SSome people start investing by stocking up on stocks and bonds and sticking with them for years. But if you’re ready to diversify, you might want to add real estate to your portfolio.
There are different ways to invest in physical real estate. One option is to own an income property, whether it’s a short-term rental or a long-term rental. Another option is to buy messy homes, renovate them, and resell them for a profit.
Many real estate investors are very successful at flipping houses for a living. But house flipping also comes with its share of risk. And if you’re considering getting into this game, it’s important to know what you’re signing up for. Otherwise, you might find that house flipping is not only a waste of time, but also money.
The risks of house flipping
If you’re new to house flipping, this can be a particularly risky prospect. This is because home renovations tend to cost more than expected, especially these days with higher material costs due to inflation.
You might also struggle to buy a home for a low enough price to make a decent profit flipping it. This is a general but more pressing risk in today’s real estate market.
Homes continue to post above-average prices due to a lack of inventory. And this trend could extend to homes in need of rehabilitation.
How to Successfully Flip Houses
Although house flipping comes with its share of risk, with the right approach it can be a solid source of income. To that end, it might be beneficial to team up with a seasoned house drummer if you’re new to the process and want to learn the ropes. Working with someone who has successfully moved houses before could help you avoid some of the pitfalls beginners often fall into, such as paying too much for a house.
And speaking of overpaying, with the right pricing strategy, you might find that house flipping is lucrative for you. As a general rule, you should limit your spending on a house flip to 70% of the final purchase price you plan to order.
So, let’s say you buy a three-bedroom house in a neighborhood where houses of that size sell for $400,000. If $400,000 is your target sale price, you’ll want to limit your total spend to 70% of that figure, or $280,000. This means that if you see a neglected house with a listing price of $200,000, you’ll either need to make sure you can keep your renovation costs at $80,000 or try to negotiate that $200,000 down ( or pass that particular property).
Should you try house flipping?
It’s important to understand that house flipping is always a risky prospect, even if you go in armed with knowledge. If you’re willing to take that risk, you can feel comfortable with a house flip. Otherwise, be aware that there are plenty of other ways to get into real estate investing, whether it’s buying income properties or investing in REITs.
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