However, almost any type of real estate property can be invested for profit. And if you use a mortgage or home equity line of credit (HELOC) to finance the purchase of a standalone home, only interest is deductible. The principal, tax, and insurance parts of your payment are not. One of the most important steps in learning how to make money trading houses is to have a thorough knowledge of the market in which you want to invest.
You can fix a house, but you can't fix a neighborhood, so keep that in mind when evaluating the neighborhood you want to invest in. Flipping is the process of selling and buying a home (or any property) with the intention of renovating it and selling it for profit. It is usually done for a short period of time, months rather than years. This is a totally different mindset and approach to “conventional” real estate investing, where you can keep a property for years, even decades.
Changing a Home Can Be Profitable. But new investors need to realize that this money-making strategy comes with risks. If you've never changed a home before, plan to spend more money than you think and earn less than you expect when you sell. As with anything else, changing houses comes with a learning curve.
Consider any mistakes you make when starting out as the price of learning about how real estate markets work. Either way, your renovation budget should detail everything, down to the last silicone tubing, preferably in a spreadsheet. In terms of prioritizing your budget, it's tempting to think that the kitchen, bathroom, decor, and cosmetic finishes are worth spending money on, but as soon as an appraiser arrives at the property they will directly see those superficial things and look at the property itself. If you are working with a real estate agent to sell your renovated home, you will need to pay that professional a commission that will consume part of your profits.
Keep in mind that since you'll be on the buying and selling side the same year, you'll probably want to focus on neighborhoods with less than six months of supply when possible. So how do you flip a building or a house? In simple terms, you want to buy cheap and sell high (like most other investments). Eric Workman, Vice President of Marketing and Long-Term Financing at Renovo Financial, a Chicago-based residential rehabilitation lender, recommends working in high-demand neighborhoods. Otherwise, if you're completely renovating your kitchen and bathroom, budget both carefully so you don't over-capitalize, as these can be costly projects.
You will have to pay them, but they will promote your home to their network of buyers and the entire real estate community in the MLS. The first thing professional investors will tell you is that you make a profit when you buy a house, not when you sell it. Make no mistake, despite what renewal reality shows might lead you to believe, investing and making a profit isn't easy money. Michael is also president of the National Custom and Self Build Association (NACSBA), host of multi-property television programs, and author of Renovating for Profit (Ebury).
As you manage repairs and the buying process fades into the past, don't forget to consider the original equation. The goal of any fix-and-change project is to sell the home for a price that is not only higher than the purchase price, but higher than the purchase price plus renovation costs, maintenance costs, contractor costs, and other charges. If you really want to maximize your return on investment, look for cosmetic projects, rather than larger structural renovations or costly, labor-intensive features. You may even find yourself in a buyer's market, a time when houses don't sell quickly and prices don't rise.