and magazines report on current market trends, in addition to providing their own analysis of how the data could affect your investment decisions. Industry-related websites, as well as social media and investment bloggers, do much of the same these days. Your network of fellow investors is another great place to gain critical insight on what is or isn’t trending. Obviously, it’s important to be discerning about which industry sources you choose to bank your decisions on. But, the right ones can keep you from making the wrong choices.
Finding Leads on Distressed Homes
There are a number of ways to find leads on distressed homes and, because you’ll want to cover all your bases, it’ll be tempting to implement several in your efforts to find distressed properties on an ongoing basis. Joining real estate investment clubs may help, as can connecting with licensed real estate agents, since members of both groups often have access to motivated seller leads that aren’t yet on the market. Exploring lead lists, foreclosure auctions, or land banks and other government programs are just a few more of the options you could also consider—individually or collectively. But, it can get overwhelming and start to frustrate you if the leads you’re getting go nowhere.
Getting qualified leads can be difficult when you’re not plugged into the community as an established, and trusted, investor. And, unfortunately, because real estate investors as a whole tend to get a bad rap, setting yourself apart from the crowd as a beginner won’t be easy. But, to be remembered, respected, and referred to others, you’ll need to build your company brand right alongside building your individual reputation as a professional. Unless you can align yourself with an existing investment company brand, like HomeVestors®, that will take time, money, and a lot of hard marketing work. However, when distressed homeowners start bringing their properties to you because they know your business and can trust you personally, it will all be worth it.
Correctly Calculating All Costs
In order to understand what price is the right one for purchasing a fixer-upper, you have to first evaluate your residential investment property and all potential costs associated with getting it ready for resell. Even more, you have to be able to do it quickly and accurately. Everything from the cost to repair the roof to the price for upgrading the plumbing has to be factored into your rehab expenses and budgeted for prior to you even making an offer. But, these aren’t the only expenditures you need to account for. Closing costs, taxes, property insurance specifically for flipping houses, renovation permits, and real estate agent fees are just some of the other obligations you’ll face during the short time you own the property. And, if these numbers start to run too high after you’ve purchased the home, or aren’t properly budgeted for from the get-go, the returns when you sell may fall short. In fact, correctly calculating your costs is the only way to know if any returns are even possible and whether you should buy the property at all—and at what price if you do.
One of the best ways to estimate your expenses as correctly, and as quickly, as possible is to use one of the many real estate investment valuation tools that are specifically designed to help you run the numbers. HomeVestors®’ proprietary valuation tool, ValueChek®, for example, can calculate the costs on over 80 different repairs right from your iPad—something that comes in handy when you’re trying to determine what to offer the homeowner and need to do it practically on the spot. You’ll need to use top-notch tools because it’s very hard to recover from a well-planned, but incorrectly estimated, renovation budget.
When you find a potentially good real estate investment opportunity, it’s essential that you purchase the property at the lowest possible price. That’s because the only way you have a chance of realizing a return on your investment is if the difference between the cost to buy it and the price you sell it for is large enough to account for the rehab and other expenses—with some left over to put in your pocket. Most investors I know count on having 15-20% expenses over the cost of repairs to handle things like holding costs, insurance, taxes, and real estate agents fees when selling. So, you need to buy at 60-70% of the homes After Repair Value (ARV) minus the cost of repairs just to have a 15-20% margin. Of course, the discount you can ask for, and actually get, will vary from homeowner to homeowner and according to their specific situation.
Keep in mind, however, that while you must stay vigilant about buying a house for as little as possible, you must also be sensitive to the distressing situation that likely led the homeowner to sell in the first place. Offering too little on a property can look like you’re trying to take advantage—and turn a prospective seller toward someone else. It’s a fine line to walk, but one you have to perfect as a part of making good decisions about investing in properties. If you can purchase a house at a price that makes good sense to you while helping a homeowner unload a property that’s become a financial burden to them, then everybody wins—no matter how steep the discount.
Having a Flexible Exit Strategy
Depending on where and when you’re investing, your exit strategy on any given deal may need to shift from time to time. Obviously, if you’re in the business of flipping houses, the point is to get in and then get out of the deal as efficiently as possible. Your returns can then be put toward the next deal, and the next one after that, too.
But, there will be times—and neighborhoods—in which a buy-and-hold strategy becomes the best fit. Where cap rates are currently high, you may want to take some time to enjoy the steady revenue stream produced by your rents while pursuing the purchase of other properties. There’s always the possibility, too, that market tides will have changed once you’re ready to offload the investment house, leaving you with a difficult-to-sell property. It happens to the best of us at least once in our careers.
When that does happen, as long as you can rent it out for at least the cost of your mortgage and operating expenses until you find a buyer, you won’t necessarily be risking your returns. And, if you can more than cover your expenses with the rent, you stand a chance of earning a nice passive income from real estate investing to boot. Keeping these variables in mind when reviewing exit strategies for each property will help to keep your bottom line on track should you need to shift gears.
