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Fix and flip real estate is a popular strategy amongst real estate investors because it has the potential to generate sizable profits in a brief period of time. However, while flipping does have a large capacity for success, there are many pitfalls that await investors who are not properly prepared.
However, you should not let the risks discourage you from trying out this strategy. Once you learn which mistakes to avoid and the proper steps you should be taking, you will be capable of entering any potential fix and flip with confidence.
So, in order to help you start flipping like a pro, here are some major pitfalls in fix and flip real estate and how you can avoid them.
But first, before you start planning a fix and flip let us show you how to get affordable financing with little to no penalties for breaking your term early with a free strategy call at the link below.
Misunderstanding the Market
One of the biggest mistakes that new flippers can make is not properly understanding the market they are trying to work in. Fix and flip real estate are all about understanding market demand and using that knowledge to convert existing properties that require updates and converting them into hot-ticket items that cater to the demands of the buyers currently searching the market.
Which Properties are In-Demand?
One of the first things you need to consider when deciding to fix and flip real estate is which properties are currently in demand. While certain types of real estate may be attractive options to you as an investor, they may not appeal to the buyers currently looking to enter the market.
For example, if the region you are looking to invest into currently has a strong demand for single-family homes and is not looking multi-family properties, you likely will not find as much success flipping a townhouse or a duplex.
How Much Are Properties Selling For?
Another consideration you need to account for is the current prices facing the market. While a property may seem undervalued at first glance, you need to compare it to nearby comparable properties in order to see if it truly is undervalued.
If a worn-down three-bedroom house is currently listed at $180,000, it may seem like a massive bargain. However, if a freshly renovated three-bedroom house a few blocks down the street recently sold for $195,000, you can infer that the house you were looking at does not have a lot of room to appreciate in the short-term and may not make a good flip.
Overspending and Underbudgeting
One of the most dangerous mistakes a flipper can make is overspending and underbudgeting. This applies to both time and money. If you are not careful and do not plan accordingly, a simple fix and flip can quickly become a massive cash sink and you run the risk of eating away your profits or worse yet, losing money on the sale.
Budgeting includes not only the cost of buying and renovating the property, but also ensuring you have enough money to cover property expenses such as mortgage payments, insurance, and utilities for the entirety of the process.
The 70% Rule
One of the key tricks that people use in order to ensure they do not overspend on their fix and flip investments is the 70 per cent rule. Essentially this rule states that you should not spend more than 70 per cent of your final estimated sale price on the purchase and renovations of a property you are flipping.
While this is more of a suggestion than a solid rule, it can be incredibly helpful to help you envision your budget and the profits you would like to make on the final sale of the property.
Budgeting Your Time
Another important consideration you need to account for is time. Fix and flip real estate require a massive time commitment and you need to account for that when you are coming up with a plan.
If you plan to be on-site working full-time on the flip, you need to ask yourself whether you have the cash flow or savings to support yourself during the process. If you are planning to have all the work done by outside contractors, you need to determine how much you need to pay them hourly and how long they will take to complete the job.
When budgeting your time, you will also need to consider how long it may take to sell the property at the end. If the market is slower, you need to double-check that you budget enough money to cover the property expenses until a buyer comes along.
Discover How To Flip A House With This Step By Step Guide
Hiring The Wrong Contractors
When you are working on a fix and flip property, you cannot afford to hire the wrong contractors for the job. By hiring underqualified or unskilled contractors, you can quickly lose massive portions of your budget to hiring new contractors and potentially requiring them to redo portions of the job that were messed up by the previous workers.
Signs of an Underqualified Contractor
In order to avoid hiring an underqualified contractor for your fix and flip, you need to understand what to look for in a contractor and which signs indicate a contractor is a poor decision.
One major indicator is under-market rates. If a contractor is charging significantly less than what most of their competitors are asking for, it may be a sign that they are inexperienced and looking to undercut the competition in order to find work.
Another red flag is if they cannot show you a license or certification for the work they are offering. Hiring unlicensed contractors is not only a risk towards the quality of the work you will receive, but it may also lead to problems securing permits, or worse yet, legal trouble and fines for the work they complete.
Not Securing Proper Financing
Finally, one of the largest pitfalls an investor can make while investing in fix and flip real estate is not securing the proper financing. That is why at LendCity, our team is dedicated to ensuring that no matter the investment, you are matched up with the lender who is going to offer you the best available rates every single time. To learn more about how you can secure the best rates for your real estate investments, visit us online at LendCity.ca or give us a call at 519-960-0370. Alternatively, click the link below to book a free strategy call with our team at LendCity today.