1) Starting with An Unbalanced SheetThe home construction process is much easier if you’re not starting in a financial hole. Real estate investors get in trouble with get-rich-quick schemes, not having enough startup funds, and over-leveraging themselves. In short, they find trouble when they do not have the money to get started, including the access to financing. Avoid this trap by getting your finances together before you start buying. You certainly don’t need to be a millionaire, not even close, but you do need to be ready to incur costs. Don’t invest your life savings in any one project. The best fix and flippers leverage their funds by spreading it out over several properties, using financing to cover the bulk of their purchase price and to cover their rehab/construction funds.
2) Not Knowing CostsMost people have no clue what it actually costs to fix and flip rehab properties. If you’ve done it a few times, you should have a grasp on what your budget for everything — from landscaping to finish paint, both materials and labor — might be. But even then, prices are constantly changing depending on the market as a whole. If you’re just starting out, avoid cost overruns by doing your research first. Actually get bids from subcontractors and price materials from wholesalers. One “I can’t believe this is that expensive” moment, and you’re already starting to chip away at your profit margin.
Also it is imperative that you protect your investment in your mini business called fix and flipping with certain precautions: 1) Have the right insurance in place, including insurance against theft/vandalism. I’ve seen too many times where investor’s profits have been completely erased because someone took off with their materials they had on site or stole the appliances, or ripped the copper plumbing right out of the walls, causing much collateral damage in the process, or stole the water heater. I could go on and on. Don’t be penny wise and pound foolish; make sure you have the right insurance. Also protect your investments as they are being worked on from the very start to the very end until you close escrow with the new buyer as it is your responsibility until escrow closes. Many investor developers will put in an alarm system once the place is secured and can be locked up. Today this is a very inexpensive option. Some have one of their subs stay at the house while it’s being worked on. Some pay the neighbors a small token to watch and call them on their cell phone if anything looks suspicious.
It is also worth reminding you that this fix and flip game is all about getting the work completely finished and sold as fast as possible. The quicker you can do this, the more profit you will make. If you drag your feet you will make less and your lender will make more money in interest. The goal is to put more money in your pocket so efficiency is the name of the game from to start to finish.