Despite what you might have read, seen or heard about the quick and easy money to be made flipping houses for profit, there’s really nothing quick or easy about it. But, if you’re willing to put the work in, it can be profitable and enjoyable. To succeed as a house flipper, you’ll need to put in the hours planning, budgeting, networking, managing and conducting research on housing trends, renovation costs and market conditions. If you skip any of these steps, your investment could turn south in a hurry. Get the steps right, though, and you could find yourself on the way to a lucrative side hustle or even at the helm of a new business. Table of Contents
Flipping houses means different things to different real estate investors, at least when it comes to the types of properties involved and how long they sit on the market. The one common denominator is that house flippers all want to turn a profit by purchasing a home, fixing it up and then selling it for a higher price within a certain time frame. Some house flippers specialize in buying distressed properties at cheap prices, rehabbing them and then selling them at a hefty profit. Others focus on more expensive houses that don’t need a lot of work but might be located in areas where home values are on the rise. These flips require less investment in capital improvements but often bring smaller profit margins. CoreLogic, a real estate data company, defines flipping as the purchase of a property with the intent to sell within a two-year period for profit. It uses the 24-month definition because that’s the Internal Revenue Service’s threshold for when real estate holdings could be considered owner-occupied and eligible for capital gains exemptions. One advantage of waiting longer than a year to flip a house, according to Corelogic, is that homes flipped within 12 months are subject to short-term capital gains tax, whereas those held for 12 to 24 months are subject to long-term capital gains tax. Long-term capital gains tax rates tend to be lower than short-term rates.
But even with the tax advantages of holding onto a property longer than a year, most house flippers prefer a quicker turnaround because of the expenses involved. The more time it takes to renovate and sell a home, the higher your carrying costs for items such as mortgage payments, utilities, maintenance, insurance, property taxes, landscaping, marketing and interest on fix and flip financing . “Time is a profit killer,” said Cappy Hagman, a broker with North Carolina-based Coldwell Banker Howard Perry and Walston. “Most beginner flippers just don't have the reserves to cover a renovation that runs long.” [caption id="attachment_998" align="aligncenter" width="1000"] Tinnakorn jourruang/Shutterstock.com[/caption]
The amount of money you make flipping houses depends on a number of factors, including the type and size of the house, its location, its purchase price and the renovations needed to enhance its market value. If you’re looking for a ballpark figure, though, there is data available that can give you an idea of what others in the U.S. make. According to research from property database Attom Data Solutions:
Seek on Forbes: Can You Flip a House With Credit Cards?
When it comes to profit goals, many professional house flippers stick to a rigid set of rules based on acquisition cost and other factors. “We’re going to typically want to make at least 15 percent of the market value of the house,” said Jeff Johnson, CEO of North Carolina-based Better Path Homes. “That’s the bare minimum. And if we can’t make at least $25,000, we turn it down.” The amount of profit his company makes on a flip depends on how much work needs to be put into a home for repair and renovation projects. “I’ve had some homes with $100,000 in profit that took eight months to fix up and sell,” Johnson said. “When I’m rehabbing, I want to add $5,000 to $10,000 in value a week to the home.”
Mark Ferguson, a Colorado-based house flipper and real estate agent, said on his InvestFourMore website that he usually makes in the neighborhood of $35,000 to $40,000 on house flips. “You may not be able to make $30,000 or $40,000 on your first flip, but you may be able to after a few projects,” said Ferguson, author of “Fix and Flip Your Way to Financial Freedom” and other books. “Many house flippers all over the country are making that much or more on each flip. It is enticing for many people to be able to make what they make in a year with one or two flips.” [caption id="attachment_913" align="aligncenter" width="1000"] honohiki/Shutterstock.com[/caption]
Like any worthwhile investment, house flipping involves a process with a right way and wrong way to do things. The wrong way is to jump in without a plan or structure in place. The right way is to take things one step at a time, in the correct order. A good initial step is to sit down and write out what you hope to accomplish as a house flipper, said Cornelius Charles, co-owner of California-based Home Property Solutions LLC. “The first thing someone should do is figure out their goals,” Charles said. “For example, do you want to invest as a part-time hobby or is it something you want to do full-time? By figuring out your goals, that will help determine the steps you take in the future.”
