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5 Rules of Success for Fix-and-Flip Property Investors

House flipping is one way to make money in real estate. House flippers buy distressed properties, fix them up, and sell them for a profit. At least that is the theory. More than one house flipper has lost his shirt because he didn’t understand how the game works. You really have to know what you’re doing to succeed in this business.

Like any other industry, house flipping is governed by certain rules. Play by those rules and your chances of success go up. Break them and you are asking for trouble. For purposes of illustration, five of the most well-known rules of fix-and-flip success are discussed below.

1. Know Your Margins Well

In business, a company’s margin is the amount of total revenues that constitute profit. Margin is important to any business inasmuch as it determines whether doing business is worthwhile. Fix and flip investors have to pay close attention to margin. If margins are not high enough, investing isn’t worth the trouble.

This suggests that fix-and-flip investors should know the margins on every house they turn. Not only that, but they also have to consider the value of their own time when calculating margins. An investor earning only $1,000 for two months’ worth of work might be wasting his time.

2. Avoid Structural Renovations

House flipping is based on the idea of spending as little as possible to obtain distressed homes. A distressed home is one that is facing foreclosure, is already subject to short sale, is being auctioned, or is in need of significant renovations. Some distressed properties cover multiple bases. In light of that, house flippers should avoid structural renovations at all costs.

Structural renovations, like replacing roofs and repairing foundations, can be quite costly. They can significantly reduce an investor’s margin as well. If structural repairs are too costly, they can even prevent the investor from completing the aesthetic renovations that would ultimately sell the home.

3. Be Cautious About Mechanical Renovations

Mechanical renovations are those having to do with a home’s mechanics – i.e., heating, plumbing, electrical, etc. They are not necessarily as costly as structural renovations. However, they do leave less money to spend on aesthetics. Investors should be cautious with distressed properties requiring too many mechanical repairs.

4. Maintain Multiple Financing Options

The fourth rule for successful house flipping is to maintain multiple financing options. Investors need steady cash flow to get properties from the purchase stage to the sales stage.

For purposes of obtaining properties, some of fix-and-flip investors turn to hard money. Even though house flipping loans are something that Utah‘s Actium Partners tends to fund, they say there are other hard money lenders across the country that deal only in the fix-and-flip market. As for renovation costs, many house flippers rely on credit cards, personal lines of credit, and so forth.

5. Avoid Premature Listings

Finally, it can be tempting for house flippers to list their properties before renovations are complete. The thinking is that closing can take 60 to 90 days, giving the flipper time to finish up before a property is actually transferred. However, this is a mistake. Investors should wait until all renovations are complete before listing. Otherwise, they are inviting potential buyers to request more costly upgrades that could ultimately eat into a property’s profit potential.

There are other rules that govern house flipping as a business. The five described in this post should at least help you understand that house flipping is not an easy proposition. You can make money at it, but you have to know what you’re doing.