Can you really get rich quickly from fix and flipping homes?
Despite the recent popularity of house flipping, spurred in part by how easy it looks on television, many people lose money flipping houses. Even though it is possible to make money with flipping, one analysis found that as many as 3 out of 10 flips in the third quarter of 2016 may have resulted in a loss. What flippers sometimes forget to factor in are all the expenses incurred, including the costs associated with carrying the house until it sells.
Flippers who have been in the business for years say that, in order to make a decent profit, a house must sell for 30 percent over what it cost to buy and remodel. A basic breakdown looks like this:
-You purchase a distressed property for $200,000, with 20 percent down ($40,000), leaving you a balance of $160,000.
-Your carrying cost for six months, including monthly mortgage payments at 4 percent interest, property taxes, home insurance and utilities runs nearly $6,800.
-You make $30,000 in repairs and upgrades to the home.
-You sell the home for $275,000.
-You pay the standard 6 percent real estate fee to market and sell the home, or $16,500.
-You pay seller’s closing costs of approximately $3,000.
In total, not counting the value of your time, you have roughly $96,000 into the property, including the down payment, carrying costs, repairs and upgrades, realtor fees and closing costs. Once you subtract the $160,000 balance on the home (which may be less, depending upon how long you have held the mortgage) and the money invested, you end up with about $19,000 — not a great profit.
If you are undaunted by the idea of house flipping, you need three things to get started:
1. An excellent credit score.
Unless you are paying cash for a property, repairs and carrying costs, you will need a mortgage lender. Lenders have not only tightened their requirements, but also view house flipping as high-risk investment, so they will want you to have superb credit.
2. Plenty of cash on hand.
You need to put at least 20 percent down on a new mortgage or you will be forced to pay private mortgage insurance, an added expense to your carrying costs.
3. Knowledge of the market.
Make sure you know the housing market in any area in which you are considering a flip. Houses in some neighborhoods will sell within days, while others, due to reputation, poor schools, or other factors outside of your control, will linger on the market for months. The longer a home is on the market, the more bargain hunters begin to circle.
So yes, it is possible to “get rich” if you have the knowledge and the resources and the market on your side. Even then, “quick” is a relative term. It’s important to remember that there is a lot of risk involved in his kind of venture, and a huge amount of time and work can go into just one house, so keep this in mind when making a decision.