245,864 residential properties in the United States were flipped in 2019, up 2% from 2018 to the highest point since 2006, as reported by ATTOM Data Solutions. Real estate investing continues to rise as more and more people see that real estate is a keystone to wealth and a catalyst for financial growth. Although investing in real estate can prove both risky and rewarding, those who make smart investments in real estate can just about bank on lucrative results. Thinking of investing? Here are 3 smart decisions you can make to turn a risky investment into a rewarding one.
STEP 1 – Assemble Your Team. Seasoned investors don’t work alone – they surround themselves with experts who can provide valuable insight into specific facets of the investment. For instance, a general contractor can inspect a potential investment property and provide estimates on the costs an investor can expect to incur in the renovation process; a real estate attorney can handle the review, negotiation, and preparation of documentation for the acquisition while monitoring and managing any and all associated risks; and a realtor can determine an appropriate list price based on current market trends and facilitate the sale of the property. Remember that iron sharpens iron, so surround yourself with the best.
STEP 2 – Set a Budget. There are great investment opportunities in virtually every cost bracket. Setting a budget at the outset of your search allows for a more focused and streamlined selection process and prevents overextension of financial resources. According to ATTOM Data Solutions, homes flipped in 2019 typically generated a gross profit of $62,900 nationwide (the difference between the median sales price and the median paid by investors). This figure, however, does not factor in the cost of renovations; so, a prudent rule of thumb is to purchase your investment property for no more than 50% of its after-renovation-value (“ARV”), less renovation costs. For example, a property with an ARV of $200,000 (as per your realtor’s report on market trends) and $25,000 in needed repairs (as per your contractor’s estimate), should be purchased for no more than $75,000 ($200,000 x 50% = $100,000; $100,000 – $25,000 = $75,000). Remember that the goal of an investor is to create the largest spread possible between total costs and ARV, so budget wisely.
STEP 3 – Control Your Costs. Controlling your costs is crucial to maximizing your profits, so manage them closely and don’t overspend. Have your real estate attorney review the property’s title and tax records to identify costly liens, title deficiencies, tax delinquencies, and a myriad of other hidden issues that could chip away at the profitability of your investment if gone unnoticed and unaddressed. Also, don’t overspend on renovations. If you budget $25,000 for renovations, but spend $40,000, you’ve eaten away at your potential profits. Toss in an unexpected structural issue (and these unforeseeable costs often rear their heads at the worst possible moment) and your profit margin takes a downward spiral. Wrangle your costs and you will set yourself up for success in your investment.
For new investors, the idea of an undertaking of this magnitude may still seem daunting, but follow these simple steps and you’ll be investing like a pro in no time. HAPPY INVESTING!