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Pros and Cons of House-Flipping

Pros and Cons of House-Flipping

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Francesca Ortegren, PhD By Friday, 25 September 2020 03:36 PM EDT Current | Bio | Archive

2020 has been a year of highs and lows in all aspects, including real estate.

Despite a slow start to the buying season nationwide, the housing market has swiftly recovered since the initial COVID-19 downturn, and demands for new listings are comparable to their pre-pandemic levels.

In fact, between the low mortgage rates and the limited inventory, real estate prices have gone up 10.1 % year-over-year, according to an August 2020 study by Realtor.com.

Such growth is excellent news for investors looking to make money buying and selling houses. House-flipping remains one of the most profitable and accessible methods to invest in real estate. Nevertheless, you will also hear about money pits even seasoned house-flippers are often confronted with for every success story.

Before pouring your hard-earned cash into what could be the next great opportunity, it is best to get a clear picture of the pros and cons of house-flipping

Pros of House-Flipping

House flipping is — in theory — straight forward: Buy a property in need of loving care for a discount, renovate it up to market standards, resell it for a profit as quickly as possible. Unlike other real estate investments, the money you spend while house-flipping is not tied for long periods of time. You can turn a profit rapidly and use that extra cash to pay for your next deal or sit back until the next opportunity presents itself.

House-flipping is also more predictable than most ventures. The housing market is typically significantly more stable than the stock market, which alleviates the uncertainties linked to any form of investment. Although the real estate market fluctuates, you have better visibility on what the property you are renovating may sell for while house-flipping because you are only in possession of the property for a short while, where widespread real estate market changes are unlikely to occur.

Finally, house-flipping gets easier as you complete more deals, and your profits will likely increase over time. You learn more about the ropes of real estate and will be able to recognize the best opportunities. You will be in a better position to estimate the multiple costs (such as closing costs) and fees associated with each real estate transaction by using a seller’s net sheet to estimate how much money you will make from each sale, for example. You will also get more skilled at assessing the costs of each renovation.

Finally, as you become more experienced with house-flipping, you will gather around you a team of trusted real estate professionals who will benefit from your success. By offering your repeat business, you may negotiate better rates and increase your profits even further. For example, your favorite contractors may be willing to give you a discount. You could also negotiate a home buyer rebate or a reduced real estate commission fee from your go-to real estate agent when buying and selling your next fixer-upper. 

Cons of House-Flipping

Not everything is always smooth sailing when it comes to house-flipping. Horror stories abound even among seasoned investors.

Anyone who has dealt with extensive home renovations can tell you that house-flipping almost always takes a lot longer and ends up being more costly than initially predicted. Buying a house, even at a discount, is expensive, as are significant home repairs.

Besides, flipping properties is far from a hands-off business. You will need to find the right property, get estimates from reliable contractors, keep an eye on the job site and remain responsive throughout the process if required before you can finally put the building back on the market. You will also need to consider the legal aspects of such a project, including your town's code and zoning requirements.

Until you are well-engaged in a new project, it is difficult to judge your final budget. House-flipping can often feel like you are opening a can of worms. Although you may think that a property only needs cosmetic repairs, you may discover along the way some significant damages such as structural issues.

Even skilled home inspectors may not be able to identify some problems. Therefore, you must be prepared to add some wiggle room into your budget. You may even end up losing money on some house-flips.

In addition, you will not benefit from the same tax advantages when selling your house-flip than for a typical real estate transaction. If you own a property for less than a year, the IRS classifies that profit as regular income and taxes it at your standard tax rate, which would affect your profit.

Finally, the future remains largely uncertain, despite some encouraging signs in the past few months. If the current recession were to perdure, many people could lose their job and, eventually, their homes. If a wave of foreclosures were to hit the market in the coming months after the moratoriums expire, unloading your property could prove to be a lot trickier than planned. The pool of potential buyers would also be significantly reduced. As always, in these unprecedented times, it is best to remain cautious. 

Is House-Flipping Right for You?

House-flipping is not for the faint of heart. Transactions are often significantly more complicated than prim-time reality TV shows would lead you to believe. Nevertheless, house-flipping remains one of the most popular and accessible ways to invest in real estate.

As long as the real estate market remains strong, daring investors have ample opportunities to make a significant profit.

Dr. Francesca Ortegren, Ph.D. is a Research Associate at Clever Real Estate where she focuses on helping people understand complex data, real estate, finances, business, and the economy by researching various topics, analyzing data, and reporting useful insights for general consumption.

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House-flipping is not for the faint of heart. Transactions are often significantly more complicated than prim-time reality TV shows would lead you to believe. Nevertheless, house-flipping remains one of the most popular and accessible ways to invest in real estate.
house, flipping, pros, cons, homes
Friday, 25 September 2020 03:36 PM
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