One of the most commonly touted ways of achieving financial independence is to get involved in real estate investing. One of the easiest ways to do that is to start by flipping houses. Reality TV shows make that look like a quick, easy process, but the reality is often far different. There are a lot of things you need to know before you jump into investing or house flipping in order to be successful.
Identifying Deals on the Market
The first thing you need to be able to do is identify a deal on the market. Specifically, you need to be able to identify a good deal. You may find houses selling for amazing prices that are too good to be true because, well, they are. There may be some serious structural, electrical, or plumbing problems that warrant such a low price. Those are probably best avoided. Instead, you might consider starting with purchasing foreclosed properties. Foreclosures can take a long time, so there’s a good chance they’ll need some TLC. And since banks are in the money business and not the property management business, they’ll be motivated to sell the property.
Zoning Laws
If you’ve ever wondered why industrial, business, and residential areas of cities tend to be distinct from one another, the answer is because of zoning laws. Zoning laws dictate what can be built where based on the purpose served. They are what prohibit a factory from being built in the middle of a residential area. You’ll need to be aware of zoning laws when investing in real estate, especially if you want to repurpose a property. Even if you don’t intend to convert a home into a business office, you’ll still need to be aware of zoning laws, especially as it pertains to density. Zoning density levels cover how many living units are allowed in a lot, which can matter if you want to have a duplex or other higher density option.
Building Codes
If your investment requires construction, you need to become somewhat familiar with building codes. You should at least follow minimum home building standards for safety and so that you’re in compliance with local requirements. Of course, knowledge of building codes and purchasing building permits is largely the responsibility of the party doing the actual building and construction. Since that party is the one performing the work, they should be the experts on it and be the ones held responsible for it. That said, as the owner or investor, you should do your best to make sure that the appropriate codes are being followed and the right permits have been obtained.
Do as Much DIY as You Can
Making a profit flipping a house is all about selling it for a better price than what you paid for it plus the cost of improvements and repairs. Those can get expensive very quickly, so if you possess the skills and knowledge it’s wise to do as much of the repairs and improvements yourself as possible. This is one of the ways you can save money on renovations. You’ll also gain valuable experience that you can take with you to your next improvement project, or even apply in your own home if you so desire. There are a lot of how-to guides online, so you can feel confident even if you’re attempting a project you haven’t done before. Just make sure you have a complete understanding of the tools, skills needed, and the process before you get started with a project.
When to Call a Professional
Of course, not every project is a good candidate for the DIY approach. For some projects and repairs, you really should call in a professional. It might be a matter of safety, skill, knowledge, or all of the above. Whatever the reason, it’s important that you know when it’s time to get a professional on the job. While hiring a contractor may seem like it costs more, there are some benefits worth considering. Contractors are motivated to get the job done quickly – the faster they work and the more jobs they complete, the more they make. They’ll also probably be able to obtain materials at a better price than you would, and they already have the tools to complete the job. They’ll already have a good idea of what the project will cost, thanks to their experience. The end result will likely be of better quality than what you would be able to do yourself as well.
Don’t Pay Too Much
Again, successful real estate investing and house flipping is all about the profit margin. You need to protect it in order to actually be able to make money. That means you can’t spend too much on purchasing property or on making repairs. One of the best ways to do this is to make a budget for repairs and improvement projects and stick with it. This may mean you have to be a little more choosy about how you allocate resources between projects. It’s also why choosing your investment property carefully is so important. If you purchase a property for a low price but find that it will need repairs that eat up your entire profit margin, you’ll wind up lucky if you manage to break even.
How to Keep Records
Keeping accurate records is an absolute must when it comes to house flipping. You’re essentially a business, and you’ll need to pay taxes on your property and your profits, so meticulous record keeping is something of an obligation. You need to track your spending, your profits, what you purchase, and who you pay. Receipts should not be considered optional here, since that’s proof of your transactions. To avoid headaches down the road, come up with an organized system for keeping your records. That could mean something a bit more old school like a filing cabinet, a digital record that you update regularly, or a combination of both. Whatever you choose, make sure it makes sense to you and that it is well organized. Keeping track of what you’re spending can also help you to see the impact of your spending decisions.
What to Expect with Taxes
Taxes in general can be a complicated mess that most people don’t really want to deal with. When you flip houses for a living or have real estate investments, that adds another level of complexity beyond what you would experience with just an ordinary, traditional job where you’re an employee. If you’re your own boss, which you would probably be considered to be if you’re flipping houses, you may have to pay self-employment taxes, capital gains taxes, and income taxes. This can add up to a decent chunk of change, so consider looking into some things you can do to save money on taxes and avoid some tax traps.
Real estate investing and house flipping can be a great way to build your wealth. Make no mistake though. It takes a lot of hard work to be successful. There are a lot of things you need to know about before you get started. Make sure you do your due diligence and become familiar with the industry and what’s required to succeed in order to boost your own chances of success.
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