Flipping houses can be very profitable, but like any financial endeavor there are many pitfalls that can cause an investor to lose a significant amount of money. Before investing in a house in order to flip it, investors should understand the many risks involved in the house flipping process. By understanding these risks, investors can take steps to reduce the potential for losing money and increase the odds of making their house flip a success.
One of the most significant problems that a house flipper can have is underestimating how long the renovation time will take. When it takes longer than expected to make repairs and upgrades to the home, the costs of the project will rise quickly. This is primarily due to increased labor costs and increased carrying costs. Carrying costs are the expenses accrued in holding the property. For example, as time passes the investor will have to make more mortgage payments, pay more utility bills and have more maintenance costs on the property.
The real estate market can change quickly. National events such as a declining stock market can cause problems for real estate all across the country, but most risk comes from the local market. Risks are especially high in areas with a struggling economy. For example, if a large employer has a widespread layoff, the entire local economy is likely to suffer. This will reduce the number of potential buyers for a home and increase the number of homes on the market, both of which will make selling the home more difficult.
Rising Interest Rates
Another factor that influences the number of potential buyers of a home is the interest rate charged by banks and other lenders. Though there are many factors that influence the mortgage rates that lenders charge, inflation or the fear of inflation is one of the most important factors. Inflation causes the value of money to decline, meaning that lenders need to charge higher rates to ensure a profit on the loan. During periods of inflation, the U.S. Federal Reserve also works to reduce inflation by raising interest rates on the money that it loans to banks. Though home flippers cannot be certain how the interest rates will move, it is important for them to invest cautiously during periods of inflation.
Perhaps the largest potential pitfall of flipping houses is buying a home with a serious repair problem. Finding a mold or asbestos problem, structural problems or electrical wiring this is not up to code after buying a home can be a financial disaster that will eliminate any chances of a profit. It is critical for a house flipper to carefully examine the property personally and to have a professional home inspector check the house for problems before agreeing to the purchase.