I have been speculating in the real estate industry for more than ten years and have made many mistakes, too many to count. I’ve learned a costly and painful lesson. I made a lot of money, but I also lost a lot of money.
Despite what you see on HGTV, flipping real estate is not an easy way to get rich. The hard truth is that buying, renovating, and renting (or selling for a profit) all come with risks. House flipping is no longer about reality TV aesthetics, but about strategic financial decisions, deep market knowledge, and the courage to take bold action.
If I had to start from scratch and I could learn five lessons from my experience, these would be them.
1.you Make money by buying thingsnot when you sell
I don’t know why this is such a hard lesson for so many real estate investors, but I think almost everyone entering the market has to learn it at least once.
If you pay too much on day one, it will severely impact your profits. You might even lose money. Your profits are locked in when you buy, not when you sell.
Here’s how to make sure you’re buying the right one:
- Stop purchasing from MLS: If you want to spend too much money on a property, buy a property for sale on the MLS. Where sellers are looking for the highest price, you’ll face the most competition.
- Know the numbers: You can’t make a solid offer if you don’t know what everything is worth. Become a pricing expert in the areas you invest in.
- Reverse engineer your profits: Without profit, no business will be successful. Calculate how much money you need to make from this deal to make it worth your time. You can then look at the purchase, potential sale and renovation costs.
- Don’t be afraid to keep a low profile: I pissed off a lot of sellers with my lowball offers, but since I have a tough skin, I didn’t care. Start with an offer that’s 50% off the asking price, and stick to it. Yes, it may seem low, but volume is your friend. The more offers you make, the more likely you are to stick with them. Be prepared for a lot of resistance, but that’s just part of the game.
New real estate investors will have an emotional investment in the property and its offer. They don’t want to “fail” or “abandon the deal.” You need to learn to remove the emotion and treat your proposal purely as a business operation.
Your goal is to get the best property at the lowest price. If you have to pay too much for a home, you need to walk away from the deal and look for another home.
2. Every decoration goes over budget
After over 1,000 renovations, I can confidently say that every renovation has unexpected costs. I never expect a renovation to cost less than budget (rarely), and I always make sure to have extra funds for when inevitable problems arise. No matter how many drills you perform, something expensive is always lurking. Expect it and budget for it.
When flipping houses, you’re not just working for profit, you’re working against the clock. Even if you buy all cash, you have carrying costs (taxes, vacancy, utilities, etc.); your money isn’t working for you while you hold the property. You need to get in, complete the renovation, and get out as quickly as possible. This means that if an item costs more than expected, it’s better to stick with the original plan and pay the extra money rather than waste time looking for alternative solutions.
That’s why I always leave an extra 10 to 20 percent cushion in my rehab budget. If you expect rehab costs to be $20,000, be prepared to spend $25,000. This way, you’ll never be caught off guard. It’s only when you’re surprised that you’re shocked.
3. It shouldn’t be “pretty” but profitable
It’s easy to get obsessed with elegant designs and end up wasting money. While this may not be true for all properties, real estate investors who are new to investing will most likely target the lower end of the market.
My market is Toledo, Ohio, so the homes I renovate are primarily workforce housing. I’m very aware of over-upgrading and avoiding finishes that the end user won’t value (or pay more for). While the nice decor looks great, my tenants or buyers are not going to pay more rent to own them. They are pleased with the repainted cabinets, laminate countertops and new carpet.
Choose materials that meet the expectations of local buyers or renters in your area. Never aim to be the best house on the street.
4. As long as the price is right, the transaction is no problem
This lesson is an extension of the first lesson: Drill it into your head that as long as the price is right, there will be no problem trading.
Don’t be afraid of hard work. The best deals are found in the most dramatic situations. These are deals that no one else wants to touch.
You want to be the person who provides solutions to problems. If you can provide a solution to a problematic transaction, your transaction will be successful.
If you buy a good and cheap house, you can almost always find a solution. This doesn’t mean you need to do the work yourself. You can always hire a general contractor or even wholesale it to other investors who really want to take on the work.
For example, I often come across properties that need a lot of work. These deals don’t meet the needs of my business because I have time constraints on how long my team can work on the property. I need them in and out quickly so they can go to the next house. But people who buy two or three homes a year may decide that this is a highly profitable deal for them.
5. Money begets money – don’t sit on your inventory waiting for the highest dollar
When I sell my house, I want it to sell quickly, so I decorate it better than similar sales and then list it at a cheaper price.
I can hear you already thinking, “Why?”
I don’t want my money to sit on the property any longer than necessary. The quicker I make my next trade, the better my long-term profits will be. I’ve been known to lower the asking price of a property below market value just to get it to sell faster. You can list your home above market value, but it will sit there and there’s no guarantee of your target price.
If you’re flipping houses as a business, your goal is volume. Even if you are flipping a Class A property, your goal must be to renovate the property better than others and then list it better.
Currently, real estate prices are high because there are many homebuyers in the market while investors wait for a better interest rate environment. When I sell properties to investors, I sometimes sell properties for less than market value because I know investors don’t necessarily care about comparisons, but rather return on investment.
final thoughts
The importance of relationships in business cannot be overstated. Build relationships with people who live and breathe local markets. They will be your best source of trade and labor.
I find that investors are so obsessed with what they read and analyze on the Internet that they forget the most important thing: being down to earth and understanding the microeconomics of a region. For example, a house facing a park might look great, but if you’re new to the area, did you know that the park is known for crime?
What I want to point out about Toledo is that while its population may be declining overall, there are specific areas where demand is strong and there always will be strong demand. These are the areas we appreciate most.
You need to know the market inside out. Then you need to build the relationships you need to fully enter that market.
Your one-stop guide to making money fixing and flipping
A step-by-step plan for successfully completing your first or next home flip, this bundle will teach you how to budget and evaluate every aspect of a renovation, from cosmetic renovations to complex installations and upgrades. Learn the ins and outs of real estate flipping at any stage of the economic cycle, and find options for financing flips and larger renovation projects.
Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
