Getting started in the fix-and-flip real estate investing sector has the potential to be a lucrative and rewarding endeavor—assuming you consistently make the right calls on which properties to close the deal on and which to take a pass. The more experience you have in the industry, the more you will learn what characteristics are typical in great buys and, alternatively, what signals are usually associated with money pits. In this article, we will discuss the red flags you should be on the lookout for to avoid throwing your hard-earned money away on properties whose return on investment will ultimately put you in the red.
There’s often more than what meets the eye when it comes to fire and flood damage on potential fix-and-flip properties. Looks can be deceiving, which is why it is essential to have an extensive home inspection conducted before pulling the trigger on any real estate transaction. If the inspection subsequently uncovers any significant issues—such as sinking, cracks in the foundation or shifting ground, you will want to proceed with extreme caution regardless of how good of a deal you think you are getting on the home. While foundations are repairable, they can be more expensive, time-consuming and challenging to complete than anticipated. Additionally, some damage can be largely superficial, which will save you an inordinate amount of stress and improve your bottom line to play it safe and get the objective opinion of a trusted inspector before signing on the dotted line for your next investment property.
Judging the collective value of any property in a vacuum is virtually impossible. While it may not be immediately obvious to you that you have to keep tabs on the surrounding locale for newly built real estate developments, doing so is a vital step in your preliminary research before acquiring an investment property. New construction properties that pop up right outside of the neighborhood you are considering buying in may detract from the resell value of your post-rehab project. This is because newly built homes are more desirable to potential buyers due to the fact that they are turnkey ready, highly marketable during in-person showings and oftentimes customizable to the unique wants of the customer. The bottom line is that high-end, brand new developments can make it harder to sell your renovated home when all the renovations are completed, so it may be better to walk away from the deal altogether in the long run if the margins are already close as is.
Not being able to obtain ideal financing terms can be a major red flag, and in certain scenarios should be an indicator that the particular fix-and-flip project simply isn’t worth the risk. Predatory financing in the form of high interest loans can negatively impact your bottom line–especially if it takes longer than you originally planned to resell the property and start making payments to the lender. Whether it’s the resale process or you experience unexpected delays on the renovations, this type of loan could end up hurting you in the long run. Additionally, if you are collaborating with investors or you create a partnership to help fund the project, be sure to check that the terms of your relationship and arrangements are explicitly stated. Accruing debt or working with individuals you do not completely trust are never an advisable move when it comes to fix and flip properties.
Purchasing a property with the intention to make renovations and resell it for a profit is always going to require a certain amount of inherent sweat equity. Being able to identify properties that only need straightforward and manageable repairs will result in quick turnarounds and an optimal profit margin—allowing you to progressively scale your portfolio and maximize your collective return on investment.
When to Walk Away from a Potential Fix-and-Flip | Gauntlet Funding – Melville, NY