House flipping is a very lucrative real estate business that has been on the rise recently, and doesn't seem like it would slow down anytime soon. It involves buying houses, upgrading and repairing them, and then reselling– within several months up to a year- to make a profit. The profit mainly comes from;
- Price appreciation that results from a hot real estate market with soaring prices
- The capital improvements and repairs you’ve made to the home or both of these factors.
The quick reselling reduce your financial risks, expenses like property taxes, insurance, mortgage, and utilities that can quickly reduce the return potential of the house.
Simply put, all you have to do is get a good deal on the house and make the purchase if it is ideal. Then, analyze and figure out how much upgrades, renovations, and repairs will cost you. Put the house on the market, and finally sell it to make your profit. Make no mistake about it; it requires a lot more that you hear mentioned by the well-dressed investors you see on house flipping shows. Are you stuck on the steps of getting into real estate investing? Below we’ve given you all the details of how to flip houses like a pro and make profits.
How to Flip a House
Learning how to flip a house takes lots of research and time. We’ve saved you all that trouble by digging up everything you need to know and detailing it all here. Flipping a house is not all about curb appeal; it is more of having the right skill, being knowledgeable, and doing your math’s right. Before you start to make big money, you will have to flip several houses that may not bring in a lot. However, they will get you up and running, and help you network as well as understand how the business model works.
How to Find a Good Deal on a House to Flip?
Every new house flipper find getting the right house to flip a tough task; great deals are easily identified and taken off the market by more experienced and knowledgeable flippers and real estate agents. However, with some research and dedication, you can find great success. Here is what you need to do:
- Check MLS (Multiple Listing Service) for great deals on houses. Also, you can use MLS to investigate how much the homes in the area are selling for before buying one to flip.
- Go for houses in desirable neighborhoods or ones that are becoming hot properties.
- Avoid houses in areas with a high number of house sales; it’s an indication of a depressed local economy.
- Look for houses in areas with factors that indicate growth like employment, good security, and new businesses or companies.
- Check local facilities like schools, hospitals, and social places. These homes located in such areas command higher prices and sell faster.
Make a Budget, Plan Repairs and Renovations for Your House Flip
Here is where you do your math and estimate how much you will spend buying the house, making repairs, and selling it. Costs you should consider include:
- The ARV – this is the after repaired value of the home.
- Repairs costs
- Building permits costs.
- Carrying costs
- Real estate sale commission
- Selling Price
- It is also good to plan and estimate the time needed for flipping the house.
Leave no room for any surprise or unaccounted repairs.
Identify all the renovations projects and any significant overhauls like plumbing, flooring changes, roofing, or electrical problems, especially when you have four-legged friends who loves to chew all the time. You should seek services of an inspector during the home check, to advise you on the right house. As a rule of thumb, always go for structurally sound homes. A home that only requires quick updates is perfect for flipping.
Always follow the 70% Rule.
Any experienced real estate investor knows it is better to analyze how much you can afford on the house and how much you’re ready to risk or lose. The 70% rule states that you should pay no more than 70% of the after repair value (ARV) of a house when excluding the repair costs. For example, you found a house with ARV value of $300,000, and it requires $40,000 in repairs, you shouldn’t pay more than $170000 for it .i.e. 70% of $300,000 less $40,000 in repairs.
Before any renovations, first, repair all the necessary little things needed for a perfect home. It ensures if a buyer sends an inspector, they quickly approve the house. Keep everything neutral as different people have different tastes. After repairs, invest in smart renovations and upgrades only, even setting aside budget for exterior addons. Spending too much on upgrades can easily eat up all your profit or make the house too expensive to get buyers.
How to Find Financing for Your House Flipping Business.
After calculating your cost, you now have to find the money for house flipping. There are numerous options for financing a house flip; however, some may not be easy as getting other types of loans.
1. Paying With Cash
If you've been making savings ready to invest in real estate business, you can use it for your house flipping venture. Paying cash for the home, repairs, and renovations save you from interest rates that come with loans that may eat into your profit.
2. Private Loans
Before going to institutions and banks for your money need, it is wise to seek private money. It can be money lent to you by friends, family, or other individuals. Once you prove competent in house flipping, they will be more likely and willing to give you money in the future anytime you’re financially stuck
3. Hard Money Financing
Hard money loans are mainly intended for financing real estate transactions.Hard-money lenders are not banks; they are individuals or companies who lend house flippers. The downside of this type of financing is high-interest rates and costs. Hard money takes care of your house purchase and renovations, but you have to have an initial amount for a down payment.
4. Bank Loans
Not all banks are ready to finance house flippers, but some will. You can get in touch with your bank for more details on options available. Notably, most banks require a specific down payment and may sometimes not cover your repairs. Banks are not the best option for a house flipper.
Get a Contractor To Repair And Renovate The Home.
Find an experienced contractor willing to work with your repair and renovation budget, and within the timeframe planned, make sure he has a great work ethic and is easy to work with.
Ask your friends and family for references of contractors who have done great work for them as a start. You can also look at advertisements of contractors to land a reputable one. Here are some great places to get them
- Advertising sites like AngiesList, Thumbtack, Craigslist or HomeAdvisor
- Box Stores – you will find contractors buying materials in these stores that may be looking for more work
- The internet –many businesses advertise their services on the internet, through their websites. Doing a local google search may be a good source.
To ensure your contractor is doing a great job, you can follow them up. Make sure you:
- Screen them, call them, and get a written bid first.
- Constantly communicate during the process
- Visit the home being worked on often
- Get a time estimate for the work
- Avoid paying them too much money in advance
Sell the House
Once your flip is completed, it is time to put in the market for a buyer. Make sure the house gets deep cleaned, and the compound is looking tidy as a buyer will come to check the house. Selling your newly renovated home should be done using the least amount of time possible to reduce carrying costs, interest on loans, and missing out on other opportunities because of your money being tied up. Here are some things to consider when selling it:
- Set a profitable price - not too high –it should align with the neighborhood.
- Avoid keeping your house in the market for too long; buyers might think it has a problem
- Use a real estate agent if possible. They charge a commission, but they do ensure your house gets seen by more buyers than you can get. Also, they have a faster turnaround, and the house is more likely to be bought at a higher price
- You can get a broker’s license and sell the house yourself on the MLS
- The best times of the year to sell a house are in the summer and spring.
Problems Associated with a House Flipping Business
Here are some significant issues every investor is likely to encounter when in the house flipping business. It is good to be aware beforehand so that you can successfully plan and anticipate these shortcomings.
1. Finding Money for Flipping Houses
Since this business involves buying the house, financing the repairs and catering for utilities, and associated taxes and costs during the price, you will have to have some money. Alternatively, you can go for loans that help finance flips. They, however, are not easy to find when starting out
2. Finding Good Deals Is Hard but Possible
You may have finally secured the money, but for you to reduce your financial risk, you need to get on a lovely deal. It’s not always rosy in this business; you can get good deals then stay a long time before hitting the jackpot again. However, the best part is that when good deals come, they pay well.
3. House Repairs Aren’t Easy.
To be successful in flipping houses, you have to work with the right people. Getting the right contractors, lawyers, inspectors, and real estate agents to partner with can be hard. The repairs have to get done right and cost-effectively. A contractor being affordable doesn’t always translate to being competent and vice versa.
4. Selling For The Right Money Is Somehow A Challenge.
Having done the repairs, you have to find a buyer willing to pay an amount that ensures your venture was profitable. When starting, you may be tempted to price the house high, something that is a rookie mistake. House flipping should be more of making the sale quickly while earning a decent profit margin rather than maximizing profits.
