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Home flipping can be a profitable venture if you know how to do it, but many people are afraid to get their feet wet. If you want to learn how to start flipping houses, the good news is that it’s not as scary as you think.
You don’t even need to have a ton of money laying around to get started. With enough determination, you can have a lot of fun becoming a house flipping pro, and even make a good living out of it.
This guide to flipping houses reviews how to start rehabbing houses for an honest profit. We’ll review what mistakes you’ll want to avoid if you’re new to this whole idea, and give you some key strategies on how you can obtain the financing you need to begin.
What Is House Flipping?
House flipping refers to finding homes that might need a little love and attention and buying them so you can fix them up and sell them for a profit. Instead of buying a property to live or do business in, you invest in a property intending to make money from it when it sells.
You’ll need to do some research so you’re buying the right properties. Then, you’ll need to put in some time making the repairs. If you can manage your repair costs and your time, flipping houses is a great way to make money on the side. Some people even make a full-time living just by flipping houses.
Fix-and-flip vs. Micro-flipping
Micro-flipping is an alternative strategy that usually skips the time and money investments needed for traditional fix-and-flip investing.
Instead of spending money to repair the things that aren’t working and putting in the added effort of making cosmetic changes, you buy a home and immediately try to put it on the market for a profit.
But how can you make a profit without doing anything to improve the home?
Most micro-flippers use technology to do this. They use computer programs that analyze things like market prices in neighborhoods, listing prices and the demand for each home.
If a home has a high chance of being resold to another person who wants to flip it, the micro-flipper can buy it and try to sell it shortly after. The biggest downside to micro-flipping is that the profits are only a fraction of what you could expect if you flipped homes the traditional way.
House Much Does It Cost To Flip a House?
Before you embark on your journey to become a house-flipping guru, you need to know all of the costs involved. This helps you plan ahead and set a realistic budget when you’re targeting homes to flip. While it can be profitable to flip a house, you should be aware of the concepts and factors that go into the house-flipping equation.
After-repair value (ARV)
The main number to keep in mind when considering a home for a flip is the after-repair value (ARV).
ARV is the estimated resale value of the home after all of your repairs and renovations to the home are complete. Your goal in flipping is to provide improvements that increase a home’s value by more than the cost to repair it.
You should also consider the following when planning your flip and estimating ARV:
- The purchase price of the home
- Closing costs when buying and selling
- Taxes and fees, such as real estate agent commissions
- Potential legal costs
What home renovations add value?
When you buy a home to flip it, you may be tempted to go overboard with your renovations. Try to focus on repairs that add more value than the money you’re investing and avoid spending money on things that won’t give you any or enough of a return on investment.
Renovations that give you the biggest return on investment
- Exterior paint: Paint is one of the cheapest home improvement materials you can find, and it instantly adds appeal to a home. In fact, a good paint job can turn a run-down house into an attractive home, which draws higher offers. Try to use neutral base paints for the greatest appeal.
- Eyesores: If there are visible, cosmetic imperfections throughout the exterior, you’ll want to fix them so the home doesn’t look like it’s in disrepair.
- New fixtures: Lighting fixtures can make a huge difference, especially in the kitchen or dining area of a home. Replacing them with modern and stylish new lighting can help you draw more money than you’ve invested.
- Carpet and flooring: You can definitely recover the cost of flooring upgrades, such as wood flooring, new carpet and tile. Just try not to go overboard.
- Minor plumbing fixes: Check for leaks, clogs and other minor plumbing issues. Clearing those up can add more value than what you’ll spend on repairs.
Flip a House in 10 Steps
You’ve probably seen TV shows about people who flip houses and think you need a special type of talent to pull off the same level of success. But anyone with the right mindset and resources can flip houses.
You just need to research the housing market, know your limitations, work within your budget and know when it’s time to bring in help. Here are 10 steps to take if you want to successfully flip a home.
1. Research the housing market
Rushing into house-flipping without doing your homework isn’t a good idea.
If you have a potential property in mind, look at what other homes in the neighborhood are selling for and if any bidding wars are going on for similar houses. This would indicate an increased demand for that ugly duckling of a house on the street – if it were only shown some love and attention.
Other things you should look into include how close the home is to schools, shopping, parks and other local attractions, whether the population is growing in that region and the age of the home.
Be sure to research what’s being built in the area. If the neighborhood is near where a new highway ramp or big nightclub is going in, that might not be the best place to flip. And you should probably avoid buying a home in an area where more people are moving out than moving in.
Weigh the cost of flipping an older home. Older homes usually require more renovations to bring them up to modern style amenities and building codes. Sellers who don’t want to invest in repairs might offer them at discounted prices.
2. Make a budget (and know the 70% rule)
It’s super important to know what you can afford so you don’t find yourself in over your head. A good rule of thumb is to follow the 70% rule. This rule states that you shouldn’t pay more than 70% of any property’s ARV minus the repairs.
Here’s an example: Let’s say the home you want to flip needs new kitchen lighting, updated faucets, an exterior paint job and new flooring. You’ve determined that the ARV would be $200,000 once you finish those renovations, and the repairs themselves would cost $25,000.
