Investing can take many forms. Some see investing as a glorified form of gambling – an opportunity to put in some money and risk catastrophic losses in the hopes of seeing explosive, once-in-a-lifetime gains. Others see investing as the tortoise side of the “tortoise and the hare” race, prioritizing slow and steady returns, despite being less exciting.
A good, diversified investing strategy includes elements of both philosophies, prioritizing riskier investments with high potential rewards, as well as steadier investments with greater consistency. Investors have a great deal of control in determining the balance, through the assets they choose as well as how they handle those assets.
Flipping houses, a real estate investment strategy that became popular a couple of decades ago, has historically been closer to the “glorified gambling” aspect of investing. But is there a way to make house flipping more consistent and sustainable?
The Basics of Flipping Houses
It’s not hard to see the appeal of house flipping. The basic idea is to acquire properties for relatively low prices, fix those properties up with upgrades and repairs, and then sell those properties on the open market for more than you invested in them.
In the best possible scenario, you can make thousands of dollars (or substantially more) with each new acquisition. Even a few flips each year could provide you with a lucrative income – and a single, massively successful flip could give you a lump sum of wealth that could sustain you for years.
However, house flipping isn’t always this straightforward.
Problems With House Flipping
Most people understand that flipping houses isn’t totally accessible, nor is it a strategy that always pays off. These are just some of the problems associated with house flipping:
- Inexperience. If you don’t know what you’re doing, you’re probably going to lose money. Buying the wrong property, committing the wrong repairs, messing up the selling strategy, or being unable to contend with competition can all cause wrinkles in your house-flipping approach.
- Competition and entry prices. Lots of people understand the potential windfalls associated with house flipping, so there’s significant competition for purchasing reasonable properties in this niche. This artificially drives up prices and makes it hard to acquire the right kind of properties.
- Repair costs. If you don’t budget for repairs appropriately, or if there are more problems with the property than originally expected, it can wreck your strategy entirely. Flipping a property could result in a loss instead of a gain.
- Timing. If you aren’t able to sell the property quickly, you could end up in the whole. While the property is unoccupied and listed on the market, you’ll still be responsible for upkeep costs, gradually increasing your total expenses.
- Listing and sale. There’s no guarantee the house will sell for your target price. This is especially true if the market changes while you’re fixing it up.
- Transactional costs. Small extra costs, including transactional costs, can throw off your profitability equation. Cleaning, staging, marketing, and selling the home can easily add thousands of dollars to your expense sheet.
- These problems are so severe that some experts insist that house flipping doesn’t work anymore – but this isn’t exactly true. Instead, it’s more like house flipping strategies need to evolve to pay off.
How to Make House Flipping Consistent and Sustainable
So how do you make a house flipping consistent and sustainable?
- Adopt the right mindset. First, you need to acknowledge house flipping for what it is. This is a risky strategy that isn’t sure to pay off, and it demands a lot of research and effort. If you treat it like a get rich quick scheme, it’s going to work against you.
- Set strict limits. Set strict limits for yourself in terms of both risk exposure and financial expenditure. Make sure you don’t go over budget and stay within the bounds of your personal risk tolerance.
- Work with experts (unless you are one). Unless you already have years of experience buying and selling properties, you should lean on other experts to make better decisions. The help of real estate agents, lawyers, and contractors can be indispensable when hunting for properties and making upgrades.
- Wait patiently for the right deals. Impatience has no place in a sustainable house flipping strategy. It’s tempting to jump at the first opportunity you find, especially if you’re eager to get started, but it’s usually better to wait for the perfect deal – even if it takes months or years for that deal to appear.
- Overestimate repair needs. Estimating repair costs accurately is incredibly challenging, even for experienced house flippers. If you want to increase your chances of becoming profitable, err on the side of overestimating repair needs.
- Rent before selling. Instead of leaving the property unoccupied and selling it right away, consider renting the property for at least a few years. This will give you a steady stream of income, which you can use to finance another property purchase and help mitigate some of the problems associated with trying to sell the home quickly. This is also a great way to increase your total net worth through equity – and might eventually serve as a passive stream of income for your retirement.
Even with these strategies in place, house flipping is still a risk. Always do your due diligence and manage risk carefully when pursuing any type of investment strategy.