Perfecting your house flipping business model
I’ve found through all the house flips I’ve done that the biggest danger is going in with a flipping business model that is destined to fail. Just know that when you are learning how to flip a house, you may execute a business plan poorly, but if it’s a good model, you still have a chance of succeeding financially, and pulling out a profit. It’s when you have a poor house flipping business plan, even when executed well, that can’t possibly achieve success.
The budgetary process
From the outset, you’ll need to create a pro forma budget for your real estate investing project. This is the easy part. Acquisition costs, tentative rehab costs, and carrying costs until you sell it need to tallied up. Be sure to be conservative in all areas, and don’t forget to add 10% as a overage factor when investing in real estate. Then, figure on a realistic market value for the property once it’s all fixed up to determine your net income projection.
Doing your due diligence
Make sure you use a local contractor to obtain accurate quotes on the work you need to have done for your renovations. Also, once you have a very good idea of the total work to be done, write it up! You can then bid out the work to several contractors (or, to disparate tradespeople responsible for their own individual parts of the whole rehab). And you’ll at least be comparing quotes with exactly the same work to be done.
Buying and selling at the right time of year
House flippers know that seasonality is extremely important in any flipping business model. Look to acquire properties in the late Fall and dead of Winter. You’ll find sellers tend to drop their prices right after Thanksgiving and Christmas…Likewise, try to have your renovations completed by the Spring to take advantage of the best time of year for any seller to place a house on the market. This is because most homebuyers come out of the woodwork in Spring, having stayed on the buying sidelines during the middle of Winter.
Knowing your local marketplace
This is the largest component to your house flipping business model. With research done online (for example, web sites such as Realty Trac, Zillow – http://www.zillow.com/ – or Trulia supply excellent data for your area) you should be well acquainted with the average sales price of like properties. In addition, you should know off the top of your head how many houses for sale there are in your town this month, how many there were last year, and what the overall change was. Likewise, you need to be very familiar with the most important statistic of all to a house flipper: the average number of days houses stay on the market in your area.
The greatest danger
Any experienced real estate investor will tell you that the greater the average number of days average that a house remains on the market in your area, the less of a proper chance for your flipping business model to succeed. House flipping requires as short a time as possible between your acquisition of the property to the date you actually have it sold. In my business model, I won’t even consider purchasing an investment property to flip if the average number of days on the market for house sales in my area runs over one year. I would prefer six months or under. And I would take a very long look at my net income projection numbers on any given project for each month over six as an average time on the market in a given area.
Always do your research before you buy
So make sure you do your research into your geographic area as intensively as possible before looking to buy investment property for flipping. Keep a keen eye on the most important statistic: the average days on the market in your area. If it’s too high, consider purchasing in a more fertile area for flipping…Even if it means you’ll have to travel farther each day to oversee the renovations. Just don’t get stuck holding a flip property in a bad economic environment. Your carrying costs (taxes, insurance and mortgage) will eat up all your potential profits – and then some.
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