House flipping was all the rage from the early nineties through the mid-2000s. Everything came crashing down when the housing bubble burst in 2008. Some of the very investors who had made tidy sums flipping houses eventually lost everything due to being overextended. Even today, with the hottest real estate market we have seen in a long time, flipping houses is still a risky proposition.
This is not to say that investors cannot make good money at house flipping. They can. Many do. However, one must be willing to take on a serious amount of risk to make it work. When it comes to flipping houses, you can lose just as easily as win. You have to be willing to accept that possibility with every new property you invest in.
Here are the top four reasons house flipping is still risky business:
1. Initial Costs Can Be High
Actium Partners, a Salt Lake City, UT hard money lender, says the biggest risk involved in house flipping relates to initial funding. That risk is why Actium Partners does not fund house flipping projects. In short, investors often have to put a significant amount of money into obtaining and renovating properties. Initial costs can be quite high.
In addition to buying distressed properties, house flippers have to renovate said properties before putting them back in the market. Structural improvements obviously take priority. But property investors still want to look at aesthetic improvements as well. The amount of improvement a home needs could significantly hamper an investor’s cash flow.
2. Real Estate Is Time Sensitive
Another problem house flippers run into is the time-sensitive nature of real estate. Assuming normal supply and demand cycles, existing houses tend to enjoy higher sale prices during the spring and early summer months. The later in the year you go, the less valuable a property is. Why? Because fewer people are looking to buy as the calendar approaches late summer and fall. It is a supply and demand thing.
This suggests that house flippers are working on very tight schedules. They have to get newly acquired properties renovated and listed before demand starts drying up. Some flippers accommodate this by purchasing distressed properties during the fall and winter months in anticipation of having them ready to sell by spring.
3. Real Estate Offers No Guarantees
Still another challenge house flippers face is the reality that real estate offers no guarantees. Again, this is why some hard money lenders will not touch house flipping projects. The unpredictability of residential housing just presents too much risk.
A flipper might buy what appears to be a lucrative property late in the year. He assumes that he will be able to double his investment when he lists the property in spring. But there are no guarantees that the spring market will be strong enough to support his financial goals. If he spends too much on renovations and next year’s market doesn’t heat up as planned, he could earn a lot less profit. He might even have to take a loss.
4. Flipping Is Cash Heavy
Finally, flipping houses is a cash-heavy business. Flippers need to have a serious amount of cash flow in order to fund renovations, pay for marketing, and cover things like property appraisals and home inspections. A lack of steady cash flow can dash a house flipper’s dreams in short order.
Making money by flipping houses is still possible. However, it is also a risky proposition. It takes a lot of nerve, along with quite a bit of knowledge and skill, to make it work.