For many real estate professionals, the most important step is to surround yourself with experts. That’s good advice in just about any new endeavor, but it’s especially important in house flipping, which requires expertise in so many different areas. Hiring or consulting the right people can help you save both time and money. “You have to build a team that involves people who know what they are doing in order to purchase the right property and then know what renovations to make,” Hagman said. If you’re determined to go it alone, it’s important that you spend time learning the industry. This doesn’t just mean reading books or researching the internet, either. It means attending real estate investment meetings, consulting with realtors and contractors and taking courses toward earning your own real estate license. [caption id="attachment_918" align="aligncenter" width="1000"] alabn:Shutterstock.com[/caption]
Most beginning house flippers are advised to get as much outside help as possible. Here are six steps explaining how to flip a house:
The number of professionals you hire depends on your individual needs and budget, but Hagman suggests you begin with a real estate agent, contractor and lender. “You need a realtor who can help you sort out the ROI and help you establish cost/rent/flip ratios, and who knows the market where the hot flips are happening or the cool flips,” she said. “You need a lender that is well schooled in renovation loans , and you need a contractor who is willing to work on a per-project basis. This will be your biggest expense and many contractors will not pick a one-and-done project. Or, if they do, they will inflate the pricing.” Hagman also said you should interview service providers in much the same way an employer interviews a job candidate: “Make sure you are building a team willing to grow with you.” The following professionals can be a big help to those interested in flipping houses.
Putting together a house flipping business plan is important for any enterprise, whether you only plan to flip a couple houses on the side or make it a full-time career. A business plan outlines your mission, capital requirements, operating and financial goals, budget and growth strategy. Even if you’re starting out simple, with only a single property, the business plan can serve as a guide to help you through the house flipping process. If you have larger ambitions, such as starting a house flipping business, many lenders will require a business plan before they offer financing. The first step is to decide what type of entity you want to set up, such as a sole proprietorship, partnership, LLC or corporation. A lawyer and accountant can help with this. Once that’s done, include the following in your business plan:
A market analysis provides important information regarding housing trends in your area. Conducted properly, it should detail how much you can expect to spend on specific types of homes in specific neighborhoods, how much renovation they’ll require, and how much the homes typically sell for. With this information in hand, you should have a pretty clear picture of how much profit you can earn. “[House flippers] need to study and understand the market they want to invest in, whether in their own city or out of state,” Charles said. “Some things to understand include housing prices and whether it’s a buyer’s or seller’s market.” Even if you’re hiring a real estate agent with deep market knowledge, it’s still a good idea to conduct a market analysis on your own to determine your desired purchase price and sales price. The best way to begin is to focus on a specific type of house in your desired price range by following these steps:
Most beginning house flippers aren’t able to buy a house with cash, so they’ll need some kind of loan or outside investment to finance the home purchase, renovations and other costs. These can range from simple mortgage loans to fix and flip loans designed specifically for the purpose of flipping houses. An article on the Realtor.com website, which is licensed by the National Association of Realtors (NAR), writers that there are five basic types of fix and flip loans:
To learn more about these and other types of funding options, check out this guide to fix and flip financing options.
Once you’ve purchased a home, it’s time to move on to one of the most important steps in the house flipping process: fixing it up to maximize its after repair value. This is when you’ll work closely with your realtor and contractor to ensure the necessary repairs, renovations and design changes are made. To get the best return on investment, renovations should be in line with current styles and housing trends. For example, it might be cheaper to leave laminate countertops in place, but if most home buyers prefer granite or quartz, then that’s an investment that can increase your odds of selling the home quicker at the price you prefer. In addition to pursuing the right rehab projects for the house, it’s also important to stay on budget and on schedule. The best way to do that is to find a reputable contractor.
With the rehab done, all that’s left is to market and sell the house. Professional real estate agents are an asset here because they know how the property should be staged, priced and marketed to achieve the best results. Just make sure you’re both on the same page in terms of the price and the associated marketing costs to ensure you meet your profit goals. Experienced house flippers often build up enough expertise and connections to strike out on their own without the help of a realtor, saving money on commissions and other fees. In some cases, they get their own realtor’s licenses by taking courses and passing the licensing exam. But for beginners, it’s a good idea to work with a local real estate agent until you gain more expereience and expertise. For any type of house flipper, it’s important to go over all the details of a deal carefully before signing on the dotted line. One of the biggest mistakes inexperienced house flippers make is continuing to pursue deals even when the numbers don’t add up. “You have to be logical,” Johnson said. “You have to run the numbers and if the numbers say it’s not a deal, it’s not a deal. When investors start getting emotional, the deal goes south. They see the house flipping shows on TV and want to make all this money, but then they end up reverse engineering the property and lose money on it. We buy houses from other investors who make that mistake all the time.” [caption id="attachment_920" align="aligncenter" width="1000"] minicase/Shutterstock.com[/caption]
Although the actual dollar amount of house flipping expenses can vary wildly from one deal to the next, the types of expenses are pretty standard. There are five basic types of costs for house flippers: the purchase price of the home, the closing costs, the rehab costs, the carrying or holding costs and the financing costs. The amount you intend to spend on each category to meet your profit goals should be clearly itemized in the budget. “ In order to maximize the chances of making a good profit, you should have an understanding of all of these costs before you purchase a property,” Charles said. Ideally, you’ll stick to each budget item down to the penny, but that’s not always possible or even realistic. Be conservative in your estimates and leave a little wiggle room for problems that inevitably crop up. You should also hire the right people to help avoid unforeseen costs during the house flipping process. “Hidden damage costs are the ones that are the hardest to predict,” Hagman said. “It pays to have good inspections on the structure and main systems.”
