Flipping a House 101
If you've watched home renovation shows anytime in the last few years, you may have watched people purchase houses and update them to increase their value. It looks relatively and many people have found success in the process, but if you want to do it the right way, it takes a lot of time and effort. Flipping houses is not the kind of side hustle you can cut corners with, but there are ways to lessen the learning curve while still minimizing your risks.
How House Flipping Works
House flipping refers to a buyer who purchases older properties in need of renovations for low prices, fixes up structural issues, beautifies the interior and exterior, and then resells them for a profit. Most houses that are flipped are bought through bank short sales, foreclosures, or property auctions.
To be successful in flipping houses, you need to spend your money wisely by investing in properties in need of TLC, but not extensive renovations. After your purchase, you'll need to invest more money in renovations to increase its resale value and attract potential buyers by listing the house on the market.
If you're not skilled in taking on older houses that require a lot of renovations, micro-flipping may be a good option. Micro-flipping involves buyers who are looking for a fast sale without doing any major home repairs. You'll have to analyze the data for the area more stringently with micro-flipping to buy a home below market value and quickly flip it for more money. People who are successful in this endeavor are able to do this because they manage a high volume of transactions.
How to Start House Flipping in 7 Steps
Get to know the seven essential steps for flipping houses to reduce your financial risk while increasing your chances of a successful flip.
1. Know Your Neighborhood
Take the time to research the neighborhood you plan to invest in. Choosing the right location is essential because you want a neighborhood that is nice enough for people to want to move to, but not too expensive to buy a house for flipping. Working with a real estate agent during this process is beneficial because they know the area well and have undoubtedly helped plenty of house flippers find their properties, so they can help you find what you're looking for.
Before you purchase a property, bring in a general contractor to do an inspection to help you get an estimate. The estimate will help you determine how much work needs to be done so you can decide whether or not the house is still within your budget.
2. Use the 70% Rule to Plan Your Budget
Real estate investors commonly use the 70% rule when it comes to the purchase price of a house. The 70% rule says that the investor should only pay 70% of the after-repair value (ARV) of a property. This is what the home is worth after the renovation and without the costs of repairs.
If the AVR of a house is $200,000 but it needs $25,000 in repairs, you should your maximum offer should be $115,000 for the home. This is because 70% of the AVR is $140,000 and subtracting the $25,000 for renovations leaves you with $115,000.
3. Assess Your Skill Set
People with an in-depth knowledge of real estate, design, and construction have uniquely suited skills for house flipping, but they aren't necessary skills! If you aren't able to do the work yourself, it's important that you know how to find professionals who are able to do the work for you. You should start the flipping process by assembling a team of experts like contractors, lenders, insurance agents, and real estate agents to help you successfully find, fix, and resell the property.
4. Finance Your Project
How do you plan to finance your house flipping endeavors? Not everybody has the cash on hand that's necessary to put into purchasing a property and doing the renovations. If that's the case for you, you'll have to get pre-approved for a loan. To get pre-approved on a loan, you'll need a good credit score and either a 20% down payment or some other type of collateral.
5. Choose and Buy Your House
Next is potentially the hardest part of flipping a house: searching for the perfect property. Not only do you have to consider how much the house costs, but you also have to have a renovation plan in mind so you can consider its potential resale value. The goal is to get the highest profit margin possible so it's good to look at distressed, foreclosed, and fixer-upper homes. A real estate agent and a contractor can help you with your decision as they would have a better understanding of the extent of the work.
Once you've found the perfect property to flip, make an offer and close on the house. Depending on the market and how good of a deal the house is, there may be some competition with other buyers and you may have to spend more money. Make sure you know how much you can comfortably pay to ensure the house is still profitable. If it's not, there's no shame in walking away rather than risking losing money on your house-flipping endeavors.
6. Build Sweat Equity
If you have a low budget, save some money by building sweat equity in the property. Sweat equity is the unpaid labor put into the project with physical labor and mental effort. For many, sweat equity is an important part of building a successful business because it gives people the momentum to keep going.
7. Flip the House
After completing all the necessary repairs and design plans, the next step is reselling the house. As soon as you list the house, time is of the essence as you are less likely to get a profit the longer the house sits on the market. The goal should be to make your improvements quickly and then put it on the market as fast as you can. Working with a real estate agent at this point is essential.
Cost of Flipping a House
The cost will vary depending on how much the initial purchase was, the cost of repairs, and the necessary time taken to complete the sale, but here is a brief overview of the aspects you should expect to pay for during this process:
Your Financial Investment
This process is all about math because you want to be sure you'll earn a profit when everything is said and done. Some of the following expenses house flippers should be prepared for include:
Your Time Investment
Aside from the financial investment required, there is a significant time investment too, which will vary depending on the scope of the project. You should expect to spend a minimum of 6 to 12 weeks on the process from start to finish if everything goes according to plan. However, there is a large chance any part of the process could get delayed by several months, which could cause a snag in your plans.
Is Flipping Houses Right for You?
House flipping isn't right for everybody. It's always a good idea to weigh the pros and cons before you get started.
Great profit potential
Great potential for loss in investments
If you are skilled in design or construction, this is a great side hustle opportunity
Without the necessary skills, outside help and support can be costly.
Compared to other real estate investments, house flipping is relatively low risk.
House flipping requires a lot of planning and budgeting to be done correctly.
You can learn a lot about the real estate market.
Plenty of unexpected costs can come up and you may spend more money than anticipated.
You can learn a lot about your local market and community.
You'll need in-depth knowledge of the local real estate industry for the best possible chance.
The Bottom Line
With a good plan that includes a careful look at your financial situation, house flipping can be a great business option, but it's not one you should take on if you're looking for overnight success. There is a great opportunity to make costly mistakes and lose money during the process, so it's important to work with a team of experts. Working with people who know the local real estate market and know how to make repairs can help you out in the long run and with the right loan and interest rate, you'll have no problem flipping a house!