(MP) Many people use dynamics of real estate market to gain profits. This practice is often called house flipping and it involves buying, renovating and selling properties at aspiring locations. In this article you will be able to find out financial pros and cons of this business and determine whether it is the right model for you.
Two Types of House Flipping
There are two major types of house flipping, and both of them bring different financial benefits.
- Real estate can be bought and sold high, using the benefit of rapidly rising real estate market that hits certain neighborhood;
- So called ‘Fix and Flip’ type involves buying real estate in bad state and investing money in renovation that will be doubled or tripled after real estate is sold.
Second type is usually more profitable since most mortgage lenders don’t invest additional funds in real estate repairs.
Where to Find Money?
One of the major questions many real estate flippers need to think about in very first phases of their plan is how they are going to get enough money to invest in house flipping. There are many individual agents and real estate agencies that use flip houses as their main source of income. They usually have enough funds on their accounts to finance house purchase and renovation. But, since this text is mainly intended for real estate flipping beginners, we will need to focus on ways how ordinary people can get enough funds to easily go through this deal. These are some sources you can use:
- Mortgage – It is like buying a regular home. Most mortgage companies offer many different packages, some of which can be used for real estate flipping expenses. Before choosing the right mortgage it is advisable for future house flippers to check their credit report, study mortgage requirements and payment plan and of course, shop around.
- Finding partners – Investors who only have one part of the funds required for conducting a real estate flip can find interested partners with whom they will join funds and share profits at the end. Partners can be found on various different places on- and offline. One of the popular places where new investors can exchange ideas and collaborate are local Real Estate Investors Association meetings.
- 401(k) plan – Many people have lots of funds on their 401(k) accounts. These plans also allow their owners to buy domestic or foreign real estate, commercial properties and raw land.
How Much Does It Cost?
Mark Fergusson, licensed real estate agent wrote a long post on Financial Samurai website, where he explains real estate expenses in detail. He flipped more then 100 homes and these are usual expenses each house flipping operation of a house that’s bought for $100,000 and sold for $160,000:
- Mortgage costs: $2,000- $8,000
- Insurance costs: $500- $2,000
- Various property taxes: $500- $3,000
- HOA costs: $0- $6,000
- Maintenance costs: $250- $1,000
- Selling costs (marketing, sales funnels, organized visits etc.) $10,500- $15,000
This means that according to Mark Fergusson’s calculation a house flipping cost (for houses bought for $100,000) is approximately in the range of $13,250 to $35,000. Of course, this calculation doesn’t include renovation costs and initial real estate price.
How Much Profit Could You Expect?
Following Mark Fergusson’s calculation we determined that the lowest profits real estate flippers can expect is $25,000. We should also add that the whole re-selling process depends on real estate market trends and gentrification that is going on in many different cities across United States. For this reason real estate location plays major role in house flipping.
One of the greatest dangers of flipping is that your funds remain stuck in the newly bought house. This happens when real estate prices in the neighborhood suddenly decrease and house owners don’t want to sell house for lesser amount of money. That’s why house flipping process needs to be followed by elaborated real estate price research, which should include consultations with experts.
The Final Word
Real estate flipping can be a risky business, especially from financial point of view, but only risky businesses are able to produce profits this big, in such a short period of time. If real estate buyers have the right approach, and meticulously inspect real estate market before they buy the property, they have nothing to worry about.
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