Short term real estate investing refers to strategies where investors purchase properties, renovate or upgrade them within a short period, and then resell for a higher price to realize profits. It is a high risk but high reward approach that can generate substantial returns if executed properly. The most common short term real estate investing strategies are house flipping, wholesaling, and buy & rent. To succeed, investors need sufficient capital, good negotiation skills, renovation capabilities, and understanding of the local housing market conditions. This article will provide an overview of short term real estate investing and give a detailed example of a house flipping strategy.
House flipping strategy targets properties with profit potential
The most straightforward short term real estate investing strategy is house flipping – purchasing undervalued properties that need repairs, renovating them, and then reselling for a marked-up price. The key is to identify homes with profit potential – older houses in popular neighborhoods that can be improved to realize capital gains. For example, a 2-bedroom 1-bath 800 sqft house bought for $120,000 may be renovated by upgrading the kitchen, floors, lighting fixtures for $30,000. After 3 months of work, if the improved property can be sold for $180,000, the investor makes $30,000 profit minus renovation and transaction costs.
Perform due diligence to assess renovation costs & sales price
A successful house flip depends on proper due diligence and financial analysis. Investors need to accurately estimate potential renovation expenses and expected resale price after upgrades. This involves research into recent housing transactions in the area, consultation with contractors on required work and costs, and setting a realistic timeline. For instance, while repainting may cost $2,000 and take 1 week, a kitchen upgrade may require $15,000 and 2 months. Understanding these parameters allows proper planning.
Arrange financing for purchase & renovation costs
A key consideration in house flipping is arranging financing to fund both the initial purchase and subsequent renovations. Typically investors would use a combination of their own capital and lending from private lenders or hard money loans. For example, buying the $120k house may require $60k down payment, with a 6-month interest-only loan for the balance $60k. Then a separate $30k renovation loan could cover the upgrades, which gets paid back immediately after the renovated property is sold.
Manage budget, timeline & market risks
Like any business venture, house flipping carries risks around budget overruns, project delays, and changing market conditions. Savvy investors plan for contingencies using project management principles – tracking expenses closely, building in buffers within time and cost estimates, and monitoring housing price trends. If the renovation expenses or duration exceeds initial plans, or the local market softens, the projected profit may disappear. updating budgets frequently and being ready to sell quickly helps manage these risks.
In summary, short term real estate investing like house flipping can generate big profits but requires diligent analysis, sufficient capital, strong execution and tolerance for risk. Investors should crunch the numbers thoroughly, arrange financing, budget carefully, and watch the market closely when attempting these high-risk, high-reward strategies.