How to Flip a House (Easy Step-By-Step Guide)
The real estate industry is a multi-trillion dollar market that offers enormous opportunities for anyone willing to put in the work and be patient for years and sometimes even decades. This waiting period is always a huge bummer for people wanting a slice from the trillion-dollar pie, but don't really have the time nor want to wait so long.
What if I told you there is a way to earn consistent short term profits over a long period in the real estate industry. Well, it's real, and it's known as House flipping.
What is House Flipping?
Put simply, house flipping is the process of buying a house and holding onto it for a short period, then selling it (flipping) for a profit. The term house flipping might sound new to you, but it's actually been around for a while.
Back in the 1980s, the stock market earnings were low, and due to this, house foreclosures were on the rise. Individuals who had knowledge in real estate back then would buy these foreclosures, renovate them and sell them for a profit - House flipping 101! This article will reveal valuable information I wish I had before venturing into property flipping, so stick around.
Financial Requirements to be a House Flipper
It's a given that whenever people think of real estate investments, they imagine their life's savings going into one property. However true that may be, an investment's success boils down to how much information you have about that particular property- average costs included- not how much you invest.
So you might be wondering, how much does it cost to flip a house anyways?
Flipping a house could cost thousands to hundreds of thousands, depending on factors such as location and size. But according to a study, the median price for house flipping in 2020 is $240,000. However, there are cases where it's possible to flip houses with no money at all. But to do this, you must have excellent credit. Now that we have a good idea of how much it would cost to flip a house, let's use a $240,000 home as an example;
You find a sweet deal in the market and purchase the house for $240,000.
And based on the typical return on investment of 44.4%, you expect to sell it for $346,560.
However, you still have to run repairs of about 20% of the after repair value (ARV) of $346,560- which is around $69,312.
Judging by this, your return on investment would be $37,248.
And this is from a single flip! Successful house flippers flip 3-7 houses a year, with an average salary of $139,440 a year.
How to Start House Flipping
Great! You've made it this far, and you're already well on your way. But you've still got more to learn before you can safely enter the house-flipping market. In this section, I'll reveal the checklist needed to flip a house and how to get into flipping houses formally.
1. Research a Range of Real Estate Markets
When researching which real estate market is the best fit, there are a couple of questions you should ask yourself:
How much money do you currently have to invest?
What real estate market can you afford?
These may sound like obvious questions but believe me, not everyone puts this into consideration.
Like every good real estate investment, property flipping requires a fair amount of research before you leap in. For example, if you've got a budget of around $50,000, you will need to identify what market class will provide the best ROI.
Market class is generally divided into four ranks- class A to D. Class A are communities with high-income earners and the most expensive housing markets. A good example is Georgetown, Washington D.C.. Class B communities are also high-income earners but are mostly classified as middle-class. Class C are white-collar workers; you can call this an average community, while Class D are low-income earners. With this kind of information in mind, you can identify a home's potential value based on the Class it sits in.
2. Make a Budget for the House Flip
Budgeting is one of the pillars of any financial investment. Even countries budget when it comes to determining the amount of money to be spent, then why not you?
With that said, your budget should include possible repair costs, selling costs, and labor costs. And holding costs- holding costs are the expenses you will pay while owning the property; in the case of house flipping, it's usually a short period. You can also apply the 70% rule, which states that a property should be bought for 70% of the After Repair Cost. This rule is a statute among house flippers, and it should give you a good idea of how much it costs to flip a house.
These days, most house flippers prefer to add cosmetic projects that add value to a home—improvements like bathroom upgrades, kitchen remodeling, etc. If you're taking this route, I'd suggest you add it to your budget too. Don’t forget to add an additional 10-15% for any expensive overhauls like plumbing or electrical that may come up – I like to call that “The Unknown”.
3. Make a Flipping Business Plan
The idea of house flipping is to make short term profits over a long period, but this doesn't mean you shouldn't treat it like a business! House flippers are entrepreneurs who ensure that every part of their business runs smoothly. They do this by creating a house flipping business plan. A house flipping business plan should cover the following aspects:
Executive Summary
Market Analysis
Your financing Strategy
And of course, your flipping Strategy
Team members: a good team will help you go a long way
Exit Strategy
It's possible to earn an ROI of 20% in the first year, but you might drop to a negative ROI in a couple of years without a good plan. All of the steps mentioned above and consulting with a real estate expert will ensure that you have a good return on investments in the long term.
