Watching an episode of a reality show starring any house flipper makes the process look easy. The real estate market is hot, and you're thinking about whether flipping houses is for you. It’s good to know that a U.S. Home Flipping Report for 2020 shows that out of all homes sold that year, over 240,000 single-family homes or condos were home flips.
Unfortunately, flipping a house is not easy when you’re first starting out. The majority of the internet sites for house flipping advice and training courses are either overpriced or feel scammy. There is so much information you need to know before you can make your first deal happen.
Before you fork over thousands of dollars for a weekend course on how to flip a house (conducted at your local Marriott), you should read this article first. Flipping a home is a short-term project that can quickly spiral into a financial disaster if you do it wrong. Now let’s get into how you can do it right and be successful at flipping houses.
What Does House Flipping Mean?
House flipping means that you follow the below steps to take a property from the buying stage to being sold for profit, as follows:
The term 'flip' can be attached to anything you buy and then turn around to sell for a profit. Popular examples would be old iPhones, Air Jordans, and anything Supreme makes.
How House Flipping Works
House flipping investors' typical purchase price is below market value. The houses may need major repairs such as a new roof, AC unit, or have issues with the foundation. The owners cannot afford to make the repairs, desperately need the money, or are uneducated when it comes to their local real estate market.
Once the flipper takes possession of the property, they'll fix it to the point it would be attractive to buyers. The speed, material, and labor cost of the renovation will dictate their average gross profit. There are also potential tax benefits, but we will leave that to your tax accountant as it differs per state.
The advantage of house flipping compared to buying a house and keeping it for a few years is that with holding long term, you pay a high price for a property with no guarantee of when or if it will increase in value. Since a house flip is completed in a small time window, you can estimate potential profits more comfortably.
The relatively New Concept Of Microflipping
Microflipping real estate is an efficient way of using advanced technology and readily accessible information to discover, purchase, and sell undervalued houses quickly.
The "micro" portion of the name derives from investors' rapid purchase and sale of a property. You don't keep the house for very long. Most real estate investors usually have a buyer lined up before they even close on the property's sale.
Internet Buyers or iBuyers such as Open Door, Zillow, and Redfin engage in microflipping. Owners can fill out an online form, submit photos, and receive a cash offer within 24 hours. The homes they purchase don't require any major renovation. Usually, a new carpet and some fresh paint are the only things they’ll need to add to attract potential buyers.
There is very little profit on each transaction, so they engage in numerous deals. Consider them the 'Amazon' of house flippers. These iBuyers are involved in every aspect of the transaction, including purchasing, repairing, and selling the property.
Skills Level Needed To Get Started Flipping Houses
The skills you'll need range from finance, negotiations, property evaluation, renovation, and marketing. You don't need to be an expert at every skill, but it is crucial to understand what you're doing and the contracts you're signing to prevent unpleasant surprises.
You need the ability to spot a good deal when you see one. Also, a good amount of house flippers don't do one flip and stop. They learn from their mistakes and learn how to use their money wisely in the next one.
If you buy it at $100,000 and invest another $50,000 into the property, how much return on investment can you expect? Make sure to calculate the carrying costs and the cost to sell. Cost to sell is around 4% to 8% of the total sales prices, depending on whether you hire a real estate agent.
Is Flipping A House Profitable?
Flipping houses can be profitable if you do it right. It would help if you expanded your network to spot good deals and act on them before someone else does. You'll have more opportunities to flip houses in cities with less competition. A savvy real estate investor will often use the 70 percent rule to gauge whether a fix and flip will be profitable. Coming up, we will show you how to calculate this yourself.
Steps To Flipping A House
The Starting Point
You need access to money to buy, repair, and market the property. You can self-fund it, borrow other people's money, or apply to hard money lenders.
If you have no money to flip houses, beware of hard money lenders. They may need collateral and offer only short-term loans with substantially higher interest rates. Think 'Payday Loans' but on steroids.
Doing The Right Research
Networking with real investors and professionals can connect you with someone in your market that is willing to sell below market.
You can look for short sales or foreclosure properties listed on the Multiple Listing Service (MLS). Offer the listing agent a quick close and even all the commission if you want to be aggressive.
In some counties, you can purchase the foreclosures at auction directly from the bank. However, you will have to be very creative as seldom do they ever let you enter the property before the auction.
If you are bold, you can connect with divorce and estate attorneys. It’s often the case that neither spouse wants to keep the house after a divorce. They might refer you if there is a messy divorce and a judge orders the properties to be put up for sale.
You can search the obituaries to see who has passed away and get in contact with their heirs. Real estate investing is not always as glamorous as seen on TV, but these families sometimes want to move on or do not live in the same state as their deceased family member.
What Is The 70% Rule In House Flipping?
The 70% rule is a formula that home flippers use to identify the highest price they should pay for an investment property. The rule of thumb is to not spend more than 70 percent of the home's future repair value, less any renovation expenses
Consider the following scenario:
Here’s the calculation:
The 70% rule suggests that the maximum price an investor should pay is $80,000.
