How to Write a House Flipping Business Plan
Don’t start flipping houses without a business plan.
- July 15, 2019
- Starting Your Business
- 10 min read
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House flipping sounds like a fun and easy way to make money, thanks in no small part to the proliferation of television shows that promise to teach you how to start flipping houses even with no money. The truth is that while fix and flip real estate can indeed be profitable, like any business, you’ll need a financial strategy to succeed. A good house flipping business plan will outline your goals and objectives, identify your source of funds and delineate the growth strategy for your business. It should also present a back-up plan for when things don’t go exactly as planned.
Flipping houses 101 teaches that a writing a good business plan is essential if you’re looking to get fix and flip loans from outside lenders, as most house flippers do. It’s also important to have a road map of all the steps you’ll have to take to see your house flip through to completion. If this is your first house flip, it’s usually a good idea to consult with an attorney and/or a CPA to make sure you cover all of your bases. The good news is that once you understand how to start a house flipping business and write one solid business plan, you can reuse the basic strategy for your next house flip.
If this is your first time writing a business plan, there are tips that can help make it easier. Although there are specifics of house flipping business plans that you’ll need to understand and incorporate, business plans in general share a similar template. No matter what type of business you’re starting, a business plan serves the same purpose. To quote the U.S. Small Business Administration (SBA), “A business plan is an essential roadmap for business success. This living document generally projects 3-5 years ahead and outlines the route a company intends to take to grow revenues.”
Now, you probably don’t want your first house flip to run 3-5 years. In fact, if it takes that long to unload the property, it’s likely going to cost you more than you put into it. But that’s where a business plan can help out, by delineating the timeframe and costs of your project, along with your exit strategy. You can also use your house flipping plan to sketch out a house flipping business that lasts for more than 3-5 years, during which time you’ll execute numerous house flip transactions.
As you draft your business plan, you’ll need to tailor it to the specifics of your industry. However, you can start with the broad brushstrokes provided by the SBA, which suggests that all business plans include the following:
- Executive Summary
- Company Description
- Market Analysis
- Organization & Management
- Service or Product Line
- Marketing & Sales
- Funding Request
- Financial Projections
As this is not a specific house flipping business plan template, you’ll need to customize the individual sections to match your house flipping business. However, regardless of the type of business you’re running, each section should contain accurate and detailed information demonstrating to your potential financial partners that you’ve done your due diligence and can run a successful house flipping business.
Templates are useful because they help ensure you don’t overlook any part of the planning process. Here’s a closer look at the different parts of the suggested SBA business plan template that you can use to write a house flipping business plan.
An executive summary provides a brief overview of the detailed information that is to come in your business plan. It should emphasize specific highlights that someone seeking information about your company should know immediately, such as your company’s mission statement, your financial projections and your operating plan.
As the name implies, an executive summary should be designed so that an “executive” — or another important decision-maker — can understand what your business is and where it is going in a matter of minutes. It should be brief and to the point, typically no more than one or two pages, and it must be compelling. If you’re handing it to someone with the capital that can make a difference to your business, that person likely has lots of other deals to look at as well. If you want your project to stand out, your executive summary must be succinct and persuasive.
The first section of your house flipping business plan should be a description of your business. You can begin with your mission statement and a description of exactly how your business intends to operate, such as whether you intend to house flip a single home or whether you intend to run a long-term business flipping several homes simultaneously.
From there, you’ll want to include details that separate your plan from any generic house flipping endeavor. You’ll want to expand on how your house flipping style — or the one particular house flip you have in mind — stands out from the plans of any competitors, particularly if you’re using your business plan to raise outside money. Here you can provide information about the officers of the company, if there are any in addition to you personally, and if the management has any particular skills or industry ties that can give the company an advantage in the marketplace.
The company description of your business plan is also where you should provide the basic information about the history and composition of the company, such as when it was founded and by whom, where it is headquartered, and how many employees it has, if applicable.
Read This: 10 Business Plan Tips for Your Startup
The market analysis of your house flipping business plan could be one of the most important sections. At the end of the day, the purpose of your business is to generate a profit, and there’s no way to do that without understanding the market environment in which you’re operating. Beyond analyzing the market for your own profitability, any potential lenders will also want to see that you understand what you are up against when it comes to competition, industry trends, and micro- and macroeconomic factors, including geographical advantages or disadvantages. Tools you can use to perform a market analysis include a SWOT analysis and a CMA, or comparative market analysis.
Seek on Forbes: Can You Flip a House With Credit Cards?
The acronym SWOT stands for “Strengths, Weaknesses, Opportunities, and Threats.” In one fell swoop, a SWOT analysis can provide an overview of how your company is positioned to succeed and what it will need to overcome to reach that success. To learn how to perform a SWOT analysis, follow these recommendations of the SBA:
“Start your SWOT analysis by describing the strongest aspects of your business. What do you do best? What unique or enviable resources do you have that give you a competitive advantage? Understanding your strengths will enable you to focus on them so you can maximize your advantages over your competitors. Describe your company’s shortcomings as clearly and honestly as you can … Weak areas need to be identified and shored up, not glossed over. Now shift your focus outward from your company to the market and customer base that you serve. What opportunities do you see just waiting for the right company to come along? Finish your SWOT analysis by identifying the major outside threats to your business. What challenges do you face? What potential threats are keeping you up at night? The better you are at identifying threats, the better positioned you will be to respond to them.”
