Is Flipping Houses A Bad Idea or not?
Any potential real estate investor at some point will ask themselves the question, Is flipping houses a bad idea? The risk of losing money, time, and potential opportunities is much higher than those who invest in homes already prepared ahead of time, but it all depends on how you plan your investments.
Home renovation shows typically show a “reality” that makes house flipping achievable, comfortable, and, most of all, luxurious. However, those shows don’t show the back-burner of the process, and for potential investors looking into flipping homes, they need all the details of the project before even getting started. Reality TV shows only aim to show what buyers want to see and give the buyer the illusion of grand home renovations so they can potentially invest in purchasing a new home. But as the investor, you need the gritty, hard financial details, and need to make amends for any mishaps or falter throughout your home renovation project.
The Myths and Risks of House Flipping
House flipping for any experienced investor sounds like a sweet deal because newly renovated homes give off the illusion of confidence for the buyer, possibly convincing them to pay a higher price for a newly remodeled house. New plumbing systems, refurnished walls and doorways, and other significant repairs to the home can make or break an investor, especially considering the home’s history and current condition. So, what should you, as the investor, be aware of when thinking of house flipping? Here are a few myths and rookie mistakes that many make when flipping homes:
Expecting Under Budget Expenses – Reality TV shows typically state at the end of each project how they were able to work under budget to complete the renovation, but in actual reality, that’s not always the case. House renovations typically come at or just over the initial budget, and that’s after investors took the time to estimate a budget and time for completing the project.
An estimated budget should consider the potentials for mishaps, such as the entire heating system needing new circuitry, the sewage system overlapping into the home’s well-water supply, or the oncoming of asbestos-related products in the house. All these risks come at extra costs, and many shows don’t show what happens when these kinds of mistakes happen or what the investors have to do about them.
Projecting a Shorter Time Estimate For Flipping – Flipping homes takes a lot longer than a few weeks. Any contractors that you hire for your renovations will most likely be working on multiple jobs at once and usually don’t deal with hard deadlines, as you see in most shows. Flipping houses consumes time. The simplest tasks that expect to be done within a few hours can take up a whole day, and as an investor, you’re continually dealing with the project almost 24/7. Flipping houses takes, on average, six months to a year to complete.
Flashy Furnishings Equals Profits – Just because a home looks flashy doesn’t make it profitable either. The changes you make to the house have an impact because the home needs to sell to have a return of profit. High-end furnishing can make for higher payments for the homeowners or landlords, and the area in which you choose to have your home renovation will also contribute to the costs of the home. If you’re focusing on getting rich quick, then you have to think about what the buyer’s looking for, even if it means just making simple repairs.
Assuming Flipping Comes With Lower Tax Rates – Short-term capital gain rates can be much higher than long-term rates. Higher tax bills can be raised as high as 40% or more, depending on your income. Even while the occupants of the home are not living there anymore, the fees to keep the house afloat must still be paid, also while you’re putting money in refurbishing the home to sell it. This factor especially becomes prominent when you’ve only owned the property for less than a year.
Flipping Gives A Consistent Income? – Flipping houses requires a significant amount of giving to gain your final reward. The opportunity costs of flipping houses make it an active venture, which means flipping needs to be a constant activity that takes time and dedication to each project. Income needs to manage on a day-to-day basis, and with flipping homes, investors lose more before gaining more in the end.
Reality TV shows don’t show where the investors are getting their income, which tends to give people interested in investing a rosy-tinted viewpoint of flipping houses. Flipping houses takes a lot of capital, which most people don’t have, making finding the money hard to attain. However, if you’re dedicated to your project, and you’re in search of a house flipping loan, then contact us at Neal Business Funding about our real estate loans.
Flipping Houses is A Piece of Cake – HAHA – It’s stressful and fills investors with anxiety because even the most laid out plans and detailed budgets can’t prepare for surprises. While you see the hosts of your favorite flipping TV show smiling with confidence, many investors, in reality, tend to stress and worry about their investments, because flipping houses is a business that needs constant care and attention. It’s a roller coaster with highs and lows, and surprises can come around the corner and lead to even more money out of your pocket. Finding the right house, in this case, matters, because while the surface may look profitable, you could potentially end up in the dumps of financial debt and stuck with an unsaleable home.
Even if these reasons don’t scare you off, you should know that flipping houses aren’t the only way investors can make a profit. Rentals also provide different strategies with their benefits and disadvantages. But what’s the difference between flipping and renting? What do rentals offer that flipping doesn’t and vise versa? Both flipping and rentals have taken on unique approaches to capital and profits, and
Flipping versus Rental: Which is Better?
When looking at different ways to invest, one keynote you should take is how much time and effort you as the investor should put into your portfolio projects.
Flipping homes require active investment in the property. It involves finding and earning money through day-to-day work, hiring contractors to work long hours on renovations, and takes a significant amount of capital to invest in before even seeing the light of day for profits. However, the process of flipping houses is quicker because you only own the home for a shorter amount of time, and you can move on from the property once you make the sale.
Rentals are a somewhat passive investment
Rentals, on the other hand, are mostly passive investments. With rentals, you earn an ongoing monthly income, which increases the value of the property over time, and has fewer tax incentives. Rentals give investors financial independence from their projects, and finding tenants to rent the property is usually a much easier process than seeing a family purchase a new home. Rental properties benefit from the costs of inflation, and finding the perfect time to purchase and sell your rental apartments gives you more time to invest in other features.
However, while rental properties have long-term benefits, they also come with some potential liabilities, as well. Rentals that have an increasing rate due to inflation can cause tenants to leave the property, making it harder to fill the space. Rentals can sit vacant for months, and thus can leave you with less income as a result. Also, the risks of dealing with tenants that damage the property or don’t conform to the rules of the complex can leave you in more legal matters than its worth. Plus, not all rentals are passive; management of repairs and constant research into finding the best rental deals can lead you to become financially and emotionally exhausted.
Rentals or Flipping Houses – to each his own
So, which one is better? That depends on how you intend to invest. Beginners into the world of real estate investing can begin with a quick house flip and then look for a rental property for long-term income. The reverse can also be done, taking a rental property up for grabs and then using the money earned from rentals to finance your flipping ventures. Flipping houses usually takes at least two strategies, either purchasing a home or apartment below the market value, or a building that starts from scratch. The money earned from flipping houses can be used to upgrade and repair your rental complex. Either way, it’s up to the investor to decide which route to take.
There are multiple ways to invest, with both options mentioned offering both short-term and long-term profits. Flipping houses can be seen as a full-time job, but so can rentals if you take an active part in the property. What both methods have in common is that they’ll eventually need repairs, and both need stable incomes to function. That’s why our financial lenders at Neal Business Funding offer many ways for real estate investors to finance their projects, whether it’d be to gain quick returns through flipping, or long-term strategy with rentals. At Neal Business Funding, we specialize in giving investors the right tools they need to improve their portfolios and get high returns.