While I’m a massive proponent of fix & flips, it doesn’t mean that it’s for everyone! Let’s cover a few reasons you might not be cut out for it.
So let’s say you’ve found a house for sale that seems to be a hidden gem. You think it has a lot of potential that’s been overlooked, and you know that if you took just the right amount of time and money, it could become a million-dollar property that sets you up to become a real estate mogul.
Before you reach out to make an offer on that property, I want to share eight roadblocks you might encounter when you first start investing in real estate. These reasons might sound like tough love that causes you to get a little defensive, but they come from a place of experience.
Knowing what you’re up against ahead of time can make the difference between earning a profit that gives you a comfortable income from investing or losing your shirt and having to get another day job because you’ve sold the property at a loss.
Don’t worry if you do recognize any of these qualities in yourself. For each reason, I’ll also give you a few tips about how you can mitigate them so that you can get started on the right foot as a real estate investor. Let’s dive in.
Reason 1: Your Only Real Estate Experience Comes from Watching HGTV
I understand entirely why house flipping shows are so popular. The drama, the budget creeps, the flea market home decor finds, and that final end result are all incredible! But you probably know what I’m going to say next: while these shows are entertaining, they’re not accurate representations of what it’s like to become a real estate investor.
Flipping houses takes a lot of dedication, time, money, and patience. It’s true that some shows will give you a snippet of those aspects, but the truth is it’s much more challenging to make that six-figure profit margin when you’re starting.
Suppose you think you can become the next Chip and Joanna for your hometown. In that case, you’ll need a water-tight business plan that includes contingencies, exit strategies, profit sharing, liability, budgets, cost projections, and a lot more.
If you’re not an entrepreneur by nature then you can still become a real estate investor; it will just take a lot more discipline and due diligence on your part to stay the course.
Reason 2: You Need to Flip the House Quickly
It’s pretty difficult to flip a house quickly, no matter how little work was put into fixing it up. In addition to the time it takes to negotiate and close on a property, you’ve got to deal with contractors, utility companies, insurance agents, real estate agents, building supply companies, etc. They’ve all got their own timelines you’ll need to fit your house into, and it’s rarely as fast as you’d hope.
In addition, you’ve also got to deal with how the market changes while holding onto your investment property. While it’s unlikely, things like crime rates, property taxes, or even school district evaluations can throw a wrench into your projected timeline, so you’ll need to hope for a fast flip but expect to hang onto a property for the long haul.
The easiest solution for maximum speed would be to wholesale the property! Many of my students have profit in their account in 2 weeks or less, as opposed to 6 months for a fix & flip.
Reason 3: You’ve Got a Lot of Debt
Very few investors can pay cash for their fix & flips, especially in the beginning. If you want to get the funding you’ll need for the purchase price and rehab fees, so you’ll most likely need a lender.
With the exception of hard money lenders, most financial institutions will do a credit check and want documentation of how much money you’ve got before they’ll approve you for a loan. If you’ve got a lot of debt and a bad credit score, you’re going to have a lot of trouble finding a bank that’s willing to take the risk of working with you until you’ve cleaned up your finances.
Even if you’ve got a good credit score or are using a hard money loan, having debt will make it hard to keep up with your bills. Flipping a house typically takes six months, so you shouldn’t expect to earn an income from your investments for at least half a year. How will you pay your bills and pay the carrying or rehab costs during that time?
Being debt-free (or at least free of dumb debt) is the first goal you should work towards before buying your first fix & flip. That way, you’ll not have the burden of your creditors hanging over your head and can take your time making the right decisions that aren’t weighed down by other obligations.
Reason 4: You Don’t Have an Emergency Fund
In addition to being debt-free, you’ll also need an emergency fund to cover your bills should something go wrong. In real estate, something will always happen that requires more money than you’ve budgeted. It could be anything from an increase in material costs, having to hold onto a property longer than expected, to your kid needing to go to the hospital.
Having to make decisions that are tied to your dwindling finances can go poorly. You’ll need to have access to some sort of financial safety net that keeps you on track to sell the house quickly and in the best condition possible.
There’s no set amount for how much your emergency fund should have. A good rule of thumb is to have anywhere from six months to a year’s worth of your bills held in a high-yield savings account.
