Not that long ago, I met a guy who just decided that it was time to get started in the real estate game. He decided to become a real estate agent. But he didn’t end his education there. In fact, he decided to learn all he could about renovations too. This led to him flipping his very first house for a hefty profit.
With a little bit of luck and sweat and persistence, he ended up turning his initial flip into even more profitable investments. Instead of spending his windfall on crap, he invested more and more money into his flipping business and before long he was finding great investment homes to sell for a profit and making a mint.
For some people, flipping houses for profit seems easy. They discover a cheap home, put a little sweat equity and financial capital into it, and then turn around and sell it for big money. On TV on those house flipping shows, it looks really easy. But according to my new friend, things are little bit different.
He said that they make it look very easy to flip houses on TV on purpose because it gets people excited and interested to continue watching the show. But the truth is it’s hard labor and it’s risky – think about the 2008 housing crash as a great example – but it’s also fun, profitable, and worthwhile if you’re willing to put in the effort to learn what you’re doing.
Are you up for the house flipping challenge? We’ll share plenty of information to help you decide.
A Solid Explanation about House Flipping
In a nutshell, house flipping can be explained like this: a real estate investor purchases a home, typically a rundown home or one that they can buy at auction. After they buy the house they fix it up and months down the road, they’re able to turn around and flip the property by selling it for a tidy profit. Sometimes the profit is incredibly good. Other times, the investors may have miscalculated and barely turned a profit or maybe even only broke even.
Here’s the rub… You could end up making serious cash in this business and there are a lot of people who have literally transformed their lives this way. But it’s no guarantee. In fact, you could have asked millions of people about guarantees 10 to 15 years ago and they’ll tell you how they literally lost everything during the housing crisis flipping properties just like you intend to do.
We do not remind you of the negatives to scare you away. In fact, we tell you because we want you to be cautious and really learn about this industry before jumping in headfirst without knowing a damn thing.
The Risks &The Rewards of Flipping Properties
Think about this for a second…
You buy a house for $125,000. It’s a bit run down and it needs to be fixed up so you invest another $50,000 to make renovations. Then you put it on the market and you hear crickets. Nothing happens. Nobody seems interested in your property.
Guess what? Now you have this massive investment on your shoulders that you have to pay for. You currently pay for your personal mortgage or rent so you can keep a roof over your head. But you also have this property that has a mortgage that you just can’t seem to flip. Or maybe if you don’t have a mortgage but you still have to pay for property taxes, home insurance, and utilities to keep the lights on so people can come over and look at it.
You may even need to rent furniture and other staging supplies and have to pay realtor fees. And you’ll continue to have to pay for all of these things until you can finally sell your house. As you can imagine, this is definitely going to cut into your potential for profits.
A report on CNBC said that flipping houses is getting really big again. In fact, it’s so popular that it’s as popular as it was before the housing crisis crash over a decade ago. On the other hand, they also mentioned that the profit potential and average returns for those flipping houses are relatively low. In fact, the margins are some of the lowest they’ve been in years.
Why? Because the housing market is really hot right now. Rents are at an all-time high, potential homes to buy are few and far between, and the prices in the housing market continue to skyrocket. Combine all of these things together and you can see how it’s going to be tough to make big bucks flipping properties.
The data is mixed at the moment. In 2016, it’s estimated that 12% of the homes flipped sold for less than the investor spent buying and fixing up the place. And in 2017 during the third quarter, it’s estimated that profits were around $65,000 per flip. So, you’re either going to be incredibly tempted or very disappointed depending on which numbers you happen to look at.
The Main Requirements for House Flipping
For those still reading, you obviously have a penchant for high risk investments like house flipping and perhaps even bitcoin. And that’s all right, so if you’re interested here’s what you need to learn to get started.
You Need Great Credit
You’re never going to make it in house flipping if your credit is lousy with one exception. If you already have enough cash to buy a home and renovate it, then you won’t need a loan. But if that isn’t the case – and it’s not going to be for most people – then you’ll need to improve your credit score to get approved for loans for house flipping.
First off, you should always run your credit report to know your score. You can get a copy of all three of your credit reports for free each year, or once every 12 months, so take advantage of this opportunity.
Related Reading: 5 Tips to Improve Your Credit Score
If your credit is poor, you have to start building your credit score immediately. Start paying off your debts, make sure all of your bills are paid on time, and lower your credit card balances to boost your score. You can improve your credit other ways as well, so learn more about this topic by spending time researching it online.
