House flipping is a great way to earn a substantial income — or it can lead to financial disaster. Get advice from a real estate professional in Pennsylvania to help you make sound real estate investment decisions.
If it’s on TV, it must be true. Right?
You may have seen the house flipping shows on TV and have watched people purchase an ugly home, replace the green kitchen countertops, plant flowers in the beds out front, and then sell the house for a profit. Of course, all this takes place in 30 minutes or less.
The reality is that even the savviest of home investors can make costly errors when picking out properties to flip.
Maybe renovation materials are more expensive than you anticipated because the doors and windows are not a standard size. Perhaps you accidentally break a pipe when installing a new toilet, and your mistake causes other renovations to be delayed because the basement is under water. When it comes to remodeling a home, anything can happen.
Perhaps you are an expert home remodeler, but you aren’t interested in learning about money. Do you understand the tax implications of flipping houses? Did you figure out how much you will owe in capital gains tax when determining how much you need to collect on a property to make a profit?
Speaking of taxes, how will your renovations affect the property tax? Will a higher tax bill make it challenging to find a buyer for the home after you remodel it? Will the price of the renovated home make it the most expensive house in the neighborhood?
Do you have enough cash to pay for insurance, utilities, and yard maintenance while you are renovating? What if the house doesn’t sell for six months? Will you be able to maintain the home with cash during that time? Will you be able to recoup those costs on the sale of the house?
What if you have a difficult time selling the home? What if the sweat equity you put into the house does not pay off, and you end up losing money?
Read on to learn general tips on how to flip houses in Pennsylvania. Discover the hot markets in the state right now. Learn how to tell if a particular property would be a good investment or not. Learn about financing that is available for house flippers. Finally, discover how the right local real estate agent can help you with the process.
2019 Pennsylvania Housing Market Analysis
To make money by flipping houses, it is essential that you know the local real estate market.
You only get this kind of knowledge by either living or working in those particular neighborhoods.
There are over 46,000 square miles in the state of Pennsylvania. With an area this large, you know that a home’s value is going to vary significantly from region to region and neighborhood to neighborhood.
While the average home in Bethlehem is in the $150,000s, and the average home in Reading is less than $65,000, how will you know an excellent price for an investment home?
Do you feel confident in your knowledge of Pennsylvania real estate? How much are you willing to gamble on that knowledge?
Making a profit by flipping houses is stressful enough. Don’t purchase investment real estate without first seeking the advice of an agent in the Pennsylvania area.
How to Tell if a Pennsylvania Property is a Good Investment
Finding a property to flip is more complicated than you would think. You should not just try to find an inexpensive, outdated home that you can improve cosmetically. You need to understand how much money you can realistically sell the property for after the renovation.
Ideally, you should be looking for the cheapest home in a great neighborhood.
Plan to sell the renovated home at the low-end value of the homes within the neighborhood. If the homes on a particular block in Philadelphia are going for $130,000 to $150,000, determine if you are still able to make a healthy profit if the house sells at $130,000 or even $129,000.
Finally, look for homes in popular areas that get a lot of real estate traffic. It doesn’t matter how amazing your renovations look if the house isn’t in a desirable, safe neighborhood with good schools. You want your property to be in a popular area.
Even if you are from Pennsylvania, you may not understand the intricacies of each local real estate market. Seek expert guidance when choosing investment properties. There are Clever Partner Agents in Pennsylvania who specialize in investment real estate. Ask their advice before making any purchasing decisions.
How to Turn a Profit When Flipping a Pennsylvania House
You know the general idea on how to make money by flipping houses, but let’s talk specific numbers.
Let’s assume you want to purchase a home in Allentown.
Some experts recommend that the house should be no more than 70% of the after-repair value of a property, minus the cost of the renovation needed that you need to complete on the home.
So if you think that an Allentown home is going to be worth $114,000 after you do the necessary repairs, and the home needs $15,000 worth of work, you should pay no more than $64,800 for the house.
$114,000 (anticipated value after repairs) x 70% = $79,800 – $15,000 (for repairs) = $64,800.
The current national data says that it takes an average of 180 days to flip a home in the U.S, which is longer than the average ten years ago.
When you are figuring out the cost of the repairs, you may consider adding a safety cushion to pay for six months of mortgage payments, insurance payments, utilities, and mowing costs in case the house doesn’t sell for six months.
Paying Cash vs. Taking Out a Loan
There are plenty of stories out there of people who go into the home flipping business only to discover they have bitten off more than they can chew. To reduce the risk of financial devastation that may come from an unfortunate investment, consider using cash to pay for your investment property. If you pay for an investment home in cash, you can have more flexibility on when the house actually sells.
Let say you purchase the home in Lancaster for $73,090. You finance the purchase price on the house, plus the $10,000 you planned to spend on renovations. You expect to make over $35,700 on the home after you sell it.
You take out a HELOC loan for 5.48% to pay for the house you intend to flip.
All is going well until the heating unit unexpectedly dies on the home. After purchasing a new, expensive furnace, your contractor has a family emergency and can’t make the renovations on the house as quickly as he was planning.
Weeks stretch into months and the renovations are not yet complete. In the meantime, you are paying hundreds per month on mortgage payments, property taxes, and insurance on the home.
You may finally sell the home eight months later, but after paying $8,000 in closing costs and real estate commissions, your profit is $7,500. You spent months on this project and only made $7,500.
If you had paid cash for the home, you could have been choosier about the offer you accepted. Paying cash gives you more flexibility because you aren’t paying interest and principal on a loan every month.
While you can get a home equity line of credit loan to flip a house, the safest method for flipping homes is paying cash.
Know your finances. Know how the worst-case scenario will affect your financial health.
5 Best Cities in Pennsylvania for House Flippers in 2019
So where should you invest your money? This is a tricky question. Ideally, you will be looking for an inexpensive home in a safe, desired neighborhood. You may be able to find this scenario in any city in Pennsylvania.
You may consider narrowing your search to the top five highest-appreciating Pennsylvania cities.
The City of Brotherly Love may be the best place for flipping houses. Check out the gentrifying neighborhoods in zip codes 19146, 19143, and 19145. These areas include the Graduate Hospital and Point Breeze neighborhoods. Also check out West Philadelphia and South Philadelphia.
Check out the neighborhoods of West Conshohocken. Buy the least expensive house in the neighborhood, and your investment will surely pay off well. Be aware of adding modern convenience to older homes in areas of West Conshohocken. It is more difficult and costly than you would think.
Conshohocken has been considered an up-and-coming area of Philadelphia for twenty years. The public schools are highly rated, and the area is considered very safe. Don’t forget the 70% rule when purchasing a home to flip.
West Chester is also near Philadelphia. It is typically a rental neighborhood, but young professionals are moving into the area and may be looking for starter homes. Be ready for those young professional buyers by renovating and updating an existing home.
Even though the rest of the areas on this list are near Philadelphia, we should definitely not ignore Pittsburgh. Some reports say that house flippers made an average of 162% return on investment. This makes the Pittsburgh area one of the best in the country for flipping homes.
Next Steps for Pennsylvania House Flippers
Are you ready to take the next step in investment real estate? Consider working with a Clever Partner Agent. Let your agent know that you are looking for an investment property to flip. Our agents will help you grab up an inexpensive piece of real estate with a lot of possibilities.
When you are ready to sell, our agents will work for a fraction of the typical commission rate. This will help you maintain the highest possible margin on your flip.