Flipping houses can be a very profitable real estate investment strategy, but it’s not without its risks. If you’re thinking about getting into the house-flipping business, there is a lot to take into consideration.
By the end of this article, you should have a good understanding of what it takes to be a successful house flipper. Let’s get started!
What is House Flipping?
House flipping is the process of buying a property, making improvements to it, and then selling it for a higher price than what you paid.
The hope is that the increase in value will cover the cost of the renovations plus give you a nice profit. Of course, there is always the risk that the property doesn’t sell or that it doesn’t sell for as much as you hoped.
That’s why it’s important to do your research before getting involved in any house-flipping venture.
Is House Flipping Right for You?
Before you start looking for properties to flip, it’s important to ask yourself if this business model is right for you. There are a few key things to consider:
- Are you prepared to take on the risk? As with any investment, there is always the potential for loss.
- Do you have the time and energy to dedicate to a flipping project? Renovations can be time-consuming and stressful.
- Do you have the necessary skills and knowledge? If not, are you willing to learn or hire someone who does?
- Do you have the financial resources in place? Flipping houses requires money for the purchase, renovations, and holding costs.
If you’ve answered yes to all of these questions, then house flipping might be right for you! If you answered no to any of them, it’s probably best to reconsider before getting started.
What are the Risks and Potential Rewards of Flipping Houses?
Now that you’ve decided that house flipping is right for you, it’s time to take a closer look at the risks and potential rewards.
As we mentioned before, one of the biggest risks is that the property doesn’t sell or doesn’t sell for as much as you hoped. This can leave you stuck with a property that you can’t afford to keep and end up costing you money.
Another risk is that the renovations take longer and cost more than you expected. This can eat into your profits or even leave you in the red.
Of course, there are also potential rewards. If everything goes according to plan, you can make a tidy profit.
You also have the potential to create something beautiful that improves the community and provides a home for someone who needs it.
What Should You Look For in a Property to Flip?
Not all properties are created equal when it comes to flipping. You want to look for a property that has good potential but isn’t in perfect condition.
This way, you can make the necessary improvements and add value without spending a fortune.
There are a few things to keep in mind when searching for a property to flip:
- Location – Look for properties in desirable neighborhoods. This will make it easier to sell the property once the renovations are complete.
- Size – Smaller properties are typically easier and less expensive to renovate than larger homes.
- Condition – As we mentioned, you don’t want a property that’s in perfect condition. But you also don’t want one that’s so rundown that it will be difficult (and expensive) to make it livable again.
- Price – You want to find a property that you can buy at a good price with the potential to sell for a higher price after renovations.
Develop in-depth criteria for the homes you will look to buy. Do your homework and crunch the numbers. This will help you focus your search and avoid properties that don’t meet your flipping criteria.
How Do You Finance a Flip?
Once you’ve found a property that you want to flip, you need to finance the purchase. There are a few different ways to do this:
- Cash – If you have the cash on hand, you can pay for the property outright. This is the riskiest option since you’ll be using all of your own money, but it can also be the most profitable if everything goes according to plan.
- Mortgage – You can finance the purchase with a mortgage and put some of your own money down as a down payment. This option is less risky than using all cash since you’ll have a loan to cover part of the cost.
- Home Equity Loan – If you own another property, you can take out a home equity loan against the value of that property to finance the flip. This option is similar to taking out a mortgage but can often have lower interest rates.
- Hard Money Loan – A hard money loan is a type of short-term loan that’s typically used for investment properties. The loans are usually for a shorter term (12 months or less) and have higher interest rates than traditional loans.
You’ll need to research and compare the different financing options to see which one is right for you. Be sure to consider the terms of the loan, the interest rate, and the fees involved before making a decision.
What is the 70% Rule in House Flipping?
The 70% rule is a guideline that investors use to determine the maximum price they should pay for a property. The rule says that you should pay no more than 70% of the after-repair value (ARV) of the property minus the cost of repairs.
For example, let’s say you find a fixer-upper that you think will be worth $200,000 once it’s renovated. The repairs are going to cost $30,000.
70% of $200,000 is $140,000. So, according to the 70% rule, you should pay no more than $140,000 for the property.
This leaves you with a buffer in case the repairs end up costing more than you expect or the property doesn’t appreciate as much as you thought it would.
The 70% rule is a good starting point, but you should also do your own research to get a better idea of what the property is actually worth.
How Do You Find Properties to Flip?
Working with an agent to find investment properties is a good place to start. They can help you find homes that meet your criteria and are in your price range.
You can also look for properties yourself. Start by searching online listings and driving around neighborhoods that you’re interested in.