If you can get your credit score high within the 800 to 850 range, you’ll get much better interest rates on potential home loans and this will save you thousands of dollars right off the bat.
More than anything else, you need to know what is damaging your credit score. Having too many credit cards is one way to keep your score low. So take the steps to raise your credit score by eliminating certain factors keeping it low.
You Need Lots of Cash for Investing
If you want to be serious in the house flipping game, you’ll need plenty of cash on hand. In fact, it’s the new investors that find themselves in trouble because they only put down a small down payment, pay for renovations using credit cards, and then have a tough time keeping up with all their payments because they can’t flip the house fast enough. Sometimes renovations end up costing more money too which is another potential problem.
Don’t be the guy or gal desperate for cash. If you want to successfully start flipping properties, you need to have this cash on hand. When dealing with traditional lenders, they typically ask for a 25% down payment. You’re going to get the best interest rates with this type of loan. When cash is available to cover paying for the down payment, you’ll be able to cut down on your expenses by avoiding PMI known as Private Mortgage Insurance. PMI can run you as much is 0.5% to 5% of the loan, so being able to avoid this expense is a big deal.
You’re already at a disadvantage getting a loan for a flip since the interest rates are typically higher. In fact, Time.com says that the average interest rate on an interest only loan is between 12% to 14%. Your typical conventional mortgage rate is around 4%, so you obviously see a big difference.
To save up some cash, you have a few options that include:
- take up a side hustle or multiple side hustles
- cut back on your expenses
- begin working a second job
- and many other options
Determining a Solid Real Estate Investment
You’ll need to look at a few things to determine the best property flip. Some things to look for include:
The Right Location
Location is crucial and many expert house flippers will agree. Your best bet is to discover a low-cost or rundown home in an up-and-coming neighborhood. Take steps to make home improvements to get the home in buying shape. But the location is critical because you cannot change the neighborhood and make it safer and more pleasant, so keep that in mind.
Before buying, research cities and neighborhoods to purchase a property in. Look at the neighborhoods closely and find those where the real estate sales are rising in value. Also look for indicators like employment growth, population growth, and new businesses. These are all signs of an up-and-coming neighborhood. On the other hand, if the neighborhood looks run down, has vacant storefronts, and the economy is struggling, it’s probably a bad place to buy a house.
Safety is also very important. So look at neighborhoods and find out about their safety records. Are there lots of crime, robberies, and other things happening that would make the neighborhood unsafe? What about registered sex offenders? You can look at different websites to find statistics about these topics and more.
In 2016, Fortune highlighted great neighborhoods where flippers made a profit of 80% or more. A small sampling includes the following cities:
- East Stroudsburg, Pennsylvania – profitable by 212.1%
- Reading, Pennsylvania – profitable by 136.4%
- Pittsburgh, Pennsylvania – profitable by 126.8%
- Flint, Michigan – profitable by 105.8%
- New Haven, Connecticut – profitable by 104.8%
It’s possible that all the good investments are taken up in those markets now. Other areas where it might be hard to turn a profit include:
- San Jose, California
- Naples, Florida
- Austin, Texas
- Dallas, Texas
- San Antonio, Texas
- Salt Lake City, Utah
At this stage, if you’ve found the right home in an up-and-coming neighborhood, it’s time to begin looking at the school system. If the school system is good, your home is going to get a better price and sell much faster. Or on the flip side, if the school system is poor or mediocre, you may have a tough time selling the place.
Lastly, consider buying a property close to your current home. If you plan to work on this investment property to fix it up, you’ll want it relatively close to your home or office. You’ll save money on gas and your commute time won’t be as great.
Renovating Under the Right Conditions
Anyone who’s ever renovated a property knows that conditions can get ugly at times. Sometimes unexpected surprises are hidden right below the surface. Examples include cracks in foundations and black mold. If this happens, you’re in for a rude awakening.
So, when choosing a property, first it has to be structurally sound. This is especially true if you plan to buy an older home. This is mainly for the folks buying at a real estate auction who cannot inspect the home. You need to know what to look for in this situation or bring along someone with knowledge regarding plumbing, electric, foundations, and more to help you determine if a property is a good buy or not.
Mainly, you should focus on the houses that only need minor renovations before you resell them. Look for things like updating the paint and carpeting, fixing up the backyard and front yard, refurbishing or installing new kitchen cabinets and appliances, and other things that are inexpensive, easy to do, but make a home more valuable.
