House flipping can look like an alluring endeavor, but it’s not as easy as they make it look on all the home flipping and competition shows and networks. Although flipping a house can be a great financial investment and opportunity there are plenty of pitfalls that can cost you dearly. Here are some things you should know before taking the plunge into the house flipping waters.

Determine your budget

It’s important to understand that this is an investment. With any investment there comes a substantial amount of risk. Understand that you shouldn’t invest any amount of money that you are not willing to lose. Many people go into flipping a house in order to make a quick buck and take out large amounts of loans or put their life savings in it not realizing the potential difficulty and hurdles that go along with flipping and in many cases go bankrupt or lose everything. Sometimes you can mitigate the risk by starting with a much smaller property using just your savings or maybe even partnering with someone in which you would split the cost and profit which will help both of you get your feet wet in the industry with limited risk.  Regardless, you need to figure out how to fund the project and the exact amount. It’s important to do the research in your area that you’re wanting to flip. Start doing comparisons to other similar homes in the neighborhood and understand that this is your ballpark selling price as well as your initial purchasing budget. 

Know your market

Different neighborhoods will allow for different price tags. Depending on where the house is located can have a huge impact on your profit margin both good and bad. Pay attention to the fixtures and finishing's in the surrounding homes, some things in some neighborhoods are not as valuable as they might be in others. For example, if you are in a starter home neighborhood where the going rate for a home in rural Kansas is $150k spending $50k on an inground pool is probably not going to bring much if any extra value to the home. However if the home is a higher end $500k home in south Florida it may be impossible to sell a home in that neighborhood without an inground pool therefore it may be necessary. The same can be said for indoor features such as granite countertops, light fixtures etc. So it’s important to know the neighborhood you’re selling in order to maximize your profit. 

Find a great deal

The most important thing to know when it comes to buying any kind of investment property is that you make your money on the buy! The simple fact is the better deal you get the more money you’ll make. But how do you spot a good deal? A lot of times if you find a property that is overgrown or significantly outdated cosmetic issues that just scare off the modern buyer. Ideally you want to find a property that needs mostly cosmetic and not structural repairs or upgrades. Find something that is well under the price of other listings in the area. A good rule of thumb is to use what many call the 70% rule which is simply set your total input cost 70% of what the after-repaired selling price will be. So if the going rate for a home in the area is $250k and you estimate that the total amount for repairs is $35k then use this simple equation (Sale Price x .70)-Repair Costs= Purchase Price so in this particular scenario ($250k x .70)-$35k=$140,000. This would give you a profit of $75k. Now, do understand these numbers will vary. Specifically for lower end homes or much higher end homes. The cost of materials will definitely play a huge impact in the cost of repairs and how much they will actually increase the value of the home. Not to mention you can always adjust the numbers a bit to fit your situation and how much work you have to do and how much you want to make. Either way, know your numbers before making any offers.

Determine “must-have” repairs

Remember that the goal here is to make money and NOT design your dream home. The main priority is that the property is safe and habitable. So focus first on electrical systems, plumbing and structural issues which need to be done by a licensed professional or in many cases need certain permits. Secondarily worry about cosmetic things like the paint colors and fixtures although these aren’t your primary repair focus they are important when it comes to attracting potential buyers. Don’t overspend on these items. You want to make it look amazing but there are a lot of affordable good looking options out on the market that won’t break your budget. Be sure that all the outlets, switches, knobs and the likes all look new and are working properly. Curb appeal is also crucially important. Pay attention to windows, the front door, mailbox, landscaping and all of those things. Determine how much personal sweat equity you can contribute to the project. If you’re handy with tools this can save you thousands of dollars and increase your profit margins significantly. Be sure to make a checklist and time estimate in order to get all the necessary repairs done timely and in order. When doing any repairs it's very easy to find a million other side repairs and projects to get distracted by. So stay on task with the most important issues that need resolving.

Should you go for it?

Flipping houses is not for the faint of heart. But if you do the research and understand that it is an investment with inherent risks and are willing to do the work then this could be a very financially as well as creatively rewarding endeavor.