Before putting your money into any financial venture, you must assess the project’s viability. If you’re looking to enter the real estate market this year, you might be wondering, is house flipping profitable. While that’s a good strategy, without following the right steps and the evaluation model, how do you know if you’re going to make a bank or break it? As a result, we’ve put together this guide to help you determine if your next house-flipping project is worth the trouble. 

What House Flipping Entails? 

Acquisition

The first step in house flipping is finding the right property. In other words, investors have to consider acquisition costs, and the majority of the expense is the purchase price of the property. However, there are other expenses that you can’t sideline, including the inspection fees, closing costs, and taxes. Most house flippers turn to hard money lenders to offset this huge upfront cost, with plans to pay it off with the returns from the property’s sale. Maryland Hard Money Lenders suggest finding distressed properties to maximize possible profits after repair because these houses are often cheaper than their ready-to-buy counterparts. 

Renovation

Next, make strategic renovations to improve the home’s interior design and external curb appeal and attract potential buyers. If you cut costs by buying a distressed property, you need to pull out all the stops by planning a remodeling project that makes the house habitable for new buyers. This step can be tricky because you have to balance the cost of materials, labor, and permits without breaking your budget. For instance, properties with hardwood floors would be worth considerably more than those with vinyl flooring. Unfortunately, the upfront cost of installing the former can easily bankrupt you, especially if you’re opting for similar high-end finishing with your cabinets, appliances, and decor. That’s why you need to be strategic in planning out what structural and cosmetic changes will yield the highest ROI when the house is on the market. 

Resale

House flipping allows investors to generate funds that can support their next project, often by selling off their previous project. As a result, this phase is the most time-sensitive as market trends can significantly affect your bottom line. For example, if you complete your fixer-upper in the middle of January, during peak winter when house prices are at their lowest, you may not get a good deal for your investment. On the other hand, if your house is ready between late spring to early fall when there are more buyers in the market, it can speed up the sale and improve your profitability. Some investors prefer to wait out the off-season, so they can sell their house for more. However, that means paying extra in holding costs like property taxes, insurance, and utilities. 

 

How to Evaluate Profitability After Renovations? 

Detailed Cost Estimation

The simplest method to determine if your property flip has been successful is to deduct your total expenses from your final sales price. In other words, you have to keep detailed records of all your expenditures, and that includes costs from every stage of the house-flipping process. Notable spending would include, the initial cost of acquiring the property, the material, labor, and repair cost of the renovation stage, and agent commission and closing fees from your final house sale. With an accurate breakdown of all your expenses, you can weigh this value against your projected income to determine how profitable a flip will be. 

Realistic ARV Assessment

 Another way to evaluate a property’s profitability is by assessing the after-repair value. The advantage of this method is that it’s often the same metric hard money lenders use, meaning you’ll have a better idea of what your financier is looking at during your application. If you’re looking to evaluate ARV accurately, the first step is to research the recent sale of similar homes in the area. The current sales price of comparable properties is an excellent way to get a benchmark for what your project would be worth after completion. That’s why it would be best to use more than one property, and you can always adjust for differences in square footage and upgrades. 

Return on Investment (ROI Calculation)

Do a post-sale profitability assessment by calculating your property’s ROI. For the right figure, divide your gross profit by the total investment, to see what percentage you returns you earned. It would also be a good idea to consider the time value of money, as a faster flip will result in a higher annualized ROI. 

 

Conclusion 

Make an informed decision on your next real estate project by estimating how profitable your next house flip will be. For the best results, you have to take into consideration the different phases house flipping entails, such as the initial property acquisition costs. Another significant expense is your renovation costs. Materials, labor, and permit prices all rack up, and you need to track them to ensure your final sales price offsets these expenses. With those figures, you can perform a detailed cost estimate or weigh the final result against the ARV value to see how profitable a house flip would be.