By Michael Internoscia, Principal M&M Private Lending Group, LLC 6/11/2020
On the surface, it looks pretty easy – purchase a house, make a few changes, re-list it on the market, and make a profit. There is an array of television shows that have glorified this process, too, but these shows don’t tell the whole story. especially when the market is going through changes like we are seeing now with Covid-19.
While flipping houses can be profitable, you definitely have to know what you are doing. If this was not true everyone would be doing it. Part of knowing what you are doing is knowing what mistakes to avoid. We will discuss these below and add a twist we are seeing today with the Virus looming.
Not Having The Proper Money Down
Investing in real estate, in any manner, is a costly endeavor. The first expense you encounter is acquiring the property. While a low or no money financing option may seem appealing, trying to find an offer from a legitimate vendor is extremely rare and usually require you to not have ownership in the asset or the LLC you want to close in. Too risky for the lender. Also, if you finance this purchase, you are going to have to pay interest monthly Lenders don’t wait until the “flip” to be paid.
During economic “weird” times such as declines values, recession and now a Virus, lenders get spooked. They reduce their loan to Values (LTV) due to the unknown. Not knowing where real estate values are going. Are they going down are they going up? FEAR creates uncertainty and that reduces LTV.
Even though the interest you pay on borrowed money is still considered tax-deductible, it isn’t a 100 percent deduction. Each dollar that you spend on interest will add to the amount that you must earn when you sell the property to break even. Also, if you choose a home equity loan or a mortgage for financing your purchase, only the interest will be deductible. The insurance portions, taxes, and principal parts of the payment are not deductible. Remember to always ask your accountant. You can’t rely on the lender to discuss this and frankly it’s not their role to engage in this.
Not Having the Time to Execute the Plan
The process of fixing and flipping houses is something that is quite time-consuming. It can take you several months to not only find but actually purchase the right property. After you own the property, you have to put quite a bit of time fixing it up. If you work during the day, the time that is spent handing the demolition and construction is going to translate into no free time on the weekend or in the evening. Don’t do this part time if you don’t have the work ethic to work “two” jobs. You know yourself best. Something to think about. Now could be the best time when people are in between careers, people are moving and looking to relocate; loss of jobs makes people desperate to sell. A flipper’s dream.
After all the work is done, you still have to schedule inspections to ensure your property complies with the applicable building codes before it can be sold. If it doesn’t, then you have to spend more time and money to meet these requirements.
TIME IS MONEY HERE.– Financial Proverb.
Not Having the Proper Skill Sets
Skilled professionals and professional builders often flip houses as a source of side income to their day jobs. They have the experience and ability to find and fix this property. However, if you don’t have these skills and if you can’t put in sweat equity, you will have to pay even more to hire someone who does this. If you are not a “handy dandy” count this into your budget because someone has to do it. Now could be the perfect time to take a class online, learn from a friend or just experiment on fixing items. Maybe you are better than you think.
Flipping Houses: Be Prepared for Everything
When it comes to flipping a house, there are more than a few factors that must be considered. Be sure that you avoid the most common mistakes which are briefly discussed here. Doing so will ensure that you make the most of the investment that you have made and that you will have the biggest opportunity to actually make money on the house that you purchase and flip. In the long run, flipping houses can be a lucrative business; however, you have to take the right steps.