How To Flip A House: A Complete Guide for Beginners
Andrew Dehan12-Minute Read
August 21, 2020
Maybe you want to indulge your inner Chip or Joanna Gaines (of “Fixer Upper” fame). Maybe you know of an opportunity to make money. With the right knowledge and connections, flipping houses could become a source of income.
To get started flipping houses, you need to grow your knowledge of real estate. While the TV shows make house flipping look like a simple process, they’re showing you a small piece of the process. So much of the work that goes into flipping a house is about managing variables.
The more you are prepared for your first flip, the more likely you are to profit. Start with a strong foundation, building your real estate knowledge and running the math to see where you can make a profit. Be honest with yourself about what repairs could cost and the level of risk in buying a property.
Can you confidently invest in a property knowing it will turn a profit? If you’re willing to put in the work, flipping houses can be a viable option. Beginners will need to start with building their knowledge of neighborhoods, learning about home repairs and renovation, and networking with investors, contractors and designers.
Flipping Homes, Defined
Flipping homes is the act of buying property (often in poor condition), taking on the repairs and renovations, then selling the refurbished home for a profit.
House flipping has become a profitable industry for many and a dream for even more. With real estate knowledge, funding and the remodeling ability, you could flip a house too. Read on to learn how to get started.
How To Start Flipping Houses
To successfully flip a house, you need to take a few steps outside of the normal procedure of buying and selling a house. You must know the real estate market and how to find bargains. You also need to understand the cost of repairs and renovations. On top of that, you need to be aware of how long it will take you to sell.
Let’s break down the five steps you need to take to start flipping.
1. Research The Market
The first step toward serious house flipping is knowing the market. You aren’t going to know a good deal in an up-and-coming neighborhood without knowing the area first.
Research the real estate market. Learn where people want to live and research popular housing trends. Partner up with a real estate agent or REALTOR® to learn the market and find a house to flip. They’ll help you understand market conditions, determine necessary repairs and help time the sale.
In fact, many professional house flippers are licensed real estate agents. If you’re interested in house flipping full-time, you need to know real estate. You should be comfortable with the process of buying and selling a home, and the juggling it requires.
Become familiar with the class ranking system real estate investors use for neighborhoods, from class A to D. Class A neighborhoods are the top of the market, with the highest real estate prices. Class B and Class C neighborhoods are middle-class and working-class neighborhoods, where Class D neighborhoods are the poorest areas.
For your first flip, choose Class B and Class C neighborhoods. They’re more affordable and move faster than the high-end homes in Class A, and they don’t come with the potential problems of homes in Class D.
When you’re working with a real estate agent who knows the area, you can pinpoint neighborhoods that have potential. Maybe a Class C neighborhood is about to get a big investment from the city, or a major employer or a university is growing nearby. Knowing about these outside factors ahead of time can create opportunity for you to profit.
2. Secure Your Finances
Before you even consider a purchase, you’re going to need the money to flip the house. If possible, purchase the property in cash. This will save you from accruing debt and paying interest on the house before it sells.
If you don’t have the cash laying around to outright buy a house, you could consider pooling money with friends and family to buy it. There’s also crowdfunding sites like FundThatFlip.com that offer ways for you to get your flip funded by investors.
If that sounds too risky to you, there are other ways to finance your flip. Keep in mind that most mortgage products aren’t offered for house flipping. Banks are interested in profiting from you paying off your mortgage over a long period, not in getting into the risky business of house flipping. You’re going to have to finance your flip another way.
Here are a few ways to finance your purchase:
1. Cash-out refinance – A cash-out refinance could be an option if your primary home has increased in value. With a cash-out refinance, you’ll take out the equity in your current mortgage and refinance to what you still owe.
2. Home equity line of credit (HELOC) – A HELOC is a loan that uses the equity in your home as collateral.
3. Hard money loan – A hard money loan is a short-term loan issued by a private lender. These loans range from 6 months to 1 year, have high interest rates and can require down payments up to 40%.
Along with the finances, for the purchase of the home, you’re going to need to pay for repairs and renovation. Make sure to budget for these expenses, as they can be the area that tanks your flip or makes it profitable.
3. Make Smart Investments
Before buying a house to flip, you need to know what you’re getting into. Just like it helps to have knowledge in real estate markets, knowing what repairs are necessary on a house and how much they cost will help you make a smart investment.
