Flipping homes is the practice of repairing a shabby, poorly maintained house or even a foreclosure home or house up for auction, bringing it back up to a charming livable quality and selling at a profit. HGTV shows and other shows the Fixer Upper with Chip and Joanna Gaines have made this a more popular investment strategy for first-time home buyers trying to find something in an area they want to live. There are thousands of home flippers in the country who serve a vital purpose in maintaining the housing inventory by restoring older homes for new families.
The US has over 140 million homes, and over 1/4 have fallen into significant disrepair. These homes are in need of new flooring, new siding, a replaced roof, upgraded fixtures; the list goes on. Fixer-uppers, when sold at all, are sold at a steep discount because they are no longer appealing and – in many cases, are not even livable. Many of these homes were built between 1960 and 1990, now older and in need of repair. But with the right home flipping project, they could be back on the market and providing a significant profit for a home flipper with an eye for “good bones”.
This article will serve as a house flipping for beginners’ guide to finding promising properties and planning profitable flips.
The Fundamentals of House Flipping
If you are considering diving into the world of house flipping, the first thing you need is a comprehensive plan. Every house flip is calculated in terms of investment and potential profit. Can you spend less on renovating the home than you will make on reselling it? That depends on the home’s condition, your vision and resources for remodeling, and the market you will be reselling your refurbished home into.
When the numbers are right, home flipping can be extremely profitable. But first, you’ll want to explore the essentials. Let’s go step-by-step through the process of assessing and enacting a successful home flip.
1. Understanding House Flipping
Home flipping involves repairing a shabby house that has fallen into disrepair and reselling it as a safe, modernized residence. There are millions of homes in the US that could make a potentially profitable flip, provided you had the skills and resources to update the home. The key is to find properties that offer the perfect balance between the cost to renovate and potential resale value. You can also flip for a personal rental property if the rent value will be high enough to ROI your efforts.
Flips can be ‘ugly duckling’ homes that just need a new look or complete property rescues. Here’s a tip from experienced flippers: it’s wise to start with ‘ugly duckling’ homes if you’re a beginner as they often require less extensive and costly repairs. Over time, as you grow comfortable with the process, you can take on more challenging projects.
2. Identifying Potential Properties for Flipping
How do you know which property to flip? You have to know what to look for. There are three essential elements in choosing a real estate investment property to flip: Location, property condition, and market trends.
Location
A shabby property in a high-demand location is always a good sign. A home’s resale value is strongly influenced by the value of other homes in the same neighborhood. High-value neighbors means that once the house is restored to modernized charm, it will sell for a higher average price.
In terms of location, it’s also important to consider accessibility. Is it close to your home-base? Is the property easy to reach for work trucks and property repairs? If so, these are also marks in favor of flip potential.
Property Condition
Property condition is vital. Many of the most profitable flips are ‘ugly duckling’ flips in which the house is in good condition, but lacks visual appeal. These may be houses with poorly designed exteriors, surface-level damage and decay, or older homes that need to be modernized.
However, shells with good bones in extremely profitable neighborhoods can be just as rewarding to fully rebuild. Always calculate the cost of renovation to the potential resale value when looking at property condition. You also need to consider your own DIY flip abilities vs the cost of hiring professionals to take care of the process.
Market Trends
Market trends influence how much you will get back when you flip the renovated house back onto the market. If home prices are rising in the area, the property value may inherently increase while you are working on the flip, which is good news. Avoid flips in areas where property values are dropping just in case the value of your work drops at the same time.
Here’s a trick from successful house flippers: often, a simple drive around a neighborhood can help you identify potential properties for flipping. Look for homes that appear neglected or vacant, as these may be prime candidates for a flip.
3. Financing Your House Flipping Project
Financing your flip is an important part of the process. Most people do not buy a flip outright, pay for the renovations out of pocket, and then make the money back. Instead, they use financing options that balance risk and optimize spend. You will want to consider financing both for the cost of buying the house and the predicted cost of your renovations.
You can finance a home flip by getting a mortgage or another type of loan to cover your costs, then paying it back with profits left over when the flip is done. Each has its pros and cons and varies in interest rates.
Conventional Mortgages
Conventional mortgages take a month or more to approve and also have stringent quality requirements. A mortgage can be used for shabby-but-functional houses, but not for gutted houses or houses in serious disrepair. Be sure to choose a mortgage that works with the short-flipping schedule.
Hard Money Loans
Hard money loans are less exacting in the home’s quality but will still allow you to use the property itself as collateral to back the loan. Hard money loans are common when flipping houses below the quality standards of a mortgage.
