“Flipping a house is going to be so easy!” I used to think that to myself. Have you ever daydreamed about doing something that you knew you weren’t qualified to do and were never, ever going to do? Trying to flip cheap houses for quick profits was my unrealistic fantasy.
We have all seen those reality TV shows about house flipping. Don’t they amp you up and get your mind working about the possibilities? How hard can this be to do?
It’s easy to delude ourselves.
One of my favorite actors is Jeremey Renner. He’s a household name now because of his portrayal of Hawkeye in the Marvel Cinematic Universe, but I followed his career for years before he became Hawkeye.
When Renner was a struggling unknown actor in 2003, the same year he starred in the film adaptation of the 1970s TV show S.W.A.T., he began flipping houses. Renner would pool his resources with other actors and flip houses for a profit.
He makes millions now flipping houses as a side-business to acting. Renner was flipping houses back when he was struggling for roles. It’s a very inspirational story that almost inspired me to do the same years ago.
That is a good way to lose a lot of money quick. Renner is an accomplished carpenter and knows the market. He pooled his financial resources with other actors to flip houses.
I didn’t know where to start a decade ago anymore than I do now. Flipping houses requires significant financial investment, home rehabilitation, renovation, and repair knowledge, and an understanding of the real estate market.
If you don’t know what you’re doing, then forget getting rich quick flipping houses. You’re more likely to lose more money than when you started.
Most House Flippers Make Modest Returns
In 2018, house flippers made an average gross profit of $66,000. The net profit gain can be as low as $30,000.
What you must consider is that you have to do some calculations to justify buying the property to rationalize flipping it.
Most house flippers follow the ARV 70 percent rule. You must calculate the, “after repair value,” of the property and then only pay 70 percent of that for purchase. That estimate does not include the cost of repairs.
For example, if your calculated ARV for a home is $120,000, then you should pay no more than $84,000 for purchase. OK, but then you must consider the cost of repairs and hiring contractors.
May the fates help you if the property must be demolished and rebuilt from scratch. You won’t be getting rich quick then.
Or profiting a $66,000 gross return (or a potential $33,000 net return) against a $84,000 investment anytime soon.
House Flipping Takes Time
Are you qualified to fix plumbing, home electrical systems, or efficiently replace insulating? You or a contractor would need qualifications, certifications, and licenses to effect certain repairs.
Renovating and repairing a house is not something you can do every other weekend for two months. It could take months or years, which is a reality that negates the, “get rich quick,” idea.
Market Conditions Rule
You could buy homes in the United States for anywhere from $1 to a few hundred dollars in various economic reform programs for economically depressed neighborhoods.
The catch is that these properties are located in high crime, economically depressed, or aesthetically undesirable areas relative to real estate market preferences.
Let’s look at it from the other side. You can rehab a home in the hottest real estate market in the country. It doesn’t mean you will sell at a profit anytime soon.
You really need experience and connections to know what neighborhoods will become hot markets before everyone else.
You Can’t Flip Cheap Houses for Quick Profits
It takes about 70 days for an average home to be sold under the best circumstances. However, it usually sits on the market for a month. Then, there is a 30-day closing period.
As a home flipper, you’ll have to add months to that time scale. I am not discouraging you from flipping homes.
It’s just important to accept that, “getting rich quick,” is an operational mindset that just doesn’t apply here.
Read More
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Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.