You can stand to make a lot of money in a short amount of time by taking an old house, bringing it up to modern standards, and then selling it on to someone interested in living in or renting out the property. However, getting a decent profit out of an old building can be fairly risky considering the size of the typical investment, and as such it’s important to avoid common mistakes like the following:
Poor Financial Planning
You have to spend money to make money, and that’s certainly true for anyone entering the real estate market with an eye for profit. The standard 30-year mortgage can afford to provide accommodating terms since the average family spends seven years (and very often more) within a single residence, but an ARV loan which covers both the real estate and the rehab costs is designed to last for a much shorter period. As such, your profit margin depends on you completing the rehab and finding a buyer as quickly and efficiently as possible.
As such, not only do you need to gather enough of your own money to meet the down payment and all the monthly installments of your worst-case scenario, you also need to know exactly what you plan to do with the property and how much all the repairs and upgrades will cost. If you have to get a secondary loan to cover rehab costs, it will mean more money spent on payments and a lower credit score as lenders grow more pessimistic about you.
Poor Professional Planning
If you have the skills to improve a home’s appearance and bring it up to code all on your own, you stand to make a significantly better profit over someone who has to rely on professionals to put in all the elbow grease. This gives you a better margin for overrun costs, for a slow real estate market, and ultimately for profit. You should be certain your skills are professional-grade, however, because every mistake you make will dip into the repair costs or the home’s final value.
Poor Upgrade Planning
Money spent on rehabbing an old house doesn’t always translate directly into a greater profit, and it’s possible to go overboard on upgrades to the point where a house becomes too expensive for its square footage and its neighborhood. No one will want to buy a house so out of place no matter what its intrinsic value is, and that can mean either selling at a loss or selling so late that you end up with a loss anyway.
Flipping a house can be lucrative, but it can also be expensive. Make sure you’re ready for whatever may come your way before you make any financial commitments.