In today’s economic environment, many people are wondering where to put their money. There are a lot of investment products available that range from conservative to aggressive, and everything in between. If you were to consult ten different financial professionals, you would likely get ten different investment recommendations. The truth is there is no magic crystal ball and all investments carry with them various degrees of risk and reward outcomes. The key to successful investing is to minimize risk. For me, minimizing risk means looking at the big picture first, and details second. Understanding what is going on in the economy will help you determine which opportunities yield the best potential. For example, in the last decade, gold prices have gone up over 400%. Some factors are, but are not limited to, inflation, supply and demand, the European debt crisis, as well as global politics. Any one of these factors probably wouldn’t be enough to drive gold prices as fast or as high as they have, but several factors taking place during the same time frame can cause more drastic change.
Real estate investing has similar rules. Any one economic or market factor is not likely to have an overwhelming affect; but a combination of a few or more, will. There are several television shows, books, and websites that talk about how much money you can make flipping houses! Can you make a lot of money flipping houses? You absolutely can. Is it a given that if you buy a house and fix it up you will be able to sell it for a profit? The answer is, no. When flipping homes, there are several factors you need to take into consideration.
1) Your Market
The number one rule in real estate is location. People that are successful at flipping homes generally select properties in a desirable market. They want to make sure that when they are finished with the remodeling portion of the project, they will have buyers lined up ready to make an offer on their property.
2) Material and Labor Costs
When purchasing a “fixer upper”, it is important to conduct a thorough and accurate assessment of the property. Ask yourself, is the property structurally sound? What changes need to be made to the property in order for it to sell for top dollar?
3) Carrying Costs
The most overlooked element in home flipping are carrying costs. From the time a property is purchased, through the remodeling phase, all the way to the day the property eventually sells, there are carrying costs associated with the project. Monthly mortgage payments, property taxes, other miscellaneous loans, are all factors that need to be considered.
The most important element of home flipping is the initial property search. Only a very small fraction of homes on the market have the potential to turn a 25% profit in 180 days. The best opportunities are foreclosures and distressed properties, in a desirable market, in a market that is not over-saturated. As an investor, be patient, do your homework, and be honest with yourself. Know what you are getting yourself into before rushing to purchase a property. In doing so, you will increase your chances of realizing a sizable return on your investment.
Brian A. Peters, M.B.A., M.S.A.
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