Fix And Flip Real Estate Investment Strategy: Pros & Cons
We covered what is the fix and flip strategy in a separate article, but to summarize the key concept, a real estate investor acquires an undervalued property that is in need of repairs. They then attend to the repairs and further improve the property’s value through renovations, after which they attempt to resell the property at a profit.
Throughout the fix and flip process, investors should be prepared to understand and shoulder the inherent risks to try and obtain the potential rewards. We’ve listed some of the benefits and drawbacks of the fix-and-flip investment strategy.
The Pros Of The Fix And Flip Process
Potential for high returns
The opportunity to generate quick and large profits is inherent in the fix and flip strategy. However, it depends on factors such as property purchase value, cost, the scope of renovations, and market conditions.
Forced appreciation
When you conduct renovations on a below-market valued property, you naturally add increased value to it, increasing its property value. This immediate increase in value is known as forced appreciation.
Short term profits
Compared to other strategies, Fix and Flip, allows investors to realize profits in a relatively shorter time window. It’s usually only the time it takes to complete the renovation and market the property till profits are generated.
Experience & Skill Development
As an investor is actively involved in managing the renovation process, they have the potential to learn about the construction, design, and renovation market, which can prove invaluable in future investments.
Less competition
Most real estate investors or owners are on the lookout for properties whose renovations end with just a new coat of paint. Due to the risky nature of the investment, the potential exists to find distressed properties at an extremely attractive price.
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The Cons Of The Fix And Flip Process
It’s a risky bet
Though the potential for healthy profits exists, it is also risky as there is no guarantee that the property could be sold for a profit or at all. Renovations may also take more money and time than initially estimated, which can eat into potential profits. Nevertheless, as the investor owns the property, the chance to make some return will still exist with the possibility of rental income.
It’s not cheap
While you may be getting a good deal on a property, it still requires an outlay of capital like any investment, on top of which the additional cost of renovations must be factored. While this process increases the project’s potential value, it can still be an expensive endeavor.
It requires active participation
Unlike some other investment strategies, investors must be willing to invest more time and effort to ensure that the property develops into the profit-generating space it should after all the renovations. Finding a property, managing the renovation, and the post-work sales process takes a lot of time and effort.
Lack of diversification
Investing in just one property to fix and flip can put investors at greater risk than having a more diverse investment portfolio.
Conclusion
As you can see, the fix-and-flip real estate investment strategy comes with many potential upsides and its own share of risks that need to be managed. The benefits and drawbacks should be carefully considered prior to making an investment decision.
Ideally, real estate investors should consult a qualified financial advisor to ensure that the fix and flip approach aligns with the investor’s investment objectives and risk tolerance. Should you decide that this strategy does align with your objectives, please feel free to reach out to our team at RE Investor News, and we would be happy to help you secure funding so you can begin your real estate journey .
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