If the idea of flipping a house piques your interest, but the fact you have no idea how to invest in real estate is holding you back, you’re in the right place. The number of houses flipped in the U.S. hit a 15-year high in 2021 according to a report released by property data provider ATTOM Data Solutions. A number of popular house-flipping shows on TV have increased the appeal of this potentially money-making venture as well.
Although these shows boil the process down to a 30-minute segment, successfully flipping a house can take a lot of work. But if you’re wondering how to start flipping houses and you’re just starting your research, this step-by-step guide will walk you through how you too can become a house flipper.
First: what is house flipping?
House flipping is just another idea for how to invest money. Some people may purchase homes to turn them into rental properties, but people who flip houses don’t buy homes with the intention of keeping them.
House flipping is a term used to describe purchasing a house and quickly reselling it for a profit, also sometimes known as a fix-and-flip. In the context of flipping houses, quickly can mean anywhere from a couple months up to a year. Often, the goal of a flip is to find a house that has the potential to increase in market value after certain repairs and renovations. After you complete the remodel, you make money from reselling the home at a higher price than you paid for it.
This type of real estate investing offers the potential for delivering strong returns. But like any other investment, you’ll be faced with risks as a house flipper. If you’re just looking to get rich quick, you could end up damaging your finances. If, however, you launch your house flipping business with knowledge and a strategy, then you’ll have the potential to do very well.
How to start flipping houses
Instead of running out and buying the first property you’re excited about, it’s best to familiarize yourself with the typical process for flipping a house. There’s often a lot of money on the line, so you don’t want to act hastily, especially if it’s your first flip. Research and creating a business plan will take you far in the world of flipping, so here are the simple steps to work through.
1. Research your local real estate market
The excitement of your first project can lead you to ignore this less-exciting part of the process. But skipping the real estate research can lead to a disastrous house-flipping experience — if you’re able to flip the house at all, that is. To be successful as a house flipper, you need to know how to pick the right property, which states are bad for flipping houses, and what the right purchase price is.
Once you start considering a house, you’ll also want to look at comparable properties to get an understanding of what’s selling and not selling in the area. Without doing market research, you won’t know whether you’re actually getting a good deal on the fixer-upper you’re buying or whether someone will want to buy it once you fix it up.
You won’t be able to identify the home’s potential value, and you won’t know how to price the house when you’re ready to list it if you aren’t familiar with the local real estate market. Keep in mind that the vision you have for your home should fit the reality of the neighborhood you’re buying in.
To turn a profit as a real estate investor, you must be sure the purchase price of the house plus the costs of repairs and any additional costs will leave you with a desirable profit margin. For example:
You purchase a house for $140,000. It’s not in terrible shape but needs some TLC. You believe the area is up-and-coming and that if you make the right repairs and updates, this property could sell for around $225,000.
You finance an additional $30,000 for renovations and get to work turning this overlooked home into an adorable property.
You list the house, but it sits on the market for two months. Unfortunately, you didn’t take the time to do proper research into the local real estate market. As a result, you’re forced to drop the asking price to $205,000.
A month later, you accept an offer for $195,500 and get your money.
After you subtract the $140,000 purchase price of the home, that leaves you with a gross profit of $55,500.
But then after you subtract the $30,000 renovation cost, the $5,000 in interest paid over four months on your loans, and $17,000 in closing costs, you’re left with just $3,500 in profit.
Is that a number that works for you for the months of time and work? Probably not, but you could improve all those numbers if you do market research and buy the right house, for the right price, in the best location.
2. Set a budget
Once you have a solid understanding of the local real estate market, it’s time to figure out how much you can afford so you can cover all the costs of flipping a house.
When determining the maximum price you should consider paying for a house, the 70% rule offers an easy guideline for new real estate investors. The 70% rule states you should pay no more than 70% of the after-repair value (ARV) of a property, minus your repair costs. For example, if a home’s ARV is $125,000 and it needs $25,000 in repairs, then the 70% rule says you shouldn’t pay more than $62,500 for the home: $125,000 x 0.70 = $87,500 - $25,000 = $62,500.
But how do you know a home’s ARV? ARV is the estimate of the value of the home after it is fully repaired. To determine the ARV, first gather information on the property you’re considering purchasing. This info can include but is not limited to:
Whether the house is on a busy road
Condition of the house
Age of the house
Finishes and features
A lot of this information can be found on the MLS (Multiple Listing Service) sheet provided by your realtor or even on Zillow. MLS is a database real estate brokers use that details property information.
Once you have as much detail as possible about your prospective property, also gather information on a comparable property. Compare the two so you can arrive at an appropriate ARV for your property. If you can determine what a similar property sold for and the types of finishes and features it had, you’ll also get an idea of the types of renovations you need to complete to make the house attractive to buyers. Once you know the types of repairs and renovations you need to make, you can determine whether this flip is within your budget.
When flipping homes, the 70% rule is useful in helping you quickly evaluate whether a potential property is within the range of what you should pay. Although it isn’t the only number that matters, it provides very valuable insight.