Real estate by its very nature is an illiquid investment. Unlike, say, the stock price of a company like Apple, there’s no public market that offers minute-by-minute pricing when it comes to property values. A comparative market analysis (CMA), however, is a tool that a real estate agent, home buyer or house flipper can use to get a pretty good estimate as to what the true value of a house may be. A CMA uses the prices of similar properties recently sold in the area to provide estimated values. For example, if you’re looking to flip a 2,000-square-foot, 2-bedroom, 2-bath house and a different 2-bedroom, 2-bath, 1,900-square-foot house down the street recently sold for $300,000, your CMA will estimate the value of your house flip to be about the same, or likely slightly higher. The closer the two houses are in terms of age, size, and condition, the more accurate your CMA is likely to be.
After performing these two tests, you should have a good handle on how your company might perform in the house flipping market. However, if you intend on having investors, they will likely be looking for even more details. For example, in this section of your house flipping business plan, you should include detailed information about house prices in the area, what kind of margins local house flippers are earning and how you specifically intend to operate your pricing model.
This is also a good place for you to respond to any threats or obstacles you identified in your SWOT analysis. Investors will want to know how you plan to overcome regulatory, economic and competitive issues while still remaining profitable.
Use the organization & management section of your business plan to go into detail about how your company is set up and who exactly is in charge. Here you can break out the educational and experiential backgrounds of anyone tied to the company. The more you can highlight the experience and talent of the members of your management team, the more you are likely to impress potential investors.
As a house flipper, you’re not exactly providing a service or offering a product. So, whereas this section of a standard business plan may be quite detailed, if you’re flipping houses, you can usually cut right to the point. Use this section to outline the specifics of your house flip, from where and how you intend to locate your house, where you will source your contractor and materials, how much sweat equity you’re going to pour into the project, and whether or not you plan to broaden your “product line” by flipping more houses and/or expanding the geographical region in which you plan to flip.
If you’re in the house flipping business, marketing and sales is a critical part of your business. Obviously, you’re going to need to sell your house to make a profit, so putting the house on the market and finding a buyer needs to be a part of your business plan. But your business plan itself is a marketing tool if you’re looking for financing. Potential investors will want to see how you will market and sell your house so that everyone can make a profit.
Sales and marketing are related, but they are not the same thing. Use the marketing section of your business plan to outline how you will publicize your house flip and reach out to potential buyers. Use the sales section to describe how you will actually close your deal. Include answers to questions such as: Will you hire sales staff? Will you use the services of a broker? Do you plan to sell your own houses? Have you factored commissions and sales costs into your budget? Answering these questions and more in your business plan can help potential investors or financiers feel confident about working with you.
The funding request section of your business plan is where the rubber meets the road. The rest of your business plan is simply a framework outlining a dream and a path to get there, but the lifeblood of your business is funding. In this section, you should be very specific about the exact amount of money you’ll need to raise and how you intend to use it. Investors are generally only interested in businesses that have a smart plan to turn their money into more money, so lay out exactly where every dollar coming into your company will be allocated.
For example, if you plan to flip a house that costs $100,000, asking for $100,000 isn’t going to get you very far. You’ll need additional money for repairs, upgrades, fees and commissions, interest payments, marketing expenses and other miscellaneous costs. By providing a line item for each of these anticipated expenses, investors can see that you understand exactly how much money you need and exactly where it will be spent.
The final section of your house flipping business plan is where you can spell out your company’s financial position in black and white, including how much profit you intend to return to yourself and your investors. Even if you’re just starting out and only plan on flipping a single house, you should still include basic financial statements, such as a balance sheet. You should also include a profit forecast based on realistic market conditions. Some business plans also provide high and low projections so investors can see a range of likely outcomes of the house flip. For this section, you can include information on how your profitability may increase with additional funding.
You can use an appendix if necessary to attach additional documents or supplemental information to your business plan, but it is not always required.
Once you’ve drafted your house flipping business plan, it’s time to turn it loose and let it fulfill its primary function — to raise capital. But where should you turn? If you’re a first-time house flipper, even an amazing business plan isn’t likely to get you the money you need from a major bank. Traditional lending institutions typically require three years of tax returns and a history of profitability to finance business loans. Even the SBA asks for three years of business tax returns before it finances loans for “new” businesses. Thus, true startups, especially in the relatively risky field of speculative real estate, can have difficulty finding funding from traditional sources. A hard money loan is an option, but they can be very expensive.
One place you can turn is Seek Business Capital, a company dedicated to helping businesses obtain the financing they need, regardless of their time in business. Seek has its own business plan that actually focuses on newer and early-stage businesses, so if you find yourself in that position, Seek can be a viable option.
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