Some expenses are easier to control than others. For example, you can control the purchase price by simply waiting for the right home to come along in your price range. Closing costs are usually easy to control as well because they’re so closely tied to the purchase price. Rehab costs and carrying costs are the wild cards. Any number of factors can impact the cost of repairing and renovating a home, ranging from a shortage of materials to bad weather. Carrying costs are also unpredictable because of problems getting the house sold, such as a buyer being turned down for a loan. One cost that often gets overlooked, Johnson said, is the amount of interest house flippers pay while borrowing money. “So much depends on your credit history and credit rating,” he said. “We borrow at 8 percent and some borrow at 15 percent, so that’s a very big difference in terms of budgeting.” See: 3 Mistakes That Can Sink Your House Flipping Business Overnight
Here’s a rundown of the different types of house flipping costs and what they involve:
The purchase price is usually the biggest expense for a house flipper because it’s the amount you pay for a home. It typically includes the house itself, the land it sits on and any other structures built on the land, such as tool sheds or detached garages. The exceptions are apartment or condominium units housed in a larger building. In these cases what you’re buying is the home itself rather than the land it sits on. Most home purchases also include large appliances such as refrigerators and stoves. The amount of money you pay for a home depends on numerous factors, including the city and neighborhood where it’s located, the type of home, its square footage and lot size, its number of bedrooms and bathrooms, its condition and the quality of its appliances, fixtures and surfaces. Home prices also fluctuate based on the time of year and the overall condition of the housing market. For example, you might find better deals during the cold months when not as many people are house hunting. Similarly, you’ll find better deals when the economy is slumping, housing markets are depressed and home prices fall. Lately, home prices have been on the rise in most American markets. The median sales price for existing homes in the U.S. was $277,700 as of May 2019, according to data from the NAR. That was up from $266,900 the previous quarter and $265,100 the previous year. Keep in mind that median prices can be inflated by homes in the upper range.
These are costs associated with the home purchase and usually include taxes, insurance, inspections and various transfer and legal fees. Real estate agents typically provide a summary of closing costs as part of their services. Home buyers will typically pay between 2 to 5 percent of the purchase price of their homes in closing fees, according to Zillow. If your home costs $200,000, for example, you can expect to pay between $6,000 and $10,000 in closing costs. [caption id="attachment_1002" align="aligncenter" width="1000"] Stock-Asso/Shutterstock.com[/caption]
This is the money you’ll spend repairing and renovating the house you want to flip. Rehab costs vary depending on how much work needs to be done as well as how expensive labor and materials are in your neck of the woods. These costs tend to be higher in big cities than in small towns and rural areas. They’re also higher in the Northeast and West Coast than they are in the South or Midwest. Rehab costs include both materials and labor. On the materials side you can expect to pay for lumber, paint and hardware as well as appliances ranging from stoves, refrigerators and washer/dryers to HVAC systems. Labor costs are those charged by contractors and other workers to fix the house up. Most will charge a flat fee for individual projects, though some charge by the hour. The condition of the home you purchased will play a big part in the amount of labor you’ll have to pay for. In general, you’ll probably need to hire a general contractor as well as electricians, plumbers, painters, handymen and landscapers. Your budget for rehab depends on the condition of the house. You might have to spend tens of thousands of dollars on major repair and renovation jobs such as replacing a roof, fixing a structural problem like a foundation crack or knocking out walls to give the home a more open feel. In homes that are in good condition, rehab costs might cost as little as $5,000 or less to pay for comparatively minor jobs like installing new kitchen countertops or bathroom fixtures. Rehab costs also typically include cosmetic work such as interior painting, replacing carpets and adding new flower beds or grass to increase curb appeal. You can also expect to dish out a few hundred bucks for new locks and new smoke and carbon monoxide alarms. It’s important that you also factor other, less obvious expenses into rehab costs. These include permit and inspection fees, trash removal, dumpster rentals and storage for materials. If you have experience at DIY projects, you can save money on many of these items by doing the work yourself. Just make sure you don’t overestimate your skills. If you mess up a paint job, for example, you’ve not only cost yourself time, but you’ll also have to spend extra money having a professional painter come in and do the job again.