Many real estate investors use the 70% rule, however it is not the only method for deciding how much to offer. Make sure to analyze your expenses, carrying costs, and market you are in to determine your offer price.
The emphasis should be on speed to maximize profit. The faster you can get a fixer-upper back for sale in a "hot" market, the easier it will be to sell it at a profit that reflects its new appearance and features.
Research For Your Ideal Real Estate Market
Do you want to focus on your city or expand nationwide? It will be easier to manage a flip in your town, but you have to decide whether inventory, costs, and tax ramifications will be feasible.
You'll need to decide whether or not you want to buy where the wealthy or working-class families live. Things to look for are schools, crime rates, and the average household income of your potential market.
Think about the families who live in that neighborhood and whether or not you think they can afford to buy a house and then what kind of houses and at what price point you'll be selling those houses.
Understanding Your Budget When Coming Up With A House
It is necessary to create a budget before acquiring an investment property to flip. This will help you determine what you can offer on a potential house, the amount of repairs you can afford to make, and the timeline you have to complete the flip. Get a home inspection and any other specialized inspections you might need when you're under contract. It's always preferable to discover flaws upfront rather than being caught off guard later.
Make a list of any cosmetic changes such as carpet and paint. Estimate the cost of major repairs like plumbing, water heater, or heating/cooling issues. Don't get stuck making monthly payments on a house waiting to complete unexpected repairs so you can sell it.
Have The Right Connections With Contractors
Contractors are the best people to ask about any information that you need to know about house flipping. They have ample knowledge on how it all works and even offer advice when they see potential problems.
You can also inquire within your network of friends or family members if they have recommendations. You can also do an online search for reputable companies that specialize in house flipping. Surprise repairs may save or destroy a flip, so do your homework carefully.
Double-Check Your Finances
Before you start, understand the financial risk you are incurring. Contact your tax advisor to make sure you are filing your house flipping business profits correctly.
Check with them to see if your real estate expenses are tax-deductible if you form a Limited Liability Corporation or Corporation when going to sell. Keep track of all your transactions and save every receipt.
Find The Right House To Flip
Make yourself familiar with the local market conditions when you're actively searching for your flips. You can search online or hire a professional to help you with this step.
If the median sales price in the area is $200,000, the further you go beyond that price point, the more days it may be on the market waiting to be sold. Your intuition may prove correct, but it's always better to be safe by doing thorough research before investing in any property. Start with a house in a location and price point that has a broad appeal.
Qualified real estate agents can help you find potential deals, but they may charge a fee for their services that cut into your profits.
Invest And Buy The House
It is essential to spend the right amount of money on renovations, but do not overspend. You should already know how much it will cost to repaint the walls, replace the flooring, and improve the kitchen. Whatever you do, make sure you are getting the best deals possible for the market conditions in your area.
Renovate And Make The Needed Improvements In The House
Redoing the flooring, installing new appliances, and lighting are all essential aspects of renovations. Depending on what problems exist within the house, it may be necessary to consult an expert before making any significant changes.
Remember, you are designing the house for broad appeal, not for you to move into. Popular and neutral colors are the safe bet, allowing your potential buyers to imagine themselves in their new home.
Sell Your House For A Considerable Profit
Congratulations! After all the hard work and months of renovations, you should be able to sell your house for a profit. Your hard work has paid off and will lead to even more success in your future flips.
Don't forget to include the repairs and renovation costs when you factor them into your expected return on investment (ROI). This way, you can make sure that you're making money regardless of expenses.
Do some research about local market conditions to know what price point is best for your flip. Make sure to highlight all the improvements you made to the home. Give them the peace of mind to move in and not have to worry about making any more additional repairs.
Then, set a fair price to convince potential buyers that it's worth their time and effort to check out the property. You have the option to sell it on your own, hire a real estate agent or attorney. Multiple flips consider getting your real estate license and saving on the commission if you plan to do so.
When Is Flipping Houses A Bad Idea?
If you don't have enough time to devote to the flip, you'll wind up being stuck with the property for longer, resulting in extra payments to lenders and utility companies. Flipping properties is a terrible idea if you can't give the project a significant amount of your time.
Can You Get Rich Flipping Houses?
According to ATTOM Data Solutions, in 2020, homes flipped achieved $66,3000 in gross flipping profit above the median initial purchase price paid by investors.
Some real estate investors can make $25,000 or more on their first deal. Others struggle to break even after spending weeks and months working on their project while dealing with countless hassles along the way.
As long as homes continue to appreciate at a rate higher than your renovation and maintenance expenses, you'll be doing alright.
Is Flipping Houses Suitable For You?
The key takeaway is that you need to have a solid strategy before starting your house flipping business. There's no guarantee of immediate success, and in some cases, people even lose money when they start out.
Flipping can take up to 6 months, but it depends on how well-executed your plan is so do not be discouraged! If this sounds like something exciting or viable, please make sure to subscribe to our real estate blog for more helpful information.