Thank you, Santa! The holiday rally has pushed most of the major stock market indices to record highs. But valuation-conscious investors are getting nervous.

Now’s the time to consider alternative investments. The housing market is booming amid a chronic shortage of homes for sale, a dynamic that’s fueling the phenomenon of house “flipping.”

The U.S. Census Bureau reported on December 16 that U.S. homebuilding surged to an eight-month high in November, as the supply of homes for sale lagged demand.

Housing starts increased 11.8% to a seasonally adjusted annual rate of 1.679 million units last month, the highest level since March. The consensus had forecast starts rising to a rate of 1.568 million units.

Permits for future homebuilding rose 3.6% to a rate of 1.712 million units in November (see chart).

To be sure, home sales fell in November on a monthly basis, but that’s in large part due to soaring home prices and the housing shortage.

The National Association of Realtors reported on December 29 that its Pending Home Sales Index, which tracks the number of homes that are under contract to be sold, dropped 2.2% in November from October.

Fact is, the fiercely competitive search for homes is a tailwind for house flipping.

Flipping is a tactic whereby an investor buys a property with the goal of reselling within a relatively short amount of time for a profit. The gain is made through the price appreciation that occurs from a healthy housing market and/or renovations.

Do it right, and flipping could make you a lot of money. Do it wrong, and you could lose your shirt. Below, I’ll examine the common pitfalls of house flipping and how to avoid them.

A reflection of the boom in flipping is the recent spike in new condo construction. House flippers often choose condos because they’re generally cheaper, easier and faster to flip than single-family homes.

The following advice could help you exponentially boost profits from house flipping and also prevent costly headaches.

Do the math…

Make sure you have sufficient capital to get through the expensive process. Acquiring the property is the first cost. Sure, there are plenty of low or no money down deals available, but the key is to find a reputable borrower who won’t gouge you.

Every dollar you spend on interest increases the amount you’ll need to make on the sale to turn a profit. Before taking out a mortgage, do your homework to find the most advantageous offer. If you can, you’re better off paying cash for the property.

Marketing come-ons from vendors that claim to be house-flipping experts are proliferating. But you should ignore those emails inviting you to join house-flipping seminars. These self-proclaimed flipping gurus just want to pick your pocket. They promise to help you through the deal, but typically they get a high percentage of the eventual profit, charge onerous fees, and push most of the risk onto your shoulders.

Also factor in recurring ancillary costs such as taxes, utilities and landscaping. The cost of one-time improvements and renovations must be considered as well. Your sale price should exceed all of these combined costs. It’s not uncommon for house flippers to lose money because they overlooked a large expense such as, say, mandated federal flood insurance.

Don’t forget about the capital gains taxes you’ll incur when you sell. The IRS considers flipping houses to be a business, not an investment. Normally, if you buy a piece of real estate to sell at later date, the profit is taxed under capital gains rules.

The word “flip” connotes fast action, but it’s actually a months-long marathon. Remain patient. You must pinpoint the right property, in the right location, at the right price.

There’s also a morass of paperwork to slog through, involving mortgage applications, official permits, inspectors, contractors, lawyers, you name it. When it’s time to sell, you’ll need to market the property and schedule open houses.

You can greatly enhance your profit from house flipping by applying do-it-yourself (DIY) skills.

If you’re handy with tools, apply sweat equity. If you can hang dry wall, fix leaky roofs, install a kitchen, repair gutters, lay tile, and replace bathroom fixtures, you’ve got a leg up on other house flippers. You’ll be able to substantially and cheaply increase the value of the house.

Renovation wive’s tales…

You also need to know which renovations to make and which don’t add value to your home. You obviously want to do a quality job, but if your chief aim is to boost the value of your home for eventual resale, keep everything in perspective.

It’s easy to spend six figures on a new space-age kitchen, but unless you live in a neighborhood of million-dollar mansions, you’ll never recoup your cost.

Many homeowners (wrongly) think that using top-of-the-line materials is a guaranteed way to boost their home value. File that factoid under “renovation wive’s tales.” Your home improvement project must match the economic realities of the neighborhood.

Before you go down the flipping route, think it all through. If you already have a full-time job, flipping a house could impinge on your ability to earn a living. Can you spare the time? And more to the point, would it be worth it?

Let’s say you make a profit of 10% on a house that altogether cost you $100,000. Was that $10,000 worth several hectic months of your time? You be the judge. If you decide to go for it, you need to commit. House flipping isn’t a hobby; it’s a difficult and costly endeavor that can either reap a windfall or end in tears.

SWK: the right tools for profits…

Speaking of the DIY boom, if you’re looking for a straightforward stock investment related to the housing sector, consider Stanley Black & Decker (NYSE: SWK).

Stanley Black & Decker, based in New Britain, Connecticut, is a household name that’s been thriving on the economic recovery. The company’s strategic moves, such as expanding into emerging markets, have put the stock on a long-term growth trajectory. SWK is a “defensive growth” play that should partake of continued economic growth in 2022, but also provide downside risk.

Stanley Black & Decker manufactures tools and accessories, engineered fastening systems, security solutions, and more. The company’s Construction & Do-It-Yourself segment manufactures hand tools, including measuring and leveling tools, planes, hammers, knives and blades, saws, and chisels.

The Security segment provides a range of mechanical and electronic security products and systems, including locks, hinges and doors.

The Industrial segment consists of industrial and automotive repair tools, including wrenches, sockets, electronic diagnostic tools, tool boxes, and tools for plumbing, heating and air conditioning.

With a market cap of $30.5 billion and a dividend yield of 1.69%, SWK is a “Dividend Aristocrat” that’s expanding its footprint in developing countries, many of which have launched ambitious infrastructure projects.

Yes, the Federal Reserve has signaled a more hawkish monetary policy, with a series of interest rate hikes penciled in for 2022. However, the yield on the benchmark 10-year Treasury note is low by historical standards. Mortgage rates remain appealing.

SWK stands out as reasonably priced, in a stock market where bargains are getting harder to find. The stock’s forward price-to-earnings ratio (FPE) is 16.37, below the S&P 500’s FPE of 21.3 and below the FPE of 20.4 for the company’s sector (industrials).

Yet the average analyst expectation is for SWK’s share price to reach $222 over the next 12 months, which implies a gain of about 19% from the current price. Analysts expect the company to post year-over-year earnings per share growth of 21.2% for full-year 2021.

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John Persinos is the editorial director of Investing Daily. To subscribe to John’s video channel, follow this link.