Some investors get started by investing in equities and bonds for years at a time. However, if you’re ready to branch out, real estate may be a good fit for your portfolio.
Investing in physical real estate can be accomplished in a variety of ways. An income property, whether it’s a short-term rental or a long-term rental, is one alternative. Another strategy is to acquire distressed houses and renovate them before selling them at a profit.
Many real estate investors are quite successful flipping houses as a profession. However, house flipping is inherently dangerous. And if you’re considering getting into that business, be aware of what you’re getting yourself into. Otherwise, you might discover that house flipping isn’t worth your time or money.
The risks of flipping houses
If you’re just getting started flipping houses, it’s a much more hazardous activity. That’s because home improvements generally end up costing more than anticipated, particularly these days when material costs are higher owing to inflation.
You might also find it difficult to acquire a house at a low enough price point to earn a decent profit by flipping it. That’s a broad risk, but one that is more pressing in today’s real estate market.
Because of a lack of supply, houses are continuing to sell at above-average prices. And that pattern might be felt in properties needing major repair.
How to succeed at flipping houses
With the appropriate technique, house flipping may be a decent source of income. If you’re new to the process and want to learn the ropes, it might make sense to work with a seasoned house flipper. Working with someone who has prior experience in this area can help you avoid some rookie errors, such as paying too much for a property.
Speaking of overpaying, if you execute the correct pricing strategy, house flipping may be profitable for you. As a rule of thumb, expenses on a house flip should not exceed 70% of the anticipated purchase price.
So, let’s assume you’re buying a three-bedroom house in a neighborhood where comparable properties sell for $400,000. If your goal sale price is $400,000, you’ll want to keep total expenditures below 70% of that number, or $280,000. This means that if you see a neglected property with a $200,000 asking price, you’ll either need to be absolutely certain that you can keep your renovation expenditures below $80,000 or attempt to negotiate the price down (or pass on the house).
Should you try house flipping?
Even if you enter a deal prepared with information, house flipping is still a hazardous endeavor. You may feel comfortable with a home flip if you’re willing to take that chance. Otherwise, understand that there are plenty of other ways to get involved in real estate investing, whether it’s by purchasing income properties or investing in REITs.
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