The recovering residential housing market continues to offer lucrative investment opportunities for first time and experienced investors looking to fix and flip a house. However, a new challenge is emerging out of the recovery: a shrinking tolerance for mistakes. The single largest mistake beginner real estate investors make today is trying to do it all themselves or relying too heavily on friends and family to execute on the real estate investment.
Sometimes a friend may have a knack for what color to refinish the hardwood floors, or who to use for repairing a roof, but rarely do these close acquaintances come to the table with the focus on return on investment (ROI) necessary to be successful today. First time investors often worry that going outside their circle of friends and family to find a vendor partner to run property rehabilitation might cut into profits. This wasn’t as much of an issue when the fix and flip market exploded during the economic downturn and profit was nearly guaranteed. Investors who purchased properties in 2007 or 2008 were making money and gaining valuable experience — the market was hot and purchase prices reasonable so novice investors could have made any number of mistakes and still realized great returns on their investments.
Assessing an Ever-Changing Market
Property values in many regions of the country have recovered and fewer distressed properties are making it to the market so the market is less forgiving. Those who were investing in the downturn learned their lesson and what mistakes not to repeat when the margins were far wider than they are today. Investors who are now counting their fix and flip successes in the double digits resoundingly say an investor must be able to make an accurate assessment of the property’s value and calculate a realistic cost for the rehabilitation — and execute to achieve the desired margin. When it comes to investing, working with the right vendor partners — from appraisers to contractors to suppliers — was the hardest lesson learned.
There’s no easy way; investors have to be ready to work and understand and mitigate risks across the investment lifecycle. They also need to know that their insulated network of family and friends may be free or ready to do a project at a discount — but they may not be the best people to turn to. Many investors think the more work they can do themselves the more ROI they’ll see. Evaluating new vendors takes time — but it can be time well spent if it makes an investment much more profitable by avoiding lost time and revenue from the mistakes less experienced investors and their friends are likely to make.