How Do House-Flippers Make Money On Their Investments?
Flipping houses can be addictive, and after flipping one property it's easy to get back on the hunt for the next one. But how do flippers make money on their rehab projects? After all, it would seem that so much goes into the purchase, renovations, and eventual sale of the property.
In order to be a successful flipper, you must be strategic and thoughtful in how you proceed with any project. Here are a few considerations that help rehabbers make money on their projects:
Buy the ugliest house on the block. "Buy low, sell high" is the name of the game. And if you're looking at the ugliest house on a great block, then it is likely that it needs the most work and not many are willing to shell out the cash or sweat to bring the property up to par.
Sell high. Rehabbers are interested in properties that can be sold for maximum profit when the renovation is over. So it doesn't matter if it's the ugliest house on the block, you'll be swimming in sweet cash when the house is sold. Think about the "we buy houses" ads you see on TV and in the paper. Those guys buy low and sell high. If your home is underwater, the goal is to pay the homeowner the minimum amount in order to realize a significant profit.
Keep renovation costs low. This is key to maximizing profits. When discussing a project with a contractor, even a quote of a few hundred dollars difference can add up when you figure in closing costs, materials, and other expenses that come up as you move forward. Every dollar counts, and you want to make sure that you keep expenses low in order to realize your maximum profit.
Paying cash instead of financing. Many flippers avoid dealing with the banks because they don't want the hassle of restrictions or exorbitant fees charged to non-owner-occupied dwellings. Interest rates are often higher due to the risk and this forces flippers to prefer cash deals instead of financing. It may sound great to use other peoples' money to make money, but that money can be expensive and eventually eat into your bottom line.
Network of referrals. Rehabbers work with a team of investors who are constantly sharing information on how to reduce costs and maximize their investments. Any rehabbers who work by themselves are on a solo mission to expanding expenses and potentially expensive mistakes. Having a network of referrals and fellow investors/rehabbers helps save money while cluing you in on how to make more money with what you have already.
Cash buyers waiting on the next deal. This is important. As a rehabber, you must have cash buyers waiting on your next project to go live. Why? You risk increasing holding costs if you don't. Holding costs are the costs required to maintain the property while you wait for someone else to buy it from you. This includes the mortgage, home insurance, property management, taxes, and any other costs related to the home. By having a list of buyers who are interested in your property, you create a bidding war which drives up the price while reducing holding costs.
As you can see, while the money is sweet as a rehabber, the plan to get there must be carefully thought out and strategic if you are to realize your maximum profits. Every dollar counts, so make it work for you.