I really love flipping houses. I get a wonderful feeling of accomplishment from the before and after when the project is complete. But the house-flipping TV shows and gurus that sell high-priced flipping courses don’t tell you about the reality of the business. The glamorous flipping-business portrayed on HGTV’s top-rated shows like “Fixer Upper,” “Flip or Flop,” and “Property Brothers” is very far from reality.
Despite my house flipping passion (and maybe yours), the reality is home-flipping makes only a few folks rich. Those who succeed in it, usually go on to other parts of the real estate industry like commercial properties and property development. In fact, home-flipping might just be a side business for them.
So, if you want to get into the game you must have realistic expectations!
Here are a few home truths (pardon the pun) LOL:
First, home-flipping requires massive investment.
A successful home-flipping business costs a lot of money especially here in Long Island. Unless you have tons of cash saved up, you’ll need to borrow money to buy your first property. But let’s be clear about it, having access to lenders’ funds comes at a steep price in the flipping business—that’s why it’s called hard money (usually 14%).
From their point of view, even with millions of dollars in the bank, the stress of flipping a house just isn’t worth their hands-on involvement. Face it, your investors and lenders will be happy to lend you the money but the headaches of negotiating with contractors and chasing down buyers are all yours. Why not? They’ll still get their money back along with a nice profit, and if they don’t then they will foreclose.
The same applies to your real estate agent. Even the most experienced flipper will tell you that time is of the essence when it comes to the house-flipping biz. You must close a deal quickly to pay the agent who sold your property. Sure, you can try to remove them from the equation and sell it yourself, but it’ll cost you more than you save.
On top of that, contractors, suppliers, inspectors, insurance companies, and lawyers will also want a cut of a smaller and smaller pie. And don’t forget the IRS will be calling soon too!
So, how much of your pie is left? Let’s take a look…
Here are more eye-opening facts and figures from a hypothetical $500,000 home sale, including the fees upon buying the property and selling it 9 months later:
- Attorney Fee $1,200
- Title Insurance $2,000
- Property Insurance $3,000
- Property Survey $900
- Departmentals $400
- Total: $7,500
- Construction $120,000
- Permits $1,200
- Architectural plans $1,500
- Total: $122,700
- Interest at 12% (going rate) $40,000
- Utilities $2,000
- Real Estate Taxes $9,000
- Landscaping Maintenance $2,000
- Total: $53,000
- Realtor Fee (4%) $16,000
- Transfer Tax $2,000
- Attorney Fee $1,200
- Property Disclosure Credit $500
- Total: $19,700
As you can see, there are over $200,000 in costs on a typical flip here in NY, and there are many more I haven’t covered yet. But you get the gist: things can get out of control fast. Sure, there’s plenty of big deals to be made, but when all is said and done, ask yourself: am I getting richer? You would have to buy a property at $250,000 in the example above to make a profit of $50,000. It’s like finding a needle in a haystack here on Long Island.
Second, expect the margins to be low and the risks to be high.
Sure, it’s possible to make $50,000.00 on a home-flipping deal, but it’s a very small return considering you’ll need to invest as much as $450,000.00. While many retail businesses aim for a 40-50% gross margin, the house-flipping industry is happy with a measly 10-11%.
Newbies in the house-flipping biz should consider these conditions even riskier than they’ve been told. The problem is over-reliance on other people. It puts everything at risk from planning renovation, managing construction, and the overall valuation of your property. Remember, you’ll set yourself up to fail if you overestimate the value of the property you’re buying.
Worse, you’ll never be totally sure what a property is worth. There are plenty of mistakes to be made since you’ll never know the worst-case scenario is until you open up a house…literally. Sure, you can repair and renovate just about anything—if you have the budget. This leaves you at the mercy of your contractors whose performance might change from project-to-project.
All experienced home-flippers like me can tell you at least one nerve-wracking story with a bad contractor behind it. Expect it.
Next, delegation and scaling will devour all your time.
By now, you know to steer clear of real estate mentors who say home-flipping can earn you lots of passive income. This business is anything but passive. It’s the opposite—it’s very much hands-on from day one.
You start by finding the perfect property. Believe it or not, that’s half the job but is by no means easy. To be honest, finding a house that meets all the conditions of a profitable flip is near impossible even with the help of multiple listing services. So, be prepared to invest a lot of time and effort locating and authenticating even one property, considering you might be buying it.
This is sure to scare off a lot of newbies from the get-go. They’ll never even find a property that meets their needs let alone develop and flip it. If you aren’t prepared, you’ll waste a lot of time and money in this phase and have zilch to show for it.
If you do manage to find the perfect home that satisfies your wish list—you’ll still need to set up funding, plan the work to get it sellable, and finally, hire your contractors. Whew!
This stage alone can be overwhelming even for experienced house-flipper. You need to spell out in painstaking detail what work your new property needs to be sellable. Thorough house-flippers might even make multiple work scopes to cover different renovation needs of their property. Oh, and you’ll still need to decide which is the best choice for maximizing your profits.
House-flipping is not good for scaling even if you have the best, most affordable contractors on board. That’s because each property will always be different from another so there’s no magic formula.
That’s the given not the exception.
Finally, you need to know everything about the industry
You’ll need to know a little something about everything from buying/selling to accounting/financing to construction/renovation, to name a few. You might even pick up some interior design skills (like picking out popular paint colors).
Naturally, on top of this long list will be real estate know-how such as how to add value to your property and what buyers are looking for once you’re ready to sell.
You’ll also need to get a good grasp of construction to work with (and talk to) your contractors. Not having this skill can lead to costly mistakes like over-improving or under-improving a house you’re flipping. So, you need to understand the gist of what it takes to build a house if you expect to be successful in this biz.
You’ll need to stay up-to-date on both real estate and business laws too, including contracting, negotiating, project management, and more.
With all the above expertise expected, it’s a wonder there are any home-flippers at all let alone successful ones.
With such hefty requirements, it isn’t surprising that today’s Fortune 500 has zero house-flippers on it. Sure, you can nab a sweet $50,000.00 in as little as 6-9 months in a house-flipping deal gone right, but no sugar-coating the situation—every minute will be a lot of sweat, stress, and risk-taking. Yes, in this biz, you’re more likely to fail than succeed.
It isn’t a profession for newbies or those looking for passive income. Remember, it won’t be regular income either. It might even take you a couple of years to get the skills and experience you’ll need to flip your first home.
So, if you’re already happy with your current career, my advice is: ignore the call of the house-flipping biz!
Ask yourself, do I really want the high level of stress and risks involved in house-flipping?
And if you’re still eager to be a house-flipping superstar (like the ones you admire on HGTV), my next piece of advice is: test the waters first.
You can invest in a small rental property as your first bona fide real estate project or even better, become a real estate agent first and learn the business and your local market. While you might not hit 6-figures overnight, it will give you the expertise and experience to stick around for the long haul.