The ARV minus the cost of repairs is $175,000. And 70% of $175,000 is $122,500. You probably shouldn’t pay more than that to purchase the home.
In other words, the calculation would be: (ARV minus repairs) x .70 = maximum purchase price.
When you use this strategy, you’re giving yourself a nice buffer to cover closing costs, taxes, real estate agent fees and other nonrepair expenses.
3. Know your skills
Do you have some skills you can use to reduce repair costs? If you’re the type that knows how to install a dishwasher, paint rooms and fix a leaky faucet, you can save a lot of money. Instead of bringing in professionals to do the work, you can do it yourself. If you’re not as handy, perhaps you’ve got great business skills and a persuasive personality.
You don’t need to be a construction guru or have all the know-how to repair everything. It’s possible to hire others to do the work and turn a profit. Knowing your limitations is important because you’re able to determine what you can and can’t handle on your own.
4. Talk with the experts
Perhaps you’re not a guru when it comes to putting homes up for sale and managing offers. That’s okay and not uncommon. You can fill the knowledge gaps by networking with other people. It’s a great idea to have some contractors, real estate agents, inspectors, title agents and lawyers in your contacts list so you can call them up whenever you’re in over your head. If you work with the same people repeatedly, you develop beneficial relationships that make it easier to flip homes as time goes on.
5. Form your plan
Now that you’re aware of your strengths and weaknesses, you need a battle plan. With your budget in mind, you can begin laying out how you plan to flip your first home. Having a solid budget and sticking to it is important because it keeps you focused on your end goal. The next step is to create a timeline so you’ve got an idea of how long all of this will take.
Unless you’ve got a whole lot of money laying around, you’re going to need financing. Decide how you’re going to obtain a mortgage and look up your credit score so you can get out ahead of any surprises. The last item in your plan should be who you’re going to call when you need assistance with repairs or marketing the house.
6. Find the right house for you
With the right budget in place and an idea of a property’s ARV, you can target houses that fit your budget and abilities. You might want to focus on homes that are close to schools or in older neighborhoods or areas where lots of people are moving in. Houses that are close to other amenities such as parks, shopping centers and major highways can be excellent choices too.
Remember that you’re going to flip the house, so you’re not looking for your dream home. You want to find a property that’s within your ability to rehab for a profit.
7. Get financed
Getting a mortgage for your first house-flipping venture might be tricky. Mortgage lenders think that home-flipping is a riskier investment than other types of home purchases, so they’re more likely to lend to experienced real estate investors over up-and-comers. Don’t lose faith, though, because it’s still possible to get financed and the process gets easier after you complete your first sale.
Conventional loans usually require certain contingencies. The house needs to pass inspection, for example, and you could need a higher credit score and a larger down payment to qualify. You’re required to provide your tax returns, proof of income and bank statements. If you can’t get a conventional loan, there are other options.
One type of loan that you could get is called a hard money loan. The bank offers you 70% of the ARV on the home you’re interested in and usually sets a very short term. One advantage of this type of loan is that you can get some of the money you need for renovations because you’re getting more money than just your purchase price of the home, in most cases. This gives you a head start and reduces your out-of-pocket expenses.
The house might not need to pass inspections for a hard money loan because the bank knows you intend to bring it up to code. The interest rates tend to be much higher, but banks are more flexible with credit scores because they know they can foreclose on the house and sell it for a profit if you default.
8. Buy the house
Even if you don’t need the home to pass inspection, you should request an inspection to identify all the issues you need to address. Home inspections give you more potential leverage when negotiating too. If you’re not experienced at buying homes, work with a real estate agent to make an offer and negotiate with the seller. Once you’ve completed the sale, you can begin rehabbing the home.
9. Repair and renovate
You should focus your repair efforts on the things most likely to add value to the home so you’re not wasting money and time. The investments you make can add something that’s called sweat equity to the sale price of the home. Any DIY projects you use to renovate the home qualify as sweat equity and can justify adding value during sales negotiations.
Let’s say you renovate the kitchen and put in new lighting fixtures, a new sink, new ceramic tile and fresh paint. You just performed a service for the future owners and your time is worth money. When you ask for more money due to your efforts, many buyers honor the work and time you’ve saved them.
10. Sell the house
There are several ways you can go about selling the house. You could do it yourself, but this isn’t a good idea if you’re not experienced and don’t know what paperwork needs to be filled out, what legal considerations to make and what negotiation strategies to use. Real estate agents have relationships with banks, attorneys and other agents, so it’s easier to find a potential buyer and get advice through the process.
Another way to sell the house is through an auction. Most home flippers prefer to buy homes from auctions rather than sell them. However, if you need to sell the home fast and there’s a lot of public interest in the home, an auction could help you out on both fronts. The interest would drive the price up, and auction sales usually close much faster.
Ways to maximize your profit include ensuring you’ve cleaned up the exterior of the home, made all of the critical repairs necessary to pass inspection and worked with the right contacts in the housing industry.
Flip Without a Flop
Now that you’ve got some information on flipping houses, do some more homework to see if this is the right thing to pursue. Most beginners rely on other income during their first few sales because it takes time to turn homes around for profit. Take care with all of your financial decisions to ensure you get the best outcome and know what you have to bring to the table.