If you see a “For Sale by Owner” sign, you can contact the owner directly to inquire about the property.
You can also look for properties that are in foreclosure. These properties are usually sold at a discount, which can make them a good option for flipping.
Just be sure to do your homework before buying a foreclosure. You want to be sure that the property is worth the price you’re paying and that you’ll be able to make a profit after renovations.
What Should You Renovate?
The answer to this question will depend on a few factors, including your budget and the condition of the property. Some people like to renovate the entire property, while others focus on specific areas.
Some of the most popular renovations include:
- Kitchens – Updating the kitchen is a common renovation that can add value to a property. You can replace old appliances, install new countertops, and paint the cabinets.
- Bathrooms – Similar to the kitchen, people often focus on updating the bathrooms when renovating a home. This can include anything from replacing the fixtures to retiling the floors.
- Flooring – Replacing old or damaged flooring is another popular renovation. This is usually one of the cheaper renovations to make but can still have a big impact.
- Paint – A fresh coat of paint can go a long way in making a property look new again. It’s an inexpensive way to update the property and make it more appealing to potential buyers.
You’ll need to decide which renovations are necessary and which ones you can live without. Be sure to stick to your budget and don’t overspend on unnecessary renovations.
How Do You Sell the Property?
Once the renovations are complete, it’s time to sell the property. The most common way to do this is by hiring a real estate agent. They will list the property and help you find a buyer.
You can also sell the property yourself. This option will save you money on commissions but will require more work on your part.
If you decide to sell the property yourself, you’ll need to list the property, show it to potential buyers, and negotiate the sale. You’ll also need to be prepared to answer any questions that potential buyers have about the property.
When selling the property, you’ll need to set a price. You’ll want to find a balance between getting the most money possible and pricing it too high, which could turn buyers away. If you’re not sure what price to set, you can look at comparable properties in the area to get an idea of what similar homes are selling for.
You should also factor in the cost of renovations when setting the price. For example, if you spent $20,000 on renovations, you’ll want to make sure that you sell the property for more than that in order to make a profit.
Be sure to research the comparable properties in the area so that you can price your property accordingly.
Once you’ve found a buyer and negotiated a price, it’s time to close the deal. This is when the property is officially transferred to the new owner.
You’ll need to sign a sales contract and transfer the deed to the new owner. The closing process can be handled by an attorney or a real estate agent.
After the property is sold, you’ll have to pay any taxes that are due and any outstanding mortgage payments. Once that’s all taken care of, you’ll have your profits from the sale.
What are the Most Common Mistakes Made in Flipping Houses?
While flipping houses can be a great way to make money, there are some mistakes that people often make. These mistakes can cost you time and money and can even lead to financial ruin.
Some of the most common mistakes made in flipping houses include:
Not Doing Your Homework – One of the most important things you need to do when flipping a house is to do your homework. This includes research on the property, the neighborhood, comparable properties, and more.
Not Having a Plan – Another mistake that people often make is not having a plan. This includes not having a budget or timeline for the project. Without a plan, it’s easy to overspend or get behind schedule, which can lead to problems.
Not Knowing Your Limits – It’s important to know your limits when flipping a house. This includes your financial limits as well as your experience level. If you bite off more than you can chew, it can lead to disaster.
Hiring the Wrong Contractors – When flipping a house, you’ll need to hire contractors for the work that needs to be done. It’s important to take your time in finding reputable and reliable contractors. If you hire the wrong contractor, it can lead to subpar work or even legal problems.
Not Negotiating with Contractors -Another mistake that people often make is not negotiating with contractors. This can lead to overpaying for the work that needs to be done.
Not Having Contingencies in Place – It’s important to have contingencies in place when flipping a house. This includes having money set aside for unexpected repairs or delays. Without contingencies in place, one small problem can lead to
Not Being Realistic – It’s important to be realistic when flipping a house. This means being realistic about the property, the repairs that need to be made, the market, and more. If you’re not realistic, it can lead to financial problems down the road.
These are just some of the most common mistakes made in flipping houses. If you’re thinking about flipping a house, be sure to do your homework to help you avoid these pitfalls.
FastExpert Can Help You Find the Perfect Agent for House Flippers
If you’re thinking about flipping a house, be sure to contact FastExpert. We can connect you with the top real estate agents in your area who have experience with flipping houses. Our service is free and there’s no obligation to use any of the agents you’ll find on FastExpert.
Take your time and research the agent’s bio, reviews, experience, and more to find the perfect agent for you. Once you’ve found an agent you like, simply contact them to get started.