Building Wealth with Real Estate Part I: Flip Houses
(By: Lisa Priest, REALTOR — This article was also published in the November 15, 2014 edition of the Palestine Herald Press)
It’s not a secret by any means–to build wealth, acquire real estate. Unfortunately, there is no such thing as easy money and real estate is not a get rich quick scheme. Real estate is a time-tested method of building wealth. As with any investment, there is risk. However, smart real estate investing is one of the least risky investments you can make, and it can pay off big time.
There are two types of investment property: flips and holdings. I won’t spend too much time discussing the differences, as many know the “scoop” from HGTV. However, do not believe everything you see, investing is not as easy as it appears through the magic of TV.
A “flip house” is a house you buy with the intention of quickly reselling for a profit. The downsides of a “flip” are that you need to have cash resources to tackle the rehab of the property. You have your feet (and wallet) to the flame for the duration of the remodel and as long as the property is unsold. Tackling a flip house requires planning—and unfortunately, some of the planning is being prepared for the surprises. You will have unforeseen expenses—it’s just Murphy’s Law. There will be pipes that need to be replaced or the AC will go out or the electrical will need updating. Something will happen. Plan for it. Time is money and the expenses don’t stop until the property sells. During the flip, you must cover the utility costs, labor and materials for any remodels, insurance, property taxes and any notes on the property. Some other important expenses to consider are sales transaction fees and taxes. Discuss with your REALTOR® before the flip is purchased, so you know exactly what fees you’ll be looking at. Work with your REALTOR® from the beginning and base your budget numbers off of the lowest current market pricing that your finished flip will return. Always assume the worst and be pleasantly surprised with anything better. Buyers in this market will not overpay, so don’t assume they will just because it is shiny and new, the appraisal value has to be there. Don’t forget Uncle Sam—you’ll want to discuss short term and long term capital gains with your tax professional, so that you are not caught with your pants down owing unforeseen taxes at the end of your flip. In flipping, there are no good surprises, so do your homework on your expenses up front. Knowledge is power and the knowledge is around you, so don’t be afraid to ask the professionals!
Don’t let me scare you off; there are many great advantages to a flip as well! The biggest advantage, of course, is the potential for large profits. If done correctly, the return on investment is faster and the money is not “tied up” in the investment as long as a buy and hold investment strategy. Let’s face it, there is something just downright cool about taking an ugly house and making it gorgeous again! It takes a clever mind to see the potential in something ugly and to create a gorgeous house that buyers will love. Designing a house from start to finish is FUN—getting to select the finishing touches from light fixtures to sinks is a blast and gives a great sense of accomplishment when you see it all come together.
It is definitely an art form with the potential to make the equivalent of a year’s salary in one deal. The first flip has a large learning curve—the more flips you do, the better you’ll be. Every deal will garner more knowledge and better contacts than the last. My best advice is to stick to your budget. Budget as much as you can for the unforeseen and keep your profit margin reasonable.
Flipping a house sounds fun and easy, but make no mistake, it is not for the meek! It is a round the clock mission to get the house to market, because every day it is still owned by you, it is costing money. Flipping definitely has its advantages, especially once the sold sign is in the yard, the keys are handed over to the new owner and the check is in hand! If you can flip it and flip it well, there is money to be made.
Next Saturday, Part II of this series will discuss the “buy and hold” real estate investment strategy.
Lisa E. Priest is self-proclaimed Real Estate addict and is an East Texas Area REALTOR® with Picket Fence Realty, Inc. You can reach her via phone or text at 903-948-3343 or email [email protected] or at BuyPalestine.com.