Carrying costs, also known as holding costs, include the money you’ll spend on various items from the time you buy a house until the time you sell it. These costs include mortgage payments, utilities, landscaping, HOA fees, insurance and property taxes. They’re usually paid monthly while the house is on the market. Be realistic when budgeting for carrying costs. You might hope that your house will only take a couple weeks to flip, but it’s more realistic to budget for a couple months or longer. In February 2019, for example, the average home stayed on the market for 49 days, according to the NAR. “Having a team that is ready on the go date, and can bring in a project in 30 days or less, will decrease the cost to carry going into the second month,” Hagman said. “I think it's really important to market the property as soon as the purchase is closed in order to up the odds of closing before a mortgage payment is due.” The best strategy is to rehab, price and market your house in such a way that you’ll attract plenty of potential buyers while still hitting your profit goals. The longer your house stays on the market, the lower your profits “All these holding costs can really eat into profit,” said Johnson, adding that his company “typically looks at holding costs at 15 percent to 17 percent” of overall costs.
These are the costs tied to borrowing money to purchase and renovate a property. If you’re buying a house with cash, you won’t have to budget for this item. Otherwise, make room in your budget for financing costs such as interest, points and closing fees. Financing costs will vary depending on the type of fix and flip loan you choose. If you’re borrowing money from a friend, family member or private investor, for example, you might get very friendly terms that include low or no interest rates and don’t include points or fees. If you’re using a credit card to pay for it, you’re basically flipping houses with no money down, though you’ll probably have to pay some kind of interest charge if the house sits on the market longer than a month and you can’t pay the entire balance. Your credit score will also take a hit until the card is paid off. Most house flippers opt for more conventional loans through banks, mortgage brokers or other financial entities. No matter who you borrow from, you can save a lot of money by cleaning up your credit rating to get better terms. [caption id="attachment_916" align="aligncenter" width="1000"] Jack Frog/Shutterstock.com[/caption]
The biggest waste of money for many house flippers is making unnecessary renovations. These can include everything from installing expensive light fixtures in a starter home to putting in outdated design elements. “The least ROI really is market specific” Hagman said. “If the home is already the largest in a neighborhood, then adding square footage is stupid. (But) if it's a two-bedroom home in a three-bedroom standard neighborhood, then adding a bedroom might make sense depending on the cost/purchase price.” One good idea, Charles said, is to “avoid going overboard on renovations. In most cases, you only want to renovate to the same standard as other houses in the area or you may not be getting the maximum return on your investment.” It’s also important to negotiate the best possible terms on loans. “ If possible, you want to avoid loans with high points and/or interest rates,” Charles said. “If that is your only option and your calculations still project you will make a profit, then it may still be worth it.”
Housing design trends tend to change pretty frequently, so what’s hot now might already be outdated in a couple of years. If you’re looking to get the best return on investment from your renovations, good places to start are where the family eats and washes up. “Usually the best renovations in terms of ROI are the kitchen and the bathrooms,” Charles said. Ferguson noted on his website that kitchen and bathroom upgrades are essential even though they often involve the highest repair and renovation costs. “I wish I could avoid replacing the kitchen and baths, but they are what sell the houses,” he said. “On most of our flips, we replace the kitchens and at least update if not replace the baths. I also make sure all the mechanicals are working well because I do not want a plumbing leak destroying all the work I just completed on a flip or rental.” Ferguson “almost always” puts stainless steel appliances in kitchens he renovates. “They aren’t that much more expensive, and most buyers love them, which helps you sell your house quicker,” he said. “We almost always replace the countertops as well.” Just be careful not to go too big on renovations. For example, it might be a good idea to update appliances and countertops to align with consumer preferences, but it’s not always a good idea to dump a lot of money into a full kitchen remodel. “You could spend $30,000 renovating a kitchen only to turn off some potential buyers who would have done it differently,” according to an article on the Zillow website. See: How to Leverage Financing Today to Grow Your Business Tomorrow
It’s also important to stay abreast of current design trends, either by visiting open houses yourself or doing research on real estate websites. “ You need to know the trends as far as design goes,” Johnson said. “I can’t stress this enough, because if you hit the right notes in terms of a home’s layout and design you really improve your chances of selling it quickly.”
Research conducted by Zillow found that sellers average 2.2 renovations or improvements while preparing to sell their homes, with 79 percent making at least one renovation or improvement. The research found that nearly 25 percent of sellers who make improvements sell above the list price versus 16 percent of sellers who don’t. The following projects had the biggest payoff in terms of improving a property’s ROI, according to Zillow:
Another project that can deliver a high return on investment is a wooden deck in the back yard, according to business website TheStreet. It found that the average cost of a new wood deck is a bit more than $13,000, but it can provide a return of more than $10,000 above the cost when you sell. Although large-scale projects often have the biggest impact on ROI, you should also pay attention to small improvements that don’t cost a lot of money but can greatly enhance a home’s value. “In a fix-and-flip, we will always replace the fixtures and make sure all the little things are done because buyers want their new house to be perfect,” Ferguson noted. “A buyer will also most likely hire an inspector who will go through the entire house. That inspector will find most items wrong with the house, and buyers will often get scared off by an inspection that finds too many things wrong. We try to have as few items mentioned on the inspection as possible.”
