The following list offers some general guidelines for gauging your total investment in the three main types of housing markets:
- Increasing: When home values are rising, your total investment in the property, including the purchase price, closing costs, renovation costs, holding costs, and selling costs, shouldn't exceed 80 percent of its estimated resale value.
- Flat: When home values are steady, limit your total investment in the property to 70 to 75 percent of the estimated resale value.
- Decreasing: When homes in the area are decreasing in value, invest no more than 60 to 65 percent of the property's estimated resale value.
After you decide how much you can afford to invest overall, adjust the purchase price accordingly. Don't expect to make up the difference in your other expenses (including renovation and holding costs).
On the surface, these numbers suggest that you stand to make more in a declining market. You invest a maximum of $130,000 in the hopes of selling the house for $200,000, but in a declining market, you can't count on selling the house for $200,000. You may have to drop the price to $180,000 or less to price it competitively. By adjusting the total investment down in a down market, you simply reduce your exposure to risk.
In any market, you want to earn at least a 20 percent profit for your time and effort.
Don't let a slow market slow you down. If you see a gaggle of homes for sale with recently reduced asking prices, the market in that particular neighborhood may be starting to soften. This softening may signal a great buying opportunity, but you need to re-evaluate your resale estimate as well.About This Article
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Certainly! The excerpt you provided discusses the fundamentals of flipping houses and understanding market dynamics to maximize profit. To break it down:
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Market Fluctuations and Investment Strategy: It acknowledges that the housing market fluctuates similarly to the stock market. The key to profit lies in buying a property below its market value. It provides guidelines for gauging total investment based on market conditions:
- Increasing Market: Total investment shouldn't exceed 80% of the estimated resale value.
- Flat Market: Limit investment to 70-75% of the estimated resale value.
- Decreasing Market: Invest no more than 60-65% of the property's estimated resale value.
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Calculating Total Investment: An example demonstrates this strategy by illustrating the investment calculation in different market scenarios using a house expected to sell for $200,000:
- Flat Market: Buying for $120,000, spending $20,000 on renovations, and allocating $10,000 for other expenses results in a total investment of $150,000, which is 75% of the estimated resale value.
- Adjusting Investment Based on Market: The investment is adjusted accordingly for increasing or decreasing markets, maintaining the specified percentage of estimated resale value.
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Risk Mitigation in Declining Market: In a declining market, reducing the total investment lowers exposure to risk since the resale value might be less than anticipated. Adjusting investment down in a declining market minimizes potential losses.
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Profit Expectations: Regardless of the market, aiming for at least a 20% profit is advised for the time and effort invested.
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Adaptation to Market Signals: Observing signs such as a rise in homes for sale with reduced prices may indicate a softening market, presenting potential buying opportunities. However, reassessment of resale estimates becomes crucial in such cases.
The provided information outlines the core principles for successful house flipping, emphasizing adaptability to market conditions and prudent investment strategies based on those conditions.
