A Winning Retirement Strategy: 8 Tips for the Perfect Flip
Most of us have seen the TV show Flip or Flop on HGTV. If you haven’t, here is the basic synopsis: Either they buy the home, fix it, and turn a large profit, or they buy the home, find out renovations are going to cost WAY more than they anticipated, and they lose money. Now, if you have seen Flip or Flop, you probably recognized that they are buying half million-dollar homes in California. The homes don’t have to be that expensive to make a good profit. Let me give you an example, and then I will explain how this process works and why it makes so much sense for people of all ages, retired or not, to invest their money.
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Soon after graduating from Kennesaw State University, my wife and I got married and bought our first home. It was a small, three-story townhome about five miles from the University, and it was a complete train wreck. The first time we stepped foot in it with our agent, who happened to be my father, I will never forget the odor that slapped me in the face like a cold wet towel. “It just takes some vision,” my old man told us. Yeah, no kidding! Nicole and I looked at each other like we weren’t sure if we should laugh or cry. The carpet was moldy and stained with pet waste, the peel-and-stick laminate in the kitchen was already peeling off the subfloor, and I will spare you the details of what awaited us in the bathrooms. Of course, considering we were both fresh out of college, our budget wasn’t very large. However, we were both hoping it was going to afford us more than what we were currently looking at…and smelling.
It was a short sale, which means it was on its way to foreclosure, and I don’t think anyone had set foot inside in months. After several long conversations with my father, most of them explaining how short sales work, we decided to purchase the home, knowing full well how much work needed to be done. After a couple weeks of negotiating with the bank, we closed on the home for $74,000. We quickly started renovations that lasted nearly three weeks, including new carpet, new hardwood floors on the entire main level, and new paint, along with a general detox cleaning of every other nook and cranny we could reach. All in all, we spent around $8,000 in renovations, and thanks to my wife’s decorating talents, the home looked absolutely stunning. A year later we sold it for $117,000 and used the profits to buy our next home, a gorgeous four-bedroom home with the Master on the main and a fenced in backyard for our two dogs. Looking back, we had no idea what kind of investment that $74,000 dump would turn into.
So when looking for the perfect home to flip, here are the eight most important things to consider:
- Location. Location. The first rule in real estate is location. It is the single most important aspect of any real estate transaction. If a home is located in a good enough area, it can overcome any other obstacle when it goes on the market for sale. Look for homes in areas where the economy is growing, where people like to live, where people feel safe, and where they have most of what they need close by.
- Good Schools. Homes in good school districts sell quicker. Period. There isn’t some magic formula to explain this point. Good school districts attract families, and it’s one of the top factors in deciding which area families move to.
- Sound Condition. What I mean by this is that you need to make sure the guts of the house are solid. Good foundation, good roof, good HVAC, and a good lot. Those are the hardest and most expensive things to repair. Paint color, flooring, and décor can all be changed with relative ease, but a house that has structural issues will quickly become a nightmare that puts you in the red.
- Close To You. If you are going to be renovating quickly to sell, a home that is more than an hour away is going to be inconvenient. You will find yourself spending more time in the car going to and from than actually inside working on the home.
- The Kitchen. The kitchen is the most important room in every house. It’s the room that can make or break a real estate transaction. Make sure that the kitchen is appealing both in size and functionality. Replacing countertops and appliances is one thing; rearranging counters, cabinets, appliances, and pantries will quickly exhaust your budget.
- Work/Profit Balance. This one may go without saying, but I will say it anyways. Usually, the more work a property needs, the cheaper it is to acquire. With that being said, I don’t recommend going out and looking for a property that is completely dilapidated. The ideal property is one that is headed to foreclosure that is in sore need of a facelift, but not much else. Flipping a home should not take more than a few weeks. If there are more than a few weeks worth of work that needs to be done, it’s probably not worth flipping. Obviously, it all depends on the price of acquisition and the price of the completed sale.
- Get a Realtor. Before you even think about buying a home to flip, get a realtor who knows the area and can give you a competitive market analysis. Determine what the home, after repairs, has the potential to sell for. This will help you determine what your renovation budget will be and what your target profit will be.
- Stick to Your Budget. Remember, your realtor has already told you the most this home has the potential to sell for. Don’t go crazy doing renovations that won’t add much value to the home. Flooring, granite countertops, and both interior and exterior paint are the big three. Most other renovation projects of smaller magnitude can be left to the homebuyer as long as the home is structurally sound.
Flipping homes is not as stressful as it sounds. If you have an experienced agent in your area that is able to give you an accurate competitive market analysis to help you determine value, much of the rest can be left to common sense and a little business savvy.
Stay tuned for the third and final part of this series, where I discuss the different options you have regarding your current investments and how you can use your IRA and 401k to acquire properties to flip.