Not every renovation will attract home buyers. In fact, some might have the opposite effect by chasing buyers away. That’s especially true if a home addition requires a lot of maintenance, won’t add much to the living experience or results in a higher home price than most comps in the neighborhood. “Some renovations that you have to be careful with, depending on your market, are swimming pools, sun rooms, cobblestone driveways and upscale appliances,” Charles said. “Again, the neighborhood you are buying in should help you determine what amenities to upgrade and which not to.” Zillow’s research found that renovating a basement doesn’t deliver much in the way of ROI, either: “The only renovation we studied that paid off worse than a kitchen remodel was finishing a basement, at a bit less than 50 cents on the dollar, even if you add a bathroom.” Adding master suites to a home also don’t deliver much ROI, according to TheStreet: “Just about the only home renovation that offers less of a payback than the mid-range master suite addition is the upscale version. It also has the honor of being 2019's least cost-effective home renovation project.”
Adding a new coat of paint to the interior is usually a good idea from an ROI perspective and might even be considered mandatory in some homes. The problem comes when you put time and money into the wrong color. If you add a color that turns most buyers off, the return on your investment can quickly turn negative. “Paint color can make a huge difference in how a house feels,” Ferguson noted. “Dark paint can make a house feel small, while white paint can make it feel stark and boring. Many people love to paint rooms in different colors to show their style and personality. The problem is everyone has a different style and personality. It is impossible to please everyone, so a nice neutral color is the best choice.” [caption id="attachment_922" align="aligncenter" width="1000"] Austin Dean Photography/Shutterstock.com[/caption]
If picking the right real estate investment were easy, everyone would do it. The fact that it’s not easy is the reason many investors end up deep in debt and stuck with properties they can’t unload. Deciding which house to flip depends on many different factors, not the least of which are your financial situation and profit goals. Once you’ve sorted through those, then you can look at factors such as price, location, size, condition and market value. “It depends on your goals and your investment strategy,” Charles said. “If you are looking to ‘fix and flip,’ ideally you want to buy the worst house in bad condition in a good neighborhood. Also, some investors buy houses hoping to be able sell the home for a profit in the future based off of nothing but appreciation. Although this can work, especially on the East and West coasts, some would consider this more of speculation than investing.” If you’re a beginning house flipper, most real estate experts recommend letting realtors scout houses to flip, based on your finances and goals. “You really need to be working with someone who can dig into the numbers to determine value, cost of improvements. seasonal fluctuations etc.,” Hagman said. “Even using consumer sites such as Zillow and Realtor.com, the average consumer simply doesn’t have the access or the time to do the digging to really understand what looks like a good investment.”
The amount of money house flippers have to work with will play a big part in determining the type of homes they should pursue. If you only qualify for a $200,000 loan, for example, there’s no point in spending time scouting homes that cost $600,000. It’s best to look for homes at or below your price range. Similarly, if you only have a renovation budget of $20,000, there’s no point in choosing a house that requires $100,000 in improvements. Instead, choose a house in good condition that doesn’t need a lot of rehab work. Unless you have a lot of cash on hand, many experts recommend starting out with a low- to mid-priced house in a solidly middle-class neighborhood. This kind of house will likely need some value-adding renovation and repair work but not an expensive overhaul. More importantly, it will probably be located in a stable area that’s attractive to home buyers.
You’ll hear a lot of talk about ARV as a house flipper, so it’s important to familiarize yourself with the term.
In real estate, ARV stands for “after repair value.” This is the estimate of a home’s value after all repairs and upgrades have been completed. It’s a critical piece of the house flipping equation because it helps determine both your sales price and your profit. From a financial standpoint, miscalculating the ARV of a house you intend to flip can have dire consequences. If you overestimate the home’s after repair value, you might have a hard time selling it. The longer it sits with no buyer, the higher your costs and the lower your profits. On the other hand, if you underestimate the ARV and sell the home below its market value, you could end up leaving a lot of money on the table.