Network with other real estate investors and talk shop. Consult your real estate agent on connections to experienced contractors and reliable inspectors. If you’re handy, know what upgrades you can take on yourself. But be aware enough to know when you’d be in over your head.
Along with budgeting money for repairs, you’ll need to budget time. This is especially the case if you’re taking out a loan to buy the home. Every day that you don’t sell the home, you’re having to pay more money in interest, insurance and taxes.
Be prepared in case something goes wrong or takes longer than planned. Not only do repairs take time, but your schedule and those of your contractor or home inspector may not align perfectly.
4. Find And Buy A House
After you’ve researched the market, secured the financing and are confident you’re going to make a smart investment, it’s time to find and make an offer on a house. Have your numbers worked out ahead of time with some wiggle room.
Once you find the right property at the right price, you need to pounce. Put your money down on a place you believe in. You can’t start working on it until you close on it. And you can’t close on it until your offer has been accepted.
Depending on who you’re buying from, closing can happen fast, or it can take months. If you’re buying from a bank, it’s likely ready to close as soon as possible. But if you’re buying from a resident, closing may be contingent on them finding a home.
Have contractors at the ready to start renovations as soon as the house closes. The quicker you get the work done, the quicker you can put the house back on the market.
5. Sell For A Profit
This is why you wanted to flip in the first place: you saw an opportunity to profit. Once the repairs and remodeling are done, it’s time to sell the house and reap the paycheck for your hard work.
Price your house competitively. Hire a real estate agent who knows the market and how to sell your home. Make note of comparable house sales in the area and what makes your house different. Be aware of how long it’s typical for similar houses to stay on the market before sale.
Selling the house you’re flipping is what makes the whole process worth it. It’s what you’ve sunk all the time and money into. Forecasting the timing and cost of the flip is what’s going to determine your profit.
How Much Does It Cost To Flip A House?
The cost of flipping a home varies greatly from house to house. A lower-priced home in a popular neighborhood could be a steal, but if it needs a lot of work, your profit margin could be slim. On the other hand, what you see as a bargain in a growing neighborhood may not need much work, but if the market’s not as hot, you could be sitting on the property for longer than you want.
You must estimate and account for a lot of factors when looking for a house to flip. Experienced house flippers abide by a 70% rule to determine if a house is a good investment. To calculate the 70% rule, follow these steps:
1. Estimate the house’s after repair value (ARV) – Determine what you could sell the house for after repairing and renovating it.
2. Estimate the cost of the necessary repairs – Does the home need a new furnace? Is the kitchen cabinetry outdated and damaged? When you evaluate the home, be aware of everything that will need to be repaired or renovated and make an accurate estimate for the cost.
3. Take 70% of the ARV and subtract the cost of repairs – For example, say a house’s ARV is $200,000, multiply it by 0.7 to get 70%, or $140,000. Now take that $140,000 and subject the cost of repairs. For this example, we’ll say total repairs and renovation cost $30,000.
4. Use the result to determine the maximum you should pay for a house – If 70% of your ARV is $140,000 and it costs $30,000 to complete the repairs, you shouldn’t pay more than $110,000 for the house.
The Bottom Line
House flipping isn’t like what’s portrayed on TV. While the shows focus on the work of repairing and renovating, that’s a sliver of the work that goes into a profitable flip. Before you buy the house to flip, you need to determine if it’s a smart investment.
Profitable house flipping comes from what you know. You need to know the market and the neighborhoods. You have to your finances secured and have an understanding of how much you can spend. You need to be aware of the repairs that need to be made, how much they’re going to cost and be able to find reliable contractors to make them. And you need to know how much you can sell your house for and how long it will take to sell.
This is all before you consider buying the house to flip. You need to have everything lined up on an efficient timeline to pull off a profitable flip. Immerse yourself in studying and knowing the neighborhoods you’re interested in. Have your money ready so when an opportunity comes up, you can pounce.
Remember that the longer you hang on to the property, the more you’ll be paying for it, whether it’s interest on a loan, or utilities or property taxes. Once the sale closes and you get the keys, you need to be in the home, making the necessary repairs. The quicker you can get it ready to sell, the more you’ll profit.
Price your flip competitively. Work with an agent to get the property ready to market. Schedule tours and an open house. The more offers you get in, the more you will be able to get for the property.
Visit the Rocket HomesSM blog for further reading on home selling and home buying.
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