4. Look Into Contractors and Smart Renovations
There's a saying I always kept in my mind while growing up; it says: Your net worth is only as good as your network. This adage applies to all industries, including the house-flipping industry.
After you create your business plan, your next step should be to build relationships with contractors. Examples of said contractors include roofers, painters, HVAC, plumbers, electricians, and general contractors. These contractors will be a vital part of your team and will help you work on renovations when needed. By building a good relationship with an experienced contractor, your flip will have a higher chance of being successful.
Buying a Property
We're almost done! The sections above spoke on what to do before buying a property. Now we will discuss the process of how to buy a property.
5. Finding a House to Flip
You've learned so far that finding a perfect house to flip depends on a couple of factors. Aside from proper planning, learning how to spot a good deal is crucial. A good deal is one which can cover all your expenses after it's been sold.
There are various ways to find good houses to flip. You could partner with a real estate agent to find local deals or launch a massive direct mail campaign. Other methods include auctions and multiple listing services. Finding a good deal can be overwhelming, but if you stick to your flipping plan, you will overcome the obstacles that present themselves.
Flipping with Cash Only
Investments come with risks. And house flipping is no exception. Flipping with cash is often regarded as a safe option compared to taking a loan and incurring debt. Here are some reasons why flipping with cash is considered a safe choice:
Interest fees, who?: Flipping a house with cash frees you from crazy interest fees set by lenders.
No debt: Debt can significantly lower our chances of making substantial profit long term.
And finally, you don't have to sell immediately, so there's no rush.
I suggest you consider using cash for your house flipping business to help protect your business from the crises caused by interest and debt.
6. Buying The House
Whenever I find a suitable property to invest in, the first thing I do before making a purchase is to get professional help inspecting it. Although I have several years in the real estate market, having a trained eye looking out for things I can't see can mean the difference between a profitable deal and an inevitable loss.
Once the home inspector has assured you that the house is structurally and mechanically sound, contact several contractors and ask for quotes. The contractor you choose should start work the same day you settle the property to save time.
7. Start Renovating your Real Estate Investment
In the house flipping industry, time is literally money. There are a lot of bills that need to be paid during the time you own the house. So as long as the house hasn't been flipped successfully, your ROI decreases.
I like to think of it like this: Time is money. So as time passes on, every day costs more and more money. Even your lender is getting paid 7 days a week.
This is why you should choose reputable contractors with a good track record of renovation. You don't want contractors that will take months to complete a 5-day job! Keep the elements below in mind when renovating a house:
HVAC, Electrical & Plumbing
Painting
Doors & windows
Cleaning etc
Make sure you work on the essential parts, and if it's within your budget, you can make cosmetic improvements that add more value to the house.
8. Sell the House!
Finally, we can earn some profit! Selling your renovated house shouldn't be much of a problem if you have a seasoned realtor in your ranks. An experienced realtor will shorten the time needed to get an interested buyer. Remember, in this business, time is money.
Your realtor can also provide an estimated after-repair value for your property. However, you can still do more research and find out the real worth of your house based on how much you've spent on repairs and also the general pricing in that community. You don't want to sell so high that it chases customers away; you also don't want to sell so low that you incur losses.
9. Connect with a Real Estate Expert
As a beginner, real estate flipping can be daunting. You need to account for multiple factors, and to be able to match up with the pros, you need a trusted real estate expert.
Asides from this, you also need to expand your network and connect with other house flippers, a simple "house flippers near me" search on google can go a long way. And with a reliable network, you can get tipped off when a market is about to explode.
See You On The Flip-Side?
House flipping is a relatively easy profession if you're well informed on the processes involved. Hopefully, this article answered all the questions you had on this topic. Here's a quick checklist for house-flipping
How to Start House Flipping:
Research a Range of Real Estate Markets
Make a Budget for the House Flip
Make a Flipping Business Plan
Look Into Contractors and Renovations
Connect with a Real Estate Expert
And lastly, sell your house.
My goal is to help investors get started and make the best return on their money from every development project they embark on. Get more FREE content on how to invest in real estate by joining our community list.
