Want to start a business flipping houses and make a substantial profit each time?
Flipping houses has grown in popularity, as online resources and television shows have opened peoples' eyes to this wonderful opportunity. In many areas, more homes sales are flips than ever before.
You only need to watch one episode of those TV shows to see the appeal. In 30 minutes, someone goes through a process that looks easy and winds up with a big windfall. Makes it all seem simple, yes?
While it’s important to understand aspects such as negotiation tactics, you need to get the fundamental strategy down before you focus on tactics.
What Exactly Is House Flipping?
According to Investopedia, house flipping is when a property investor buys a home and then sells it for profit. For a home to be categorised as a flip, it needs to have been purchased purely with the intention of a quick resell. The time in between the initial purchase and the final sale can range anywhere from weeks up to a year or more. Several months is the norm.
House flipping happens in two primary ways:
1) The investor purchases a property that has good potential for increased value, given the right updates and repairs. Once the work is finished, the investor makes money by selling the home for a lot more than what they paid for it.
2) The investor purchases a property sitting in a market where home values are rising rapidly. These investors don't make any updates whatsoever. They just hold on to a property for several months and then resell for a higher price that gives them profit.
Is House Flipping A Good Investment Opportunity?
It might seem easy to flip a home, but there are a lot of technical details you need to know before you get started.
When done properly, flipping a house is a tremendous investment opportunity. In just a short while, you get to make some smart renovation choices before selling a home for a lot more than you paid for it.
However, when done wrong, a house flip can just as quickly go south. We've all heard of horror stories of house flips gone bad, homes that looked like a steal at first before someone found the leaks in the roof and the cracks in the foundation. In some cases, you might not make anything off of a house flip. Or worse, you might even lose tens of thousands.
If you do choose to flip a home, then losing money certainly isn't anything you want to happen. You need to be smart with your investment so you can reap the rewards.
How You Can Flip A Home In 5 Simple Steps
1) Finance The Flip Using Cash:
House flipping carries a lot of risk with it, so it's easy to understand why mixing debt into the situation only adds fuel to the fire. Here are some good reasons why you should only flip a home using cash:
- First, any flippers who assume debt to finance their purchase can wind up paying interest for the duration of the project. That just means that their break-even price for selling the home goes up every month.
- Secondly, if you use debt when financing a flip, you might start acting out of desperation. If you're not able to sell the home fast, then you might be tempted to lower the price. Cash-only flippers are better positioned to wait through a slow market, so they get more profit in the end.
Let's consider a real-world scenario where you buy a home to flip for $130,000. You then finance an extra $30,000 for renovations and upgrades, with the hopes of a final sale price of $200,000. That should be $40,000 in profit, right?
Everything looks like it's going well until a repair you didn't anticipate pops up, costing $2,000 more. Then the renovations go past your four-month schedule and instead cost you $3,000 more for taking half a year instead. When you do finally list the home, it winds up sitting on the market for over a month, before you have to drop the price down. After the whole process is closed out, you get a final payout of $185,000.
Here's how all this winds up breaking down:
Selling Price: $185,000
- Your Purchase Loan: $135,000
- The Renovation Financing: $33,000
- The Interest Paid Our Between Purchase And Sale: $4,240
- Repairs: $2,000
- Closing Costs: $15,000
Your final profit winds up being just $760.
Is that even worth it? Even if you technically profited, this is certainly a bad flip. Keep in mind, this is just an example of a flip gone wrong. With the right strategy, you’ll be putting the odds in your favour to turn a healthy profit.
Funding your house flipping business without cash
Most people won’t have a few hundred thousand dollars lying around to spend on a house deposit. But there are other options available. According to second mortgage providers Max Funding, second mortgages is a flexible option, noting that “you can receive funding from as little as $2,000 to as much as $1,000,000. With timelines in days instead of months, this is a great option for business owners”.
2) Know Your Market:
An unfortunate reality of this business is how many flippers fall for the excitement of their next project and just gloss over the less appealing aspects of this kind of work.
If you don't personally understand the market all that well, you might run some serious risks:
- You won't know if the home you are buying is a good deal or not. One good rule of thumb is to only buy investment homes for 80% of their market value, minus any potential repair costs.
- You can't pinpoint the potential value of a home. What you envision for a home has to align with the community around it as well as what home-buyers are willing to spend.
- You aren't sure how to price your home. If you buy a home in an area full of homes averaging $140K, then you should price the home you flip a bit lower at selling time.
So, how do you go about learning the marketing factors involved in successful flipping? The best idea is finding a real estate agent, not just one with years of experience, but experience in that particular area. Your agent should be able to help you focus your flip searching to good neighbourhoods based on your renovation budget, desired profits, and your price point.
You might think that you found a steal of a home online for just $145,000 with tonnes of potential. Just imagine what you can do with the kitchen! However, if the neighbourhood's nicest, biggest home sold only months ago for $160,000, then your renovations would likely out-price the whole surrounding community. Then you'd get stuck with a home you can't sell.
It pays off to partner up with the right real estate agent that knows the local market well. When you are ready to sell, that agent can again be useful in competitively pricing a home for the most profit. A great agent is a great investment.
3) Budget Your Whole Flip:
Don't wait to do a budget after you buy an investment home. You need to know what your price range is before you buy the home, and that includes everything from purchase price and repairs to renovations and sales price.
Be sure you identify the cosmetic projects necessary on top of expensive overhauls of electrical and plumbing systems. If you don't personally have a construction background, then you need a good contractor to let you know what needs fixed up and how much it's going to cost you. Surprise repairs are deal-breakers for many flips, so you have to do the legwork here.
Get a total home inspection, as well as any other specific inspections you think wise. You should always find things in advance instead of discovering them later.
4) Make Wise Renovation Investments:
You might dream of professional appliances in the kitchen, on-trend lighting, and hardwood flooring, but such choices can spiral your renovations out of control. This is why you need to know what your budget is in advance so you can keep your updates on course with things that actually do boost your home value.
This is especially true for the larger renovations, which tend to be kitchens and bathrooms. It's not uncommon to spend $50,000 on just a kitchen remodel, and doing this wrong can sink the whole flip. In fact, the average kitchen remodel gets back only two-thirds of what's spent on it, which isn't a good ROI for a flip.
If you intend to renovate a high-end home for around $250,000, then don't sink $75,000 into a kitchen island and custom cabinets. Smarter choices include simply swapping out for new appliances, putting in granite counters, and just refinishing the current cabinetry. You spend far less, and you're much more likely to get your money back.
Many flips might have some big updates, but don't neglect the potential of the smaller tweaks. Updated hardware, fresh landscaping, and a new coat of paint go a long way.
5) Let A Local Property Expert Guide You:
Is home flipping a money maker for you? It can be, if done right. Flipped home frequently hit $200,000 in sales prices, with raw profits of $60,000 or more. Just remember that gross profits don't include renovations and repair costs. However, if you can do a cash flip and stay within your renovation budget, then a good ROI is always possible.
The secrets to successful home flips include choosing the right finance option, buying the right kind of home, picking budget-friendly renovations, and selling fast. Partnering up with the right real estate agent makes all of this possible.
A high-calibre real estate agent has the expertise and skills to help you find a short-term flip or the home you intend to spend years in.
