If you are interested in the fix and flip real estate investment strategy, you must know some of the common mistakes that flippers make.
It is very common for first-time investors doing the fix and flip strategy to lose a big portion of their money, and the biggest reason this happens is that they are not paying close attention to the details.
So if you are trying to maximize your investment potential and flip houses like an experienced investor, make sure you avoid making the mistakes below.
Holding the Property For Too Long
The process of flipping a home does not happen overnight. Depending on how much rehab is needed for a property, it could take a few weeks, months, or even up to a year.
During this time, you will have recurring monthly expenses for owning the property, and the longer you own the property, you will begin to start dipping into your profits.
Typically, investors using the fix and flip strategy owns the property outright, meaning they do not have a mortgage on the property; however, other items you must consider as holding cost of the property are:
These items are known as the cost for holding or owning the property, and they will continue to increase until you resell the property. Therefore, it is important to have a solid plan for rehabbing and marketing your property as soon as possible.
Underestimating Rehab Cost
Underestimating the cost of rehabbing a property is probably the most common mistake new investors make, but it can be avoided. If you do not have vast construction experience, you are likely not the right person to look at a property and estimate how much capital is needed to fix it.
Always get a home inspection before buying a property, or at least have a general contractor or someone with professional experience to help you along the process. In most cases, contractors are willing to offer you a quote because it could lead to potential business for them.
Too often, new investors conduct their own inspections of a property, which ends up costing money and time in the long run. The last thing you want is to start a project and then find other expensive issues during the process. This could ruin your investment altogether.
When estimating your rehab cost or working with a contractor to do so, it is best practice to add a 10 - 20% buffer in your budget for emergencies. You should plan for some unexpected things to happen during the rehab, but you will be okay as long as you planned for it.
Attempting To Do It Yourself
Too many new investors attempt to do all of the rehab themselves. Being overconfident about their construction knowledge and ability has cost many new investors both money and time doing the rehab process.
Hiring a licensed contractor or skill professional to complete the rehab does add additional cost to the project; however, getting the job done right the first time will save you more money and time instead of having to redo parts yourself.
New investors also make the mistake of over-improving a property when doing it themselves. You must understand the market you are in because adding the nicest amenities within a property does not always equate to selling it for more money.
The market usually dictates what the house will sell for with consideration to the amenities that it has. It doesn't make any sense to over-improve the property than what is necessary because then you will just be eating into your profit.
The best advice here is to humble yourself and seek help when you need it. Yes, if you know how to do certain aspects of the rehab, please make sure you add a time buffer for yourself just in case you might need it.
Not Having Multiple Exit Strategies
Experienced house flippers understand that sometimes their property just won't sell once the rehab is completed. When this happens, they always have multiple exit strategies to ensure their investment is not harmed.
When you have multiple exit strategies, it gives you the foresight to adjust if things don't go as planned. Selling the property on the MLS should not be your only plan when doing the fix and flip strategy.
When you are analyzing a deal, you should consider all of your options, such as potentially wholesaling the property if the rehab begins to be too intensive, or you could obtain a mortgage on the property for yourself and rent it out to tenants. This investment strategy is called the Buy Rehab Refinance Repeat (BRRR) Method.
There is truly no reason not to have one or two additional strategies that will allow you to profit off your investment.
Now that you know some of these common mistakes, you can now begin conducting more research to avoid them. It may also help you to go and find an investor that flips properties within your market to help guide you along this process.
Have a detailed plan for rehabbing and selling the property asap
Set aside 10-20% of your budget for the rehab
You don't have to do it all yourself
Have multiple exit strategies