Houses to avoid include:
- homes with black mold problems
- homes that need a new roof
- homes that need to be rewired
- homes with foundation problems
By knowing the repairs and updates you can afford to make ahead of time, you’ll be able to increase your asking price, fix up the home, and add value all at the same time.
To estimate your potential costs, come up with a number based on your calculations and then add 20% to it. This will cover any surprises that spring up unexpectedly.
Finally, let’s not forget about the price of building permits and other licenses and permits when fixing up a home. They are also costly and will take away from your profits, so it’s definitely important to keep this in mind too.
Determining a Property’s Market Value
When buying a home to flip, make sure you pay less than what other homes are going for in the local community. In fact, if you can get a rundown and very inexpensive home in an excellent neighborhood, you can fix it up cheaply and make a nice profit in the process. Buying an amazing home in a lousy neighborhood is definitely a bad idea because it’s an undesirable neighborhood and everyone knows it.
It’s possible to find millions of homes being foreclosed online, but you should never purchase a foreclosure unless you actually see it with your own two eyes. Lots of new flippers buy homes without looking at them in person and it turns out to be a huge mistake. Online photo galleries can only show you so much. Seeing black mold and a cracked foundation with your own peepers is very enlightening to say the least.
It’s also crucial to avoid spending too much on renovations or overvaluing the house. You want to make improvements, sure, but only fix it up enough to turn a nice profit. Spending too much is going to make it impossible to recoup your investment and it will definitely cut into or eliminate your profits to boot.
11 Steps to Flip a House
If it was easy to flip houses, everybody would be doing it and everybody would be profiting. But it’s not, so you have to get an education and learn the ins and outs of this business. The important things to know include:
- Understanding Your Investing Market
Before you do anything, you need to get to know the real estate market you intend to buy in. Things to consider include: the types of houses people are buying at the time, the best neighborhoods, the up-and-coming neighborhoods, and more.
- Know Your Financing Possibilities
Second, you need to learn the ins and outs of your financing options. Are you going to pay cash for a house? Are you looking to take out a home mortgage loan? Are you trying to get an interest only loan? Or maybe a HELOC? Understand these options before applying to make the best decisions possible.
- Stick to the 70% Rule
The 70% rule is important to understand. It’s this: never pay more than 70% of the ARV a.k.a. after repair value for a property minus the repair costs. If you stick to this rule, you’ll find it easier to make consistent solid profits. It will also help you to avoid paying too much for a home when first starting out.
- Learn the Art of Negotiation
Discover excellent strategies for negotiating. You’ll be able to haggle and get good deals. Because the less you pay for a house, the more room you’ll have to earn great money.
- Learn the Average Price of House Flipping Projects
Do you have any clue about average repair prices? Do you know how much it would cost you to landscape your yard? Or how much it might cost to build a new deck? Or how much you’ll pay to get your house completely rewired?
Each house flipping project is going to be different, but having experience with estimating costs will help you determine if a potential property is a good buy or a bad investment. One way to get more experience is to renovate your current home. Not only will it help you understand the process more, you’ll also know which type of home improvements you don’t mind doing yourself and others that you’d prefer hiring an expert to do.
Plus, before starting a project you need to determine the right home improvements that will add value. These are the areas that you need to focus on. Some potential areas include repainting the exterior of the home, upgrading to energy-efficient stainless steel kitchen appliances, adding a new deck, adding green technology, and adding additional closet space to name a few.
- Begin Networking with Possible Interested Buyers
Building relationships with potential buyers is always important if you’re getting into the flipping game. In fact, you want to know about potential buyers ahead of time so you can learn about their wants and needs, likes, and desires and buy homes that you’d think they’d want to purchase from you.
Getting a real estate license and becoming a realtor is one way to solve this problem. Plus, you can avoid paying real estate agent fees when you broker your own deals, which isdefinitely an added bonus.
- Discover Your Perfect Real Estate Investing Mentor
Do you know anyone who successfully flips houses? If so, you need to contact this person right away to find out if they will mentor you. Make their mentorship enticing by offering them an incentive, because you catch more flies with honey than vinegar, so remember that. An example for Floridian’s would be this BREIA program.
As an example, if you do find a potential mentor, be willing to cut them on a small percentage of your profits for helping you make your first successful flip. This will help motivate your mentor to be your tutor, and you’ll receive an amazing education at the same time for a very small percentage of your initial profits.
