Some people start out investing by loading up on stocks and bonds and sticking with them for years. But if you're ready to branch out, you may want to add real estate to your portfolio.
There are different ways you can invest in physical real estate. One option is to own an income property, whether it's a short-term rental or a long-term rental. Another option is to buy up homes in disarray, renovate them, and sell them at a profit.
Many real estate investors do quite well flipping houses for a living. But house flipping also entails its share of risk. And if you're thinking of getting into that game, it's important to know what you're signing up for. Otherwise, you might find that house flipping is not only a waste of your time, but also your money.
The risks of flipping houses
If you're new to flipping houses, it can be as especially risky prospect. That's because home renovations tend to cost more than anticipated -- especially these days, what with material costs being higher due to inflation.
You might also struggle to purchase a home at a low-enough price point to make a decent profit in the course of flipping it. That's a general risk but a more pressing one in today's real estate market.
Homes are continuing to fetch higher-than-average prices due to a lack of inventory. And that trend could extend to homes in need of rehabilitation.
How to succeed at flipping houses
Although house flipping carries its share of risk, with the right approach, it can be a solid income source. To that end, it could pay to team up with a seasoned house flipper if you're new to the process and want to learn the ropes. Working with someone who's successfully flipped homes before could help you avoid some traps newbies commonly fall into, like overpaying for a home.
And speaking of overpaying, with the right pricing strategy, you may find that house flipping is lucrative for you. As a general rule, you should limit your expenses on a house flip to 70% of the ultimate purchase price you think you'll command.
So, let's say you're buying a three-bedroom home in a neighborhood where houses that size are selling for $400,000. If $400,000 is your target sale price, you'll want to limit your total expenses to 70% of that figure, or $280,000. That means if you see a neglected home with a listing price of $200,000, you'll need to either make absolutely sure you can keep your renovation costs to $80,000 or otherwise try to negotiate that $200,000 downward (or pass on that particular property).
Should you try house flipping?
It's important to understand that house flipping is still a risky prospect, even if you go in armed with knowledge. If you're willing to absorb that risk, you may feel comfortable with a house flip. Otherwise, know that there are plenty of other ways you can dabble in real estate investing, whether it's buying income properties or putting money into REITs.