Property has the potential to make you a lot of money. But the work is hard, and real estate flipping requires time, money, and passion. But essentially, you find a place in need of some love, renovate it and then sell it for a profit based on your initial investment.
Know the 70% rule
Buying houses isn’t cheap, even distressed ones. The 70% rule will help you determine the maximum price you should pay for an investment property. The rule dictates that you don’t invest more than 70% of the home’s after-repair value (ARV) less the costs of restoring the property.
Using this rule, you can almost always sell your home for a profit. To determine how much you should shell out: estimate value after renovation, multiply by 70% and subtract from renovation cost. The calculation is as follows: (ARV) x .70 – cost
Do what you can
If this is your first time trying to flip a property, you probably have another job and aren’t doing it full-time as a business. But renovating a house takes a long time, possibly a lot longer than you initially thought. Also, your first renovation is likely to cost more since you are learning the ropes and might not know money-saving tricks yet.
But one of the most valuable tips is to do as much as you can yourself. For example, you might not be licensed or skilled to replace an electrical system. Still, you don’t need any special skills to paint a wall, clean the bathroom or install dimmers.
Defer your taxes
Like any income, you will need to declare the profits from your property flipping on your tax returns. Yet, like everyone else, it’s doubtful you enjoy paying taxes and are looking for ways to spend the minimal amount by law. Fortunately, there are ways you can do this.
For example, in the United States and the UK, you can defer the tax from a sale by reinvesting it into another property to flip. Additionally, you can convert to a rental property or live at the house for two years. If you are unsure, consult a real estate accountant for expert advice.
Avoid common mistakes
Real estate flipping is a challenge to get right. However, with time and patience, you can become successful. But like anything, there are terrible mistakes you can and probably will make as a beginner in the flipping business. Try to avoid the following:
- Disregarding the housing market: know when buyers are more likely to spend.
- Last-minute changes: will add more time to the project and rack up charges.
- Unreputable yet cheaper contractors: they are cheap for a reason. Check reviews.
- Becoming attached: it’s a business investment, not your forever home.
- Partnering up: some people are unreliable and want money without working.
Of course, there is much more to successful flipping, but these are some of the biggest mistakes new flippers make. Of course, inexperience will cause you to make mistakes. Still, you can avoid these by studying the concept, planning correctly, and knowing precisely what needs to be done.
Always get insurance
Further to mistakes, one of the biggest you can make as a beginner is not insuring your flip property. Your new property can be damaged by weather and its effects, such as flooding and wind damage. Or there could be an accidental fire.
Therefore you need to protect your investments to avoid losing money. Insurance money will help repair any damage or give you back the investment capital. You can get property insurance from various online or local brokers but shop around to get the best rate available.
Incorporating yourself helps with certain business aspects of flipping houses and helps protect you legally. Therefore, you should consider incorporation as a Limited Liability Company (LLC) in the US or a Limited (Ltd.) business in the UK and Europe. For flipping houses, limited companies are usually the best option for tax and self-protection reasons. However, they aren’t tax-exempt, and taxes apply more to a limited European business than in the USA. However, your liability extends only to the amount of your investment.
If you are new to flipping houses, you will probably make some mistakes. And even if you are experienced, you cannot account for unforeseen circumstances. However, you can learn from mistakes and plan ahead with contingencies. By doing so, you mitigate risk and prevent all but the worst from happening.
You can help your project by listing potential risks such as weather damage and how you can avoid them. Then decide what can be done in the event of a threat becoming real and how likely it is. Also, distribute contingencies to everyone involved.
Flipping houses is a challenging yet rewarding experience. While you might start with a single side-project, you can make it a full-time business. However, you need to be aware of the 70% rule, how to defer taxes, the common mistakes people make, and reducing risk to your property.