This financial incentive is great for those who do not personally know someone in this industry. It will make it easier to approach an expert that you don’t know and offer to compensate them for their time and trouble. They’ll certainly be a lot more receptive to your proposal if there is a financial reward at the end.
- Foreclosure and Listings Research
You can find foreclosure listings in a lot of places online. Some popular options include:
- Williams & Williams
It’s also possible to search regular real estate agent websites and filter your results to discover the foreclosures.
Another great place to find foreclosures is right in your local newspaper. When homes are being auctioned by a mortgage company, they have to publish this information in the local paper. So buy a physical copy of the paper, or even better, look at their online publication to learn about their upcoming auctions.
Banks also sell foreclosed properties. Visit a bank’s website and check for the Real Estate Owned or REO section to see if you can discover some of the foreclosed properties for sale.
- Presenting Your Offer
Now it’s time to make an offer on aninvestment property of your choosing. If the house is ideal for an investment and you can buy it cheaply, there’s likely going to be competition. Many flippers view flipping as a full-time job, so they’ll have discovered this house as well. One way to get past the competition is to go door-to-door through a neighborhood and make offers on properties.
Before presenting your offer, you have to know the largest amount you can pay and still turn a profitable flip. To figure this out, you need to factor in repair estimates, taxes, and interest payments. And whatever estimate you come up with, remember to add 20% to play it safe.
- Finding the Right Contractors
If your DIY skills are on point, you might do most of the labor and renovations yourself. You’ll save a lot of money this way, but only take on this responsibility if you know what you’re doing.
You need to determine when to hire a contractor or handle repairs yourself. Only take on projects that you can complete with excellence that fit within your budget. For other projects, you must hire the right contractor to get the job done.
You may want to consider hiring a general contractor or GC for short. Even though they bring their own subcontractors and their expenses add up, they definitely have their benefits as well. They can manage the whole project from start to finish, bring in the right labor to get the job done correctly, and complete the project in a timely manner.
Also, hiring the right contractor will help you avoid making costly mistakes. This will help you save time, money, and a whole lot of sleepless nights. With the right contractor in your corner, you’ll make fewer mortgage payments, sell the house faster, and you can continue to work your full-time job as you run this business on the side.
General contractors are also great because they take care of all the building permits. Their name will be on each one of the permits, so it’s their responsibility for the job to pass inspection. Begin applying for these permits right away as soon as the sale closes, because the quicker you get the permits, the quicker you can start making renovations.
It’s now time to build up your network of contractors. Find trusted landscapers, electricians, plumbers, and general contractors. There are many resources online that can point you in the right direction.
As you interview a potential contractor, keep the following questions in mind:
- Did the contractor arrive on time? If a contractor is late for an initial appointment, they are probably going to be late more often than not.
- How were their references? Ask each contractor for references. If they do not have any references to provide, you should avoid them altogether.
- Did they come to the first appointment or ask to reschedule? How many times did they reschedule? If time management seems like an issue, then your renovation is also going to suffer from time management problems.
- Was the contractor organized? Disorganization is a major time waster so keep this in your thoughts when hiring a contractor.
- How did they bid on your project? Was the bid accurate? Was it done in a professional manner? Was it a detailed quote? Making a handshake deal based on a verbal quote is a bad idea. You need a contract in writing detailing every renovation the contractor intends to make and how much they plan to charge for each renovation.
Experienced flippers aim to buy, fix up, and sell a home in 90 days. That turnaround time is quick and it might not be possible when you first begin flipping. But the longer it takes to get your home ready for market, the less you’re going to make in profits, so you have to develop a list of trusted contractors that can meet your deadlines, work affordably, and help get your properties ready for market within 90 days.
- Listing and Selling Your Property
For the most part, it’s undoubtedly easiest to contact a realtor to list and sell your house. They have active buyers, they love listing and showing properties because it’s their job and they’re good at it, and they have access to the MLS database as well.
On the other hand, you can sell your property by yourself if you choose to do so. You’ll certainly cut down on real estate agent fees, but it may take forever and a day to sell your house in some markets. So you have to weigh the pros and cons and decide from there.
At this point, you should be very aware that flipping houses is risky to say the least. But if you do it right, make smart decisions, and work hard you can flip properties and make a ton of money. But remember, it’s also possible to make a bad investment and lose all of your money too.
Are you ready to begin flipping houses? Or have you flipped a house already? Do you have any regrets? How was your experience? Please tell us in the comments.