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Generated 0:01:10 on May 27, 2019
Pitfalls of flipping real estate
Question: I have a chance to purchase a house at a very low price; I am sure I can turn around and sell it for a good profit right away. Are there any pitfalls I should be aware of?
Answer: Your question leaves too many issued open. Ask yourself the folloing questions:
1. besides the purchase price, does the house need repairs?
2. Assuming it needs repairs, how long will they take at worst case?
3. Can you them yourself? If not, do you have contractors available and when can they start working on it?
4. How much will those repairs cost?
5. Marketing and real estate commissions - how much? Some people estimate 10%. Depends on your local market.
Look hard at question 3. If the property costs you $100,000 then you either pay interest on it or you paid in cash and have the opportunity cost. Either way, you pay something like 6% - 10%. On $100k that would be (at 7%) $583 a month.
Don't forget property tax and insurance for these months.
The longer the property is in your possession, the more this cuts into your profit.
If you buy in January and you start repairs right away, let's say it's ready in March. Now it takes 2 months to sell the property. You sell for $120,000
We're already looking at 5 months of interest (5 * $583 = $2915),
5 months of property tax (let's say $150 / month .. 5 * $150 = $750)
Repairs cost $4000
Selling commissions.. 6% on $120k = $7200
Total cost is $2915 + $750 + $4000 + $7200 = $14865
You sell for $120k, bought for $100k.
Total profit = $120k - $100k - $14865 = $5135
Not as much as you thought, hm?
If there are more repairs, or problems show up as the repairs are performed, it may take 8 months.
An additional 3 months of interest take an additional 3 * $583 = $1749
Let's say repair cost is now $6000 instead of $4000.
Your profit shrinks to $1386.
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