Miscalculating a property’s ARV is a common problem for beginning house flippers who don’t take the time to educate themselves on the process of gauging a home’s repair needs and market value, according to the website of FortuneBuilders, which provides educational tools to real estate investors. “Assessing the ARV of a property requires some ability to gather repair estimates with accuracy, including insight of the local market,” according to a FortuneBuilders article. “Professional investors that are well-versed in the real estate investment game can easily walk into a property and assign a value based on their knowledge of the market within minutes. Unfortunately for beginners, that’s just not possible.” Johnson offers a similar take, saying that the biggest mistake for house flipping rookies is “overestimating the home’s value and underestimating the construction costs.” FortuneBuilder suggests taking the following steps to ensure you get the ARV correct:
Comps give you an idea of how much similar homes in the area have been selling or listing for recently. It’s a way to get an accurate assessment of a home’s actual market value. This is important because no matter how much work you put into a home, or how much you think it should sell for, the market itself will ultimately determine its value. For example, if similar-sized homes in similar neighborhoods have sold or listed for around $250,000 in recent months, you’re not likely to sell yours for $350,000, regardless of its condition or your investment in it. There are a few ways to access information on recent home sales and listings. One way is to check real estate websites such as Zillow, Redfin, Trulia or Realtor.com to find sale prices and estimated values of similar homes in the area. You have to be careful here, though, because the values listed don’t always reflect a home’s condition before necessary repairs and renovations. Another way is to access a Multiple Listing Service or MLS. These are private databases that are created, maintained and paid for by real estate pros to help clients buy and sell property. According to the NAR, access to MLS listings is usually provided to the public free-of-charge by participating brokers. What the public can’t access is information that would endanger sellers' privacy or safety, such as contact information and times the home is vacant for showings. You should also dig up information on comps for recent sales of real estate-owned properties (REOs), which are homes owned by banks and other lenders after unsuccessful sales at foreclosure auctions. To get an accurate assessment of comps, FortuneBuilder suggests researching the following:
Once you have this information, look at how the current market is performing. If sales have slowed recently, and an usually high number of homes are on the market, it’s not an ideal time to sell a home.
It’s almost impossible to overstate the importance of getting an accurate estimate of construction and other costs when flipping a house. These costs play a key role in determining your sales price and profit margin. Make a mistake here and it’s a sure bet you’ll end up narrowing your profits or even losing money on a deal. “The first thing you need to know are the construction costs,” Johnson said. “If you get those wrong nothing else matters. It’s easy to figure out what a house will sell for — any realtor can tell you that. It’s a lot harder to know how much it costs to remodel a home.”
This is such an important part of the house flipping equation that Johnson offers his own training classes on construction costs. He suggests that anyone interested in flipping houses take the time to educate themselves on costs before plunging in. “They can either find a local mentor or take a class, but it’s important to get as much information as possible,” Johnson said. “I took a class in California that really helped me out. There are all kinds of places online you can learn about construction costs. Or, you can get on the phone and call local contractors to find out what local costs are like. How much does it cost to swap out a door? How much does flooring cost? Asking these kinds of questions is a good first step before doing anything else.” [caption id="attachment_929" align="aligncenter" width="1000"] Roschetzky Photogaphy/Shutterstock.com[/caption]
Just about every business has a mathematical formula that serves as a goalpost for hitting the right profit numbers, and house flipping is no different. In real estate, that formula is known as the 70 percent rule. This rule states that real estate investors, including house flippers, should pay no more 70 percent of the after-repair value, minus repair costs, for a home.
Here is the formula for calculating the 70 percent rule:
For example, suppose a property’s ARV is $200,000 and it requires $30,000 in repairs. Under the 70 percent rule, the most a buyer should pay for the home is $110,00 — $200,000 multiplied by 70 percent ($140,000) minus $30,000 for repairs equals $110,000. The goal is to ensure a 30 percent margin that covers not only profits but also transfer and holding costs and other miscellaneous expenses. According to the REI/kit website, one benefit of the 70 percent rule is that you can quickly calculate a fix and flip offer “because the 70 percent rule equation has a margin for profit and costs already ‘baked in.’ If you are able to calculate the ARV and the repair costs with accuracy, it’s likely that your end result will also be accurate as well.” The potential downside, of course, is that you get the estimates wrong before plugging in the formula. That’s an especially big risk for beginning investors who underestimate the repair costs and wind up cutting into their profits. Find Out: Cities With the Most Female Entrepreneurs
It’s important to understand what the 70 percent rule covers, and how that translates into profit. Many beginning house flippers might assume that the 30 percent left over is pure profit, but that’s not the case. “This margin must account for not just your profit, but all of the costs to purchase the property, sell the property and hold the property, as well as the profit,” the REI/kit website said. “Depending on the value of the house and the transfer costs …this formula often results in a profit of about 15 percent for the investor.” On the flip side (pun intended), experienced investors with better negotiating skills might aim for a 60 percent rule, which would give them a 40 percent margin and potentially higher profits. There’s nothing that says house flippers have to stick to the 70 percent rule in every deal.
The 70 percent rule for house flipping doesn’t always work, especially for lower end homes with an ARV of $100,000 or less. The lower the ARV, the less money you can pocket from the deal. In these cases, you might want to target 65 percent instead of 70 percent. For higher end homes that let you pocket a greater amount of money, you might change the rule to 75 percent or higher. “A realistic ROI will depend on your area and the market conditions,” Charles said. “For example, you will not find anything near the 70 percent rule here in Southern California unless you get real lucky. This is why attending local REIAs (Real Estate Investors Associations) can be very helpful to new investors. I personally would probably not invest in a fix and flip with less than a 10 percent ROI, but that should depend on your personal risk tolerance.”
