Investments in real estate are among the safest and are often used as protective ones. This is due to the constant increase in the price of objects, which practically does not depend on either the level of inflation or the economic situation as a whole. Among investors, the opinion has long been rooted that such investments are an exclusively long-term option. However, there is also an investment option in this industry that brings a quick and very substantial income. It is quite popular in the USA and is called flipping or flip strategy.
Flip real estate strategy – concept
The term flipping is widely used in trading and investing and refers to a quick change in the direction of an open position (flip). By analogy, real estate traders began to use the expression house flipping, which refers to the purchase of residential property with the aim of reselling it quickly.
In 2020, more than 8% of transactions in the US market are made by flippers. In many cities, special paid flipping courses are held, each of which is attended by at least 50-100 people weekly. All in all, a very popular activity!
Of course, the most profitable option for flipping is considered to be a sale with an extra charge for 2-3 months of the acquired object, which did not require additional investments. However, such transactions are extremely rare.
The following flip strategy is basically implemented:
- buying below the average market price
- quick and inexpensive repairs
- sale with good profit
What determines the success of the flipper?
There are many conditions for success that will give a trade flipper an acceptable profit margin.
- The right choice of object
Choosing an object to buy is not as easy as it might seem. At least 2 main circumstances require a thorough assessment:
- Possibility of a quick sale
- The necessary amount of repair work for resale at the desired profit.
If in any area of the city the average cost of a good apartment is 400 thousand dollars, then buying for 300 thousand may seem quite attractive. However, if we take into account that after the repair, in order to receive an acceptable income, it will need to be sold for 500–600 thousand, the question arises: how quickly can it be sold? It is likely that such a deal will drag on for a long time. First, it will reduce the turnover of capital. Secondly, it will require additional maintenance costs. As a result, the final profitability will drop significantly.
The second condition is also difficult to fulfill. Without proper training and experience, it is rather difficult for an ordinary investor to assess the general condition of an object, its structures and communications. It is quite likely that instead of a cosmetic repair, you will have to do almost a major overhaul, which again will entail an increase in the time to prepare for the sale and the volume of investments in reconstruction.
Correct ranking of search models will help to solve both of these problems. They should be considered in the following order:
- Sites for the sale of collateral real estate. The objects presented here have passed the bank’s assessment and examination, therefore, as a rule, they practically do not require serious investments. Their prices are generally significantly lower than market prices, since the bank is interested in returning the balance of the loan, and not in receiving the full cost;
- Auctions for the sale of property in bankruptcy. As for the state of housing, the same postulate is true here as in the first case. With the price, everything is somewhat more complicated: it is far from always possible to get the right price at the auction;
- Specialized services that aggregate data about objects. For example, Zillow.
A good option for searching is to conclude an agreement with a well-known real estate company, in which you immediately correctly formulate the entire package of requirements. In this case, the agency will independently weed out all unsuitable options and give the best result. Naturally, this will increase costs somewhat.
Flipping costs have 2 main components:
- The actual price of the purchased object
- Preparation costs
The second point includes a whole set of expenses. This will include funds spent on:
- Search for an object. Registration on services and auctions, subscriptions to specialized news feeds, payment to agencies, etc.
- Registration of transactions: first purchases, then sales.
- Pre-sale preparation of the object — repair, where it is necessary to accurately take into account all the necessary materials and the cost of work.
- Current maintenance of the house. For the time before the sale, all maintenance costs (payment of utilities, etc.) are borne by the flipper (the more time passes before the conclusion of the transaction, the more these costs will increase).
- A marketing campaign to speed up the sale, which, as a rule, includes payment for real estate agencies, advertising campaigns, CEO studios for effective advertising on the Internet, etc.
- Payment of taxes after the completion of the transaction.
The 70% rule
This methodology, which is used by almost all flippers in the US, is formulated as follows: the maximum purchase price should not exceed 70% of the After Repair Value less costs.
With this approach, flipping becomes a fairly profitable investment: with two transactions per year, the investor receives about 35-50% per annum.
Flip strategy risks
Flipping, despite a fairly solid potential profitability, is considered to be a low-risk strategy.
This is due to the fact that the investor, even without realizing the object, practically does not incur losses:
- The apartment or house can be sold later, which will return all invested funds and even earn income;
- The renovated object can be rented out, covering the current maintenance and making a real profit.
Flipper must be willing to take some risks due to:
- Unplanned expenses
- Fluctuations in the market value of real estate
- Changes in the tax base
- Tightening the time before the sale transaction (increase in maintenance costs)
- Force majeure circumstances
- Some of them are impossible to deal with, others can be taken into account when properly assessing the costs and sale price of the object
In general, flipping is not such an easy way to make money. You need to have analytical thinking and the ability to manage processes. This is the only way you can benefit.
At LBC Mortgage, we always make sure that you benefit from your property purchase. Regardless of your goals, we can find the right financing and implement your plans!