If you're about to venture into the world of flipping real estate, you're in for an exciting adventure. With the potential for huge paychecks from part-time work, this is becoming an attractive business for many people either dissatisfied with their current job or looking for a way to earn extra income. But before you get started building your real estate empire, here are a few pitfalls you should keep an eye out for - situations that can be disastrous when they occur but that can be avoided with a little proper planning and the right team in place.
Repair Costs
The biggest single mistake that most people make in flipping real estate is under estimating repair costs. When the repair costs turn out to be more than what was expected, this can quickly throw off the entire deal. This is why one of the most critical members of your team will be a knowledgeable and honest contractor. You'll need somebody that can accurately estimate what it would take to bring a property back up to marketable condition (at least a reasonably accurate estimate). If you don't have this expertise yourself, then not having someone like this as part of your team is almost a certain recipe for failure.
Repair Time
The other issue that typically comes up, especially with new entrepreneurs working on their first few deals, is underestimating how long it will take to repair a property. This can be just as bad as an inaccurate estimate on the repair costs since money equals time. Again, this is why you need a knowledgeable contractor as part of your team so you'll have someone that can help you gauge how long it will take to get a property back in order.
Time Needed to Sell
Once the property is repaired, the game still isn't over. You still have to list and sell the property and depending on the conditions in your market, this might take longer than you expected. Having a property that's been repaired but still sitting on the market is just as bad as the previous two situations and can result in a huge amount of stress for you and your family. That's why it's a good idea to have a top-notch real estate agent as part of your team. A good real estate agent that knows the market in general and the area that your property is in can properly advise you prior to purchasing the property or as you're having it repaired so you know how long to expect it to be on the market.
Hard Money Loan Coming Due
The above three problems all lead to the last one we'll discuss, which is your hard money loan coming due. Often times, investors repairing properties will take out hard money loans which are high interest, short-term loans secured by the property being repaired. The problem comes in the fact that these loans are typically short-term and therefore have very high interest rates compared to a normal loan. Therefore, lenders typically don't want their money out for too long and even if they did, the payments would be very expensive.
You can see that making any one of the above mistakes can quickly turn a great deal into a disaster. The best way to avoid this is to have sharp, knowledgeable people as part of your team so you'll have the necessary expertise to tap into to help you make the right decisions as they come up. That way you can focus on building your business rather than putting out fires that could have been avoided.
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