As always, the key to making the 70 percent rule work in your favor is to do your homework. Before deciding on the 70 percent formula, take the time to research local repair/contractor rates, comparable sales data, days on market data and soft costs such as utilities, commissions, general upkeep, legal fees and closing costs.
Those new to house flipping should begin the process of finding properties by networking with local real estate professionals. You’ll not only meet potentially important contacts, but you’ll also learn a lot about the local market — including who’s in the market to sell. “The biggest hurdle for beginners is finding property, and the easiest way to do that is to find home sellers who buy and flip to investors,” Johnson said. “It’s not like the old days when you can just go to the MLS. There are so many huge companies looking for home sellers, so you’re competing with them as well as small individual investors. I always advise beginners to go to local REIA meetings. You can get a lot of market information for free. That’s the best way to get started quickly.” He also recommends contacting local real estate agents and checking social media and online ad sites. “There are a lot of Facebook real estate investor groups, and you’d be surprised how many investors find deals there,” Johnson said. “Craigslist is another good way to find sellers.” The process of finding good houses doesn’t necessarily stay constant from one year to the next. Market dynamics can play a big part in how to go about scouting homes. “If you are in a buyers’ market, you may be able to find good deals on the MLS,” Charles said. “If you are in a sellers’ market, you may have to find off-market properties to find good deals. Some ways to find off-market properties are through Craigslist, by sending direct mail to homeowners, door knocking, cold calling or by using online marketing strategies.” Another place to find homes is through estate sales, Hagman said. “I have clients that specifically target estate sale properties. Heirs are sometimes more flexible around price, even though it can be complicated working with multiple signatories.”
Some fix and flip investors research auction sites, short sales and foreclosures to find homes. A short sale is when the homeowner owes more to the lender than the house is worth, which means the lender must approve getting less money than it’s owed. “Many homeowners bought foreclosures and houses in disrepair after (last decade’s housing crisis),” Ferguson said. “Not every homeowner had the money or time to repair the house once they moved in. Some of those homeowners need to sell a house that is in poor condition. If a house needs repairs, that creates opportunities. The more work that is needed, the bigger the discount it takes to get a house sold.” You have to be careful when scouting properties that have gone into foreclosure, however. People who are losing their homes often do little to improve them. In fact, some go to great lengths to damage them. “When they find out the bank is taking it back, they trash them,” Hagman said. “I've seen homes with all the cabinets, appliances and toilets gone, and have even seen the sheet rock destroyed to pull out the copper wiring. That’s a big expense to fix.”
Just as important as finding homes to flip is finding sellers once the house has been fixed up. For beginners, the easiest path is to list the home with local realtors. “This will help ensure your property gets to the widest audience possible,” Charles said. He also recommends attending local REIA meetings. “This is where other real estate investors go to meet, usually on a monthly basis, to talk about real estate investing,” Charles said. “This will help someone without prior experience understand the local market better and what other investors are having success in. It is also a great place to network and potentially find a mentor.”
Simply put, a “bad flip” is one that falls short of your profit goals and could even lead to an investment loss. The one thing almost all real estate experts agree on is that buying a house with structural problems is a recipe for disaster. It takes a lot of work and money to fix these kinds of problems. Even when you do fix them, the fact that they existed in the first place will scare off many buyers and greatly reduce demand for the home. “To me, the most important thing is foundation issues,” Charles said. “Depending on the scope of the problem, foundations can be very expensive to repair.” What’s more, fixing foundation problems doesn’t really add much return on investment because buyers don’t pay extra for a sound foundation. They just assume it should be sound and would probably walk away if it’s not. Other problems that can lead to a bad flip include:
One way to dodge these kinds of problems is to hire the right people before making an offer on a house. “This is not something a consumer can suss out on their own,” Hagman said. “You need to have a base line inspection, and based on those results you call in a structural engineer. It's also good to have the big systems — HVAC, plumbing, electrical — checked out by a licensed contractor. It adds upfront costs but it gives the flipper a chance to make resale pricing decisions before the house hits the market.”
If there’s one thing that beginning house flippers can do to improve their chances of success, it’s to keep their goals realistic. Don’t get hypnotized by house flipping programs on TV that show investors making a pile of money in a short amount of time. “People have these ridiculous expectations of the cash truck pulling up and them shoveling off what they want,” Hagman said. “This is hard work that requires experience. It’s not really beneficial to watch DIY programs inflate the ease at which people can finish a project and make money.” For Charles, the most common mistake is overestimating the ARV of a house, particularly for house flippers who buy properties outside of their own cities or towns. “Another mistake is underestimating how much it costs to repair/renovate a home,” he said. “You should always include a ‘fudge factor’ into your numbers to account for any unforeseen expenses. Beginners are also prone to pay too much for a property. They think they have room to pay more for a property than they really should.” [caption id="attachment_927" align="aligncenter" width="1000"] kurhan/Shutterstock.com[/caption]
Choosing the right contractor for your rehab work might sound as easy as hopping on the internet and doing a quick search, but that’s only half the battle. The trick is finding a reputable contractor willing to work on your terms and at your schedule. This can be a challenge in hot housing markets where many contractors have a full slate. “Lack of labor is a huge issue right now,” Johnson said. “You have to market for contractors as hard as you market for properties. It’s important to let them know why your job can be more lucrative for them than other jobs.”
