House flipping TV shows have inspired at least thousands to change the dynamics of their finances, lives and futures. They have also become seriously dangerous for many who have leaned on them as their only source of knowledge for investing in real estate. It’s like being your own doctor, surgeon or pharmacist without having any training. You might heal yourself. Or you might do far more damage.
So, what are the most dangerous myths being circulated by ‘reality’ TV shows?
It’s Easy
Make no mistake that investing in real estate can be fun. It can be highly profitable. It can be one of the easiest ways to make money. It can be vital for regaining control over your time and future. However, flipping houses can be real work. It can bring struggles, and create the need to constant problem solving and improvement. It’s not going to be profitable if you are just doing it as a hobby. It needs to be approached in a businesslike manner.
The Amount of Math You Need to Do
You don’t have to love math or even be great at it in order to profitably invest in real estate or flip houses. However, you do need to know what numbers you need to factor in and be able to use a basic calculator. The big danger of these shows is that they gloss right over some of the most important math. They might throw up the purchase price, some remodeling expenses, the resale price, and the ‘profit’. All too often this skips many of the closing costs, finance costs, front and back end marketing costs, holding costs and taxes.
People do lose money on house flips. You’ve really got to know your numbers if you are going to make money.
For some this may mean they just need to learn more about the process, costs and how to optimize all of these numbers. For others it might mean they are better suited for other investment strategies. Like a fund where you just need to worry about the ROI and eliminating taxes on any gains.
Overimproving Properties
Overimproving properties is incredibly financially dangerous. We love doing beautiful luxury remodels. We always want the houses we are flipping to look amazing. Yet, you’ve got to remember this is a business. It is an investment. Very few line items are really going to add tangible value. You have to know what those are. What to spend money on. Where not to waste your capital. Otherwise you might as well just go to the mall or makeover your own house again. Be careful to know the return on every dollar you put in, and what level of rehab and quality you need to do for that specific asset.
Due Diligence
A lot of these house flipping series show properties being bought sight unseen or with very little due diligence done. You can buy properties sight unseen and make a lot of money. Many of the most successful investors do it every day. That doesn’t mean they don’t do due diligence though. You really have to know what you are buying and what the value is. Otherwise you are just gambling. At a minimum you have to price in the absolute worst case scenario for any unknown variables. If you don’t know if the electric is any good, price in replacing the panel and all the wiring into your offer. If you don’t know if the plumbing is any good, price replacement into your offer. Otherwise just any one of these items can bankrupt you. If you are not equipped to do thorough physical and title due diligence, then you had better be working with someone who is.
Summary
Flipping houses can be highly profitable. It is great to see how many people and families have changed their circumstances and futures by investing in real estate. Similarly, it’s sad to hear of all the others who have totally flopped on their first attempt and who have sabotaged their own potential. Watch out for these pitfalls and get ahead of them to make real money, eliminate risk, and get the results you really want.
Investment Opportunities
Find out more about investing in secured debt and real estate, go to NNG Capital Fund
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