Reason 5: You Don’t Have a Lawyer Experienced in Real Estate Flipping
There are dozens of areas in which attorneys will specialize. Using your cousin, who typically handles family law, isn’t going to cut it when it comes to reviewing real estate contracts. You’ll need to find a lawyer who is not only experienced with buying property but is also well-versed in real estate law as it pertains to businesses that focus on flipping properties.
Don’t settle for an attorney who practices business-to-business law or “retail” home buying (buying a house that you’ll live in); it’s well worth the effort to find the right lawyer who can ensure your business and its inventory are legally protected.
If you’re unsure where to start looking for an attorney who specializes in real estate flipping, I’d suggest tapping into your local real estate investor community. I’ve found most investors to be very open and helpful with professional recommendations, so don’t feel intimidated talking to your competitors. You’ll find that once you start networking with other investors, you’ll have access to a whole world of resources, connections, and time-saving advice.
Reason 6: You Don’t Like to Take Risks
Not only is real estate investing a long-term game, but it’s also incredibly risky. Your first flip may result in either taking a loss or breaking even while you learn the ropes. Do you have the type of personality to roll with punches and keep going?
Other factors can affect your ability to earn a profit that are entirely out of your control. Local economy fluctuations, market cool-offs, material supply levels and rising costs, the list goes on. To sum it up: if you want a sure thing, fix & flips aren’t for you.
However, that doesn’t mean you need to gamble with your retirement savings to become an investor. There are other ways you can still enter the industry with less personal risk, like becoming a partner in an existing business or starting as a wholesaler.
Reason 7: You’re Not Handy
You don’t need to be a general contractor to flip houses, but you should know a few basic fixes that prevent you from having to call (and pay for) a professional. YouTube can be a fantastic resource for just-in-time learning about anything from fixing a leaky pipe to more complex things like electrical repair or even full-scale renovation advice.
If you feel that being handy is just beyond your grasp, that’s fine. But you should consider the extra cost it will take to always have people fix things for you. It becomes a situation of what’s more important: time or money, and that’s a decision you as an investor will have to make for yourself.
While you should take steps to learn basic repair I will suggest, however, that you don’t try and do it all. Taking on more than you can handle will end up costing more than hiring a professional would have in the first place. Stick to the basic things like tightening screws or installing new light fixtures and build on your skillset as you go.
Reason 8: You’re Bad at Negotiating
You can get away with not being handy when you’re a real estate investor, but you cannot get away from learning how to negotiate. Understanding what it takes to become a good negotiator is an essential lesson every investor should know.
Your goal as a fix & flipper is to purchase a home for the lowest amount possible, spend enough to improve the house without going over your budget, and sell it at the maximum profit. All of these things require you to negotiate with someone else and have them understand the benefit they’ll receive in giving you the price you want.
This is not easy to learn, and you will feel very uncomfortable doing it the first few times. Real estate investing is a numbers game, though, and the more you try, the more refined your skills will become. Before you know it, you’ll become a master negotiator.
But if you’re introverted or shy and worried about what people will think about you, this wouldn’t be the right field to launch your business in. You’re going to need to step on a few toes here and there to ensure your business stays afloat.
One tip I can give you is to start positioning yourself as a problem solver and not a real estate investor. When dealing with sellers, they can feel like they’re being taken for a ride if you act too much like a salesperson. Suppose, instead, you’re able to position yourself as a problem solver who gets rid of this burden of a house for them while also paying cash. When it works right you’ll be able to negotiate from a place of power while also maintaining a good relationship with your seller. This can go a long way to helping you get the best price possible and make sure the contract you signed is as favorable to you as possible.
Here’s a guide I put together that will be helpful: The Hustler’s Guide to Negotiating a Property Sale Price
Real estate investing is not a tricky business to get into; all you need is a home seller willing to take the price you offer. What makes a successful real estate investor, however, is having a certain skill set that not only helps you become a better business person but also ensures that you’re able to set yourself up for success. Take a few of these points into consideration and look at them from an honest perspective. If you feel like some of these might be speaking to you, that doesn’t mean you should give up on house flipping completely; it just means that you need to work a little bit harder to get the proper foundation in place.
Are there any qualities that a house flipper needs that I missed? Leave a comment below and let me know.