Settling for less than the best available contractor is a sure way to either shrink your profits or kill them altogether. “You need to thoroughly vet contractors and make sure you have good contracts and paperwork in place to protect yourself,” Charles said. The first step is to ask your network of family, friends, neighbors and professional associates for recommendations. Real estate agents can be a big help in this regard because many of them have worked with contractors before and know which ones are reputable and which aren’t. Once you have a few names in place, make sure the contractors are licensed to work in your area and can facilitate the process of getting necessary building permits. After that, follow these steps:
Ask just about anyone who works in real estate and they’ll tell you that rookie house flippers should always hire a realtor the first time out. “Unless you are a realtor yourself, I think you should always use a real estate agent,” Charles said. “This ensures your property is listed on the MLS and gets the most possible views. Another advantage to using a realtor is that they are experienced in negotiating and can potentially get you a better offer than if you try to sell the home yourself. Also, using a realtor puts most/all of the liability on (the realtor) if something goes wrong with the sales process and the buyer comes after you after the sale of the home.” Even with all the online tools available to house flippers, experienced realtors “know the market better than what the consumer can (learn) from public sites such as Realtor.com, Zillow, etc.,” Hagman said. “Realtors can save you time and money in the search for appropriate properties and typically have service providers that can do the work. The National Association of Realtors has shown time and again that sellers net more both in purchase price and in the cost of negotiated repairs by using a realtor.” The time to consider flying solo is after you’ve built up a few years of experience as a successful house flipper and/or gotten your own real estate license. For house flippers in this category, DIY websites such as FSBO.com (For Sale By Owner) can be a valuable resource. “FSBO is a fine option for reselling if you know what you're doing and are in a hot market, but it takes time and focus,” Hagman said. Read: 10 Tips for Female Entrepreneurs From Women Who Founded Their Own Companies
A number of options exist for financing a house flip, and the one you settle on largely depends on your financial needs and credit history. If you have good credit, enough income and a large amount of cash saved up for a down payment — 20 percent of the loan or more — many realtors recommend pursuing a conventional loan through a bank or credit union. “Conventional loans usually have the lowest fees and best interest rates,” Charles said. “The downside to this is that you personally have to qualify for the loan. Also, if the house is in bad condition, a traditional bank may not lend on it.” The next best funding source, Charles said, is a private lender such as a friend or family member. “Depending on the situation, you can usually negotiate the terms of the loan with (a private) lender.” If you intend to set up a small business as a house flipper, one option is to get a small business loan through the U.S. Small Business Administration or through private small business funding procurement consultants such as Seek Business Capital. [caption id="attachment_925" align="aligncenter" width="1000"] lenetstan/Shutterstock.com[/caption]
Beyond those options, you can seek fix and flip loans , which are set up specifically for house flippers. An article on the Realtor.com website outlined five different types of common fix and flip loans:
When someone asks, “Is flipping houses a good investment?” the answer often depends on when the question is asked. During periods of economic growth and low unemployment, housing markets tend to do well. When the economy dips, and consumer confidence dips with it, you wind up competing for a limited number of buyers, which drives prices down. Judging from recent trends, plenty of real estate investors still want to know how to flip a house, even though activity has slowed in some areas. Attom Data Solutions reports that the rate of flipping homes reached a nine-year high during this year’s first quarter, with more than 49,000 single-family homes and condos being flipped. House flipping represented 7.2 percent of all U.S. home sales during the quarter, up from 5.9 percent the previous quarter and 6.7 percent the prior year.
But while those numbers show that a higher percentage of U.S. housing deals involve flipping, they don’t necessarily reflect a rise in the number of homes being flipped. The total number of houses that were flipped during the first quarter actually fell 8 percent from a year earlier. The total number of investors flipping homes also declined. Recent home flipping activity could be a sign of a changing housing market, ATTOM Data Solutions Chief Product Officer Todd Teta said in a statement. “With interest rates dropping and home price increases starting to ease, investors may be getting out while the getting is good, before the market softens further,” Teta said. “While the home flipping rate is increasing, gross profits and ROI are starting to weaken and the number of investors that are flipping is down 11 percent from last year. Therefore, if investors are seeing profit margins drop, they may be acting now and selling before price increases drop even more.” A lot depends on the individual market. In Charlotte, Johnson said, “it’s a very good (house flipping) market for sellers but not for buyers.” For much of the rest of the country, house flipping remains a pretty profitable venture, though the overall real estate market may be cooling down … for now. More From Seek
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