Have you been watching too much HGTV lately? A side effect of this might be a strong desire to learn how to flip a house. Or maybe you’ve been searching for a way to break into real estate for awhile now, and flipping homes seems like the right investment strategy for you.
If you’re serious about learning how to flip a house, it’s essential to do your research. The more you understand the real estate market, and the multiple variables that go into flipping a home, the more likely you are to be successful in your first flip. This article focuses on what’s needed to learn to flip a house, and some mistakes to avoid in the process.
How flipping a house works
Flipping houses is a form of real estate investing, often referred to as wholesale real estate investing. This strategy consists of an investor purchasing a property with the intention of selling it for a profit. Properties that are purchased with the intent to flip are typically in poor to very poor condition. The buyer takes on the responsibility of repairs and renovations, ultimately selling the property.
At the end of the day, the overall goal is to make a profit. However, flipping a house can be a big project, and it’s essential to do your research before making a decision, and be sure you spend your money wisely when you’ve found the right property.
You may have heard of micro flipping, as this term is growing in popularity. Microflipping differs from traditional flipping, or wholesale real estate investing in its speed and lower demand for physical labor.
Buyers wondering how to flip a house with minimal renovation work should consider micro flipping. To microflip a property, a buyer analyzes data to identify opportunities to buy a house that is under market value. The ideal house needs little renovation, thus you can sell the house quickly, for a profit.
It’s important to realize that one of the most important factors in micro flipping is time. Ultimately, your success is driven by a higher volume of transactions.
How to Flip a House: Where to start?
When considering how to flip a house, there are a few differences to understand compared to a normal home buying transaction. It’s essential to understand real estate, the market and how to find a deal. An understanding of the timeline of slipping a house is also key.
Do your research
When searching for a house to flip, look for properties that fit your budget. An experienced real estate agent can make your search much easier and provide guidance along the way. Foreclosures, short sales and auctions offer budget friendly options in most cases. Identify homes that are right for you based on your skills to perform the necessary renovations, and stay within your budget.
House Flipping and Finances
Before you even begin to think about making offers, you need to set a budget. Many wonder how to flip a house without going into debt initially. If it’s possible to purchase a flip property in cash, you’ll avoid accruing debt and having to pay interest. However, this isn’t feasible for everyone and there are other options available.
- Crowdfunding: Sites like fundthatflip.com provide ways to fund your investment properties with other investors
- Home equity line of credit: A type of loan that uses the equity in your home as collateral
- Cash-out refinance: This allows you to take the equity out of your primary residence and refinance what you still owe.
- Hard Money Loan: A short-term loan issued by a private lender. This type of loan ranges from 6-12 months and often has high interest rates.
- Consider pooling your money with other investors
Remember, you’re not just purchasing the house with this budget, you’re paying for updates and renovation costs as well.
Set a Budget
As you consider how to flip a house, remember the cost of flipping varies by location and from house to house. To a novice house flipper, a relatively low priced home in a popular neighborhood may sound like a bargain. But if it needs major renovations, your profit margin decreases and suddenly your purchase price isn’t such a steal.
Real estate investors experienced in flipping houses typically use the 70% rule. This determines whether or not a property is a good investment.
Estimate the ARV: ARV, or after repair value, shows the investor what they can sell the house for after making repairs and renovations.
Consider repair costs: Think of this as an additional, in depth home inspection. Does the house need new appliances? Will landscaping be needed to add curb appeal? Carefully consider the necessary repairs. Then make a detailed estimate of the total cost.
Calculate: Look at the ARV you determined, then take 70% of that number and subtract your repair costs. For example: If the property’s ARV is $250,000, multiply this by .7 and you get $175,000. Then, take $175,000 and subtract the total repair cost estimate. In this example, let’s say the total repair cost estimate is $40,000.
Now, calculate the maximum amount you should pay for a property. If 70% of the ARV or $175,000 and you need $40,000 to complete all repairs, then you shouldn’t pay over $135,000 when you buy a home.
Create a Timeline
Budgeting time is just as important as setting your financial budget. Not all repairs were created equal, some take much more time and effort than others.
Creating a team of trusted contractors can make flipping a house much less stressful. While you can absolutely choose to do all the repairs yourself, typically this is not the most cost effective, or efficient way to spend your time and money. When hiring contractors, be sure to check their licenses, and ask for references. It’s important to ensure their rates fit your budget and they’re able to work with your timeline.
Once you’ve determined how you’re going to pay for the house, and know what your repairs budget is in relation to your bottom line, make an offer on a property. A real estate agent can help you stay within your budget, and identify other properties if one offer falls through.
After you’ve completed the repairs and renovations to the property, you’re ready to list it for sale. Some investors choose to market to home and oversee all showings themselves, but this is time consuming and tedious for many. Instead, try working with a real estate agent who’s an expert on the neighborhood your flip is in. Your agent will market your home to the right buyers and broaden your overall reach. An agent is especially valuable when wondering how to price your flip to ensure you don’t price the house too high or too low.
How to Flip a House: Mistakes to Avoid
As you consider how to flip a house, remember, it’s not as easy as it looks on tv. In order to become profitable, avoid these common mistakes.
Double and triple check your budget. Whatever you think you budget is, life happens and plans change. Be sure to give yourself breathing room to accommodate repairs coming in over budget. Consider repairs that can be scaled based on your leftover budget after major renovations.
Don’t get cocky. If you bought your primary residence you may think the transition to real estate investing will be seamless. Don’t let flashy tv shows win you over without thinking through the details. Ask yourself if you understand every step of how to flip a house, and what you need to protect yourself and your investment.