3. Get funding for flipping
In general, real estate investing can be expensive. With large upfront costs and the ongoing costs of repairs, it can quickly add up. Unless you have a pile of cash laying around, you’re probably going to need funding to finance your flip. Just keep in mind that going into debt to flip a house increases your financial risk.
The largest expense in house flipping is the property acquisition cost — i.e. what it costs you to buy a house. Luckily, there’s more than one way to get funding for flipping. Your financing options could include getting traditional bank financing, opening a home equity loan or home equity line of credit, taking out a personal loan, or, of course, paying in cash.
If you’re having trouble securing a traditional loan, a hard money loan might be an option as well. A hard money loan is a type of real estate financing that doesn’t rely on credit score and income for approval but rather a hard asset, such as the property you want to purchase. The property is used as collateral, so defaulting on the loan can result in losing the property. Because the property is the primary means for determining your approval, hard money lenders will usually offer higher interest rates and fees.
House flippers who take on debt to finance their flip will pay interest on that debt. Because of this, the amount you will have to sell the house for increases just for you to break even. The cost of paying interest on a loan and the risk of using your project as collateral can be avoided entirely by paying for your flip with cash. Although this might not be feasible on your first flip, you may be able to work yourself up to goal over time.
If you decide to borrow money to fund your flip, don’t be afraid to ask your lender questions about the mortgage process. Having a solid understanding of the lending process will make your flip go smoother.
4. Find a realtor with flipping experience
A quality realtor, especially one with house-flipping experience, can provide the market knowledge and guidance you need to choose a smart real estate investment property. Your agent should understand the local housing market and current market conditions, help scout properties and find the right buyers, help find good contractors, and help you time your sale and list price to maximize your profit.
Working with a real estate agent from the get-go can help ensure your initial assessment of the property is accurate and aligned with your budget. Not being familiar with the area, the market, and how much you can sell your rehabbed home can be a very costly mistake.
To find a reliable realtor, start with your network and ask whether anyone can refer you to someone they’ve worked with. After you’ve found a few potential candidates, do some research. You can get a personal feel for them through their online presence and you can check with your state’s real estate regulator to verify that they’re licensed.
Once you’ve narrowed down your choices, schedule a time to speak with each of them. Ask for references and follow up with those references about their experience working with each realtor. If anything doesn’t feel right, don’t move forward with that person. It’s important to trust your real estate agent in this business.
5. Purchase a property
With all your preparations complete — market research, setting a budget, deciding how you’ll finance the flip, and finding an experienced realtor — it’s time to close on the house.
During the closing process, ask whether you can enter the property so you can start the planning process. Take several general contractors with you and get multiple quotes. Get a sense of how each contractor will approach the job and then choose your contractor. This way you’ll be able to hit the ground running on day one, as time is of the essence when it comes to the renovation process.
6. Hire the right renovation team or do it yourself
If you can swing a hammer, lay carpet or flooring, hang drywall, install a kitchen sink, or even roof a house, you can save a significant amount of money throughout the renovation process. Alternatively, you could do as many renovations as you can handle personally and hire out for the more difficult tasks. Although paying a professional to rehab your house will reduce your profits, you may not be in a position to do repairs yourself either due to skill level or availability of time.
Ask your network for referrals for local contractors. Then, do your due diligence to vet them and make sure it’s a good fit. Ask for references and if you can see their work firsthand. If you’re unable to find a reputable contractor through your personal contacts, hop online and search sites such as Home Advisor and Angie’s List.
7. Source your own materials
Another way to boost your odds of making a large profit is to source your own materials. Use coupons if possible, and look at the different shopping portals to earn cash back on your purchases. Check out thrift shops and Habitat for Humanity to find discounted furniture and building materials. If you want to save money, exhaust all your options to source your own materials.
This is a great place to take advantage of rewards credit cards as well. Whether you're working to hit a minimum spend requirement for a sign-up bonus or you just want to earn rewards for your spending, a little bit of strategizing can go a long way in reducing the costs for flipping a house.
8. Relist and sell
The final step. If you’ve done your research and are working with an expert realtor, this can also be the simplest step. Hiring a realtor with experience flipping homes will make this step go as smoothly as possible. They can give you tips on how to improve the home’s curb appeal. You can also tap into their expertise for pricing, but ultimately, you’re responsible for properly pricing your flip as your profits depend on it.
If you’ve done your research early on in the process, then you will have an understanding of real estate pricing and your home’s market value before you get to this stage. As you continue to do more and more projects, your understanding of real estate will continue to grow and you’ll begin to develop your own strategies around timing and pricing when it comes time to list your houses.
9. Reevaluate and flip again
So you flipped your first house! Congratulations! How did your first deal go? Now is the time to look back over the entire house-flipping process and the choices you made.
Take some time to evaluate your experience. Gather all the numbers and tally the hours you put into the project. Look at your time spent and profit made. Figure out where you can cut costs. Maybe you’re not happy with the contractor you chose. Take everything you learned and see where there’s room for improvement.
Now, are you ready for your second flip?
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This article 9 Simple Steps if You Want to Flip Houses (and Make a Profit) originally appeared on FinanceBuzz.