Private Lenders
Private real estate investors will sometimes back a home flipper by sponsoring the cost to buy and renovate each home. You are more likely to win private investors as you build a track record of successful flips, though they are also more likely to want a slice of the profits.
Home Renovation Loans
There are also a variety of loans specific to home renovations that you can seek to cover the costs of the flipping process, so take time to do your research. Seasoned house flippers have learned that when it comes to financing, it’s crucial not to overextend yourself. Always ensure that you have a cushion in your budget for unexpected expenses – because in house flipping, they almost always arise.
The 70 percent rule is a guideline that aids in determining the maximum price you should pay for a house you intend to flip. In essence, it stipulates that your investment in a house in need of repairs should not go beyond 70 percent of its anticipated After-Repair Value (ARV) – the expected market value of the house once renovations are complete – after deducting the estimated cost of those repairs.
(ARV x 0.7) – total cost of repairs = maximum purchase price
4. Renovating for Profit
The next step is planning a profitable renovation. In fact, your budget and plan should be in place before you even secure financing on a house. Renovating for profit means planning for updates to the home that cost less than the resale value when you are complete. This requires sticking closely to your budget and managing your contractors with close oversight.
Plan Necessary Renovations
- Start with property inspections that will let you assess the full condition of the house. Build a list of renovations that will be necessary to get the home market-worthy again along with updates to the look and feel of the house that will boost its resale value. Turn this into a comprehensive renovation plan.
Determine Resale Value
- Use the neighborhood and home’s potential to determine how much you can likely resell the home for when you’re done. Your total budget including renovation and loan costs will need to come in below this number.
Set Your Budget
- Next, price each renovation you plan to complete and set your budget. Determine how much you can afford to spend and how much each renovation step will cost.
Hire Contractors vs DIY
- Many home flippers can save some money with DIY work, but you will likely also need the help of licensed plumbers, electricians, and appliance installation pros. Carefully research and hire your contractors and build a coordinated schedule to complete the work.
Oversee Project Completion
- Manage your project to make sure that your work and that of your contractors come in on time and on budget.
One pro tip in this step is to focus your renovations on high-return areas of the home. Kitchens and bathrooms typically offer the best return on investment.
Also, it’s a common trick among flippers to consult with a realtor, interior designer, or home inspector. They can provide insight into current trends, curb appeal, and buyer preferences, and do a home inspection, ensuring your renovations align with what buyers in the market are seeking and are up to code.
5. Selling Your Flipped House
When the renovations are complete, you’re ready to resell, also known as “the flip”. Selling a flipped house on the housing market is an adventure of its own. First, connect with a skilled local real estate agent. Together you will set the price for the house based on location and market trends. Then you will build listings to market the house and draw in interested buyers.
Here’s a tip when you’re at the selling stage: consider professionally staging the home to make it more appealing. A well-staged home can often sell faster and for more money. And remember, the first impression counts a lot, so invest in professional photography for your online listings.
When a buyer is hooked, they will make a bid and you can decide if it’s high enough. Your real estate agent will help you negotiate the contract and finally close the sale. Don’t forget to budget for home staging, photography, and closing costs.
6. Risks and Challenges in House Flipping
There are, of course, several known challenges in house flipping. It’s a tough job that is best done by talented, determined people who can quickly estimate the cost of renovations and the potential value of a renovated home.
- Choosing the right property: Look for homes with surface-level problems in high-value neighborhood selling at a discount.
- Predicting your costs: Bring a contractor with you to help estimate the costs of potential renovations when touring properties
- Securing a favorable loan: Work with local lenders and credit unions who are interested in seeing the neighborhood uplifted by flip renovations
- Not going over budget: Carefully manage your renovation projects and work with trustworthy, transparent contractors
- Marketing your flip to sell at the highest price: Take time to stage the house and work with an experienced, invested real estate agent.
Experienced flippers know that house flipping isn’t a get-rich-quick scheme. It takes time, patience, and a lot of hard work. But by carefully considering your property choice, meticulously planning your renovations, and making smart financial decisions, you can mitigate the risks and increase your chances of a successful flip.
Conclusion
House flipping can be a rewarding venture, offering the potential for significant profits when approached with careful planning, financial savvy, and a keen eye for properties with potential. Remember to focus on ‘ugly duckling’ properties in high-demand locations, always keep a strict budget with room for unexpected costs, and prioritize high-return renovations like kitchens and bathrooms. Finally, keep in mind that patience, hard work, and the willingness to learn from both successes and failures are the foundation of a successful house-flipping business. With these tips and strategies, you’ll be well on your way to a successful career in house flipping.