Securing Funding That Makes Sense
Unless you have access to a lot of extra cash, you’ll need to find another way to fund the purchase of your investment properties and their renovations. Traditional lenders don’t usually want to lend on houses intended to be flipped. For this reason, most investors get a hard money loan to buy and rehab a property. Interest rates and other fees are usually high with these loans, but the lenders can close fast and disperse renovation funds quickly—both of which are pretty important when you’re flipping houses. And, since the typical timeline for buying, rehabbing, and selling a home is anywhere from three to nine months, most hard money lenders will offer the kind of terms that accommodate this schedule.
You will still have to set aside a significant amount of your own funds for your projects, however. For one, you’ll need a big chunk of change to put down as your deposit since hard money lenders usually only cover up to about 80% of an investment property’s value. In addition, most hard money lenders that will lend on the repairs, require you to do the work first, and then will reimburse you after the repairs are completed. And, you’ll be required to make interest-only payments, at the very least, throughout the rehab process. In addition, there’s almost always surprise repair expenses that creep up when you’re flipping houses, and you don’t want to be caught off guard without any money when they do. Fortunately, as an independently owned and operated HomeVestors® franchisee, getting the money I need to buy and renovate properties is never a problem because HomeVestors provides financing for qualifying purchases and repairs.
Insuring Your Investment Against Disasters
Disasters come in all shapes and sizes, which makes buying property insurance for flipping houses a crucial component for securing potentially good returns. Without it, you will be left holding the bag—and, possibly, no profits—if someone breaks into the house and vandalizes the walls or a cold winter snap freezes then bursts the pipes. There are few things worse than spending your hard-earned cash on a fixer-upper that very nearly gets fixed, only to have a crook or a storm undo all of your efforts—except having to pay to repair the damage yourself. Even if you never have to file a claim, protecting your investment property with the right coverage will bring you peace of mind. And, if you do have to use the policy, it will help to keep you in the green.
Selling At a Price the Market Will Bear
Typically a mistake that new investors make, selling for too little is often an issue of confidence. But, it can also be an issue of competence. If you don’t know your market well or don’t know how to accurately analyze comparable homes in the area, you may ask for too little and, unfortunately, get it. Obviously, you don’t want the property sitting around waiting for a buyer—and weighing down an opportunity to grab the next potential deal. So, yes, it’s important to price the house to sell so that you can get your money fast. But, selling your investments for less than they’re worth almost guarantees you won’t realize the kind of cumulative returns that you’ll need to keep your business up-and-running.
Of course, it’s equally important not to shoot too far north when pricing your property or else you’ll scare away would-be buyers. The fact is, having the highest-priced home for sale in the neighborhood isn’t the same draw as having the most expensive car on the block. People intuitively know when they’re being had and, when it comes to big purchases like buying a new house, they’ll take the extra time to make sure they’re getting a good deal. And, since most homebuyers will be working with a real estate agent who has access to the sold comps in your area, they’ll know if your asking price is off the mark and likely look elsewhere if it is—especially if they are working within a budget too. This is also part of why it’s critical not to buy too high or let your renovation costs run away from you. Just because you paid too much, doesn’t mean a potential buyer should too. But, provided you ran all the numbers correctly, bought the house at a good price, and stayed within budget on the rehab, then selling your property at a reasonable ARV that attracts buyers should position you to make enough money to move on to the next deal.
If you have a house on the market, and have very few showings, that is a good sign it is priced too high for the area. If you have having a lot of showings, but the house is not selling, that is a good signal that it does not meet the expectations of the buyer – either the rehab is not the quality the buyer expects or the house needs some staging.
With all this in mind and assuming you do everything right on almost every deal, how much money can you really expect to make flipping houses? The truth of the matter is that it’s up to you. After all, having a say in your earning potential is one of the core benefits of buying, rehabbing, and selling homes. That said, if you want to build a real estate investment business that can do more than just sustain you and your family, it will take a lot of hard work and plenty more than one property. You will also need a good system in place that you commit to following to the letter.
A Better System for Investing Starts With Joining the Best Team
I wasn’t as young as Reggie when I started investing in real estate, but I wasn’t the old hat that I am now either. A lot of years have passed between when I bought my first house to flip and my most recent speaking engagement on the subject. Quite a few mistakes have gone by as well. I’m grateful that none of my early errors—like buying a fixer at ARV and neglecting to budget for holding costs—ever cost me my career. It’s also a good thing that, like Reggie, I caught on quickly to the fact that something was off. Even when I occasionally made money, I clearly wasn’t creating the career as a professional real estate investor that I’d envisioned.
Eventually, it occurred to me that I needed a better system for building my investment company. But, it wasn’t until I became an independently owned and operated HomeVestors® franchisee that I discovered I also needed to improve my mindset. You see, there is no one deal to end all deals in real estate investing. The only way to begin a good business out of flipping houses is to buy and sell a lot of homes. And, the best way to do that is to have access to leads that convert, tools that help you correctly calculate the numbers, and a team that stands beside you—and guides you—through the market’s ups and downs. After my week-long initial training with HomeVestors, followed by years of ongoing training and support, that’s exactly what I got. And, with years of hard work behind me, I also now have a reputable real estate investing business—one that has grown as fast as my hopes.
If you want to get real about how you can make money as a professional real estate investor, contact HomeVestors about franchise opportunities in your area today.