Flipping houses can be lucrative, and many people can make a fortune doing it, but there are also horror stories of those who have lost more than they bargained for. Like any business, flipping houses has risks and challenges, but you can succeed if you research, prepare, and learn how to flip a house with a good rate of return.
To succeed as a house flipper, you must first understand the process and potential pitfalls of undertaking such an endeavor. With the right knowledge, planning, and patience, you can minimize the risks and maximize your chances of making a profit when flipping a house.
This article is an excellent place to start if you are interested in flipping houses. It covers the core concepts of property flipping, including the steps involved and potential issues to consider.
How Flipping Houses Works
The basic concept of flipping properties is simple:
- Buy real estate at a low price.
- Renovate and improve the property to make it more appealing to buyers.
- Sell the property at a higher price.
These are usually fixer-upper properties – homes in poor condition that require work before you can sell them. So, you must have an eye for distressed properties with potential and be willing to invest the time, effort, and money to renovate them.
Given that the purpose of flipping a house is to make money, you must buy the property at a low enough price to make a profit after renovation. Also, consider time because the longer you hold onto the property, the more money you will spend on upkeep (utilities, taxes, insurance, etc.).
If you get it right (that is, you buy a house at the right price, at a good location, and renovate it quickly), you can profit from the house flipping business. Now here’s how you can get started.
How to Start House Flipping and Make Money
Research and Planning
The first step in flipping homes is to do your research and plan out the project. This phase includes finding the right home, estimating renovation costs, determining financing options, and creating a timeline for the project.
Finding a Home: There are many ways to find homes to flip – you can use real estate websites, join online communities, look through local classified ads, or work with a real estate agent. The key is to find a property that has good potential, is in a “hot” neighborhood, and is available at a price you can afford.
Estimating Renovation Costs: Before committing to the project, it is crucial to estimate how much the home renovation will cost. This information will help you determine whether or not it is feasible to flip the home and the budget you need for the project.
Determining Financing Options: The next step is determining how you will pay for the project. You can finance the purchase and renovation with a traditional mortgage or get a loan.
You can also use cash or get a real estate investor or money lender to finance the project. However, you are better off using cash to avoid paying high-interest rates on loans or mortgage insurance that will affect your bottom line.
Creating a Timeline: Finally, you need to create a project timeline, so you don’t end up overcommitting and underachieving. It means working backward from the anticipated sale date, estimating how long it will take to renovate the home, and factoring in any setbacks you may encounter.
Once you have a clear timeline, you can work to manage your time and resources more effectively. This will help you complete the project on time and ensure you don’t lose money due to delays or other issues.
Make a Budget With the 70% Rule
Budgeting is crucial to successfully flipping a house. One helpful rule of thumb is to set your maximum budget at 70% of the property’s after-renovation or after-repair value (ARV). This rule helps ensure the project’s profitability, despite unexpected costs and delays.
The 70% rule means you should spend at most 70% of the after-repair value of a home minus the renovation cost. For example, if you estimate a property’s ARV at $200,000 and the cost to renovate it is $20,000, your maximum budget should be $120,000.
70% of $200,000 = $140,000
$140,000 – $20,000 (repair costs) = $120,000
After renovating and selling the property at the after-repair value, you should make a good profit of $60,000. That’s a solid return on your investment, but unfortunately, the amount you keep depends on how long it takes to sell the home and the tax implication.
If your flipping project exceeds a 12-month timeframe, you may need to pay capital gains taxes. However, if you hold onto the property for a short period (for example, a few months), you are not required to pay these taxes. Other associated bills and loan repayments may also affect your profit.
Save Cost With Sweat Equity
If your budget is too small to cover all the renovation costs or to purchase a home, sweat equity can be a valuable way to save some money.
Sweat equity is the concept of using one’s own labor and skills to contribute to a project. Those looking to build or flip a house on a budget often use it since they have the knowledge and skills to make some renovations without paying contractors.
Can you paint, fix plumbing, roof a house, or install flooring? If so, use your skills to save money on the project. You can also work with a contractor or specialist on aspects of the renovation and then take on some of the remaining tasks yourself.
Caution: Only do a job requiring specialized skills and equipment if qualified. You are better off hiring a professional for tasks beyond your abilities. Not only will this decision help you avoid costly mistakes, but it will also save you the time you can devote to other aspects of your project.
Sell the House
With all repairs and renovation complete, it’s time to sell the house. The selling price will determine whether or not you have a successful flip, so do everything possible to ensure that your home is appealing to potential buyers.
Some factors that may affect how fast your house sells include the property’s condition, the neighborhood, and the listed price. To increase your chances of selling the house quickly, price it competitively. For example, you are less likely to sell a house for $250,000 when most houses in the area sell for $150,000 or less. And that’s why the initial step of researching other properties in the area is essential.
It will also help if you advertise your home in multiple ways, including FSBO listings, yard signs, social media, Craigslist, traditional advertising, auctions, virtual tours, advertising campaigns, and hiring a real estate agent.
Real estate agents are often the best option because they can use their resources to find the right buyer, negotiate a fair price, and complete the deal. The only problem with this option is the hefty realtor commissions. If that’s okay for you, go for it. I recommend interviewing at least three realtors and try to negotiate down the commissions. Most real estate brokers will ask for 6% fees, but you should be able to find a broker willing to go down to at least 5%, in my experience.
In summary, put in the extra effort to make a sale quickly by:
- Cleaning and decluttering the home so that it looks fresh and put-together.
- Sprucing up the landscaping and outdoor spaces to make the property look more inviting.
- Establishing an asking price that is reasonable but allows for a profit.
- Marketing your home to potential buyers using various channels and strategies.
Remember that flipping a house is not always straightforward, so be prepared for any challenges or setbacks that may arise along the way.
Issues That May Arise When Flipping a House
There are several potential issues that you may encounter when flipping a house. Some of the most common include:
1. Budgeting and Cost Overruns
Flipping a house requires careful planning and budgeting to ensure you have enough money to cover costs and make a profit. Unforeseen expenses or a misjudgment of costs can result in overruns that can quickly eat away at your profits. Create a detailed budget and stick to it as much as possible.
2. Permits and Zoning
Ensure you have the necessary permits and zoning for your project. You may need to work with local authorities and building departments to obtain the necessary approvals, or you may find yourself on the wrong side of the law.
3. Property Conditions and Hidden Damages
One of the biggest risks in flipping a house is damage caused by termites, mold, or other hidden problems that can affect the value of your home. Before you invest in any renovations, thoroughly inspect the property for any signs of damage or other issues that may increase your costs.
4. Time Delays
Unexpected delays can occur when you are renovating or remodeling an existing property. Complex repairs, poor weather, and late order deliveries can set back your timeline and delay the completion of your project. Think about all the issues that could delay your project and plan accordingly.
5. Finding Buyers
Although the housing market is generally stable, finding buyers in the current market can take time and effort. You’ll need to ensure you have strategies to market your home to potential buyers effectively.
By being aware of these potential obstacles, you can better prepare for and navigate through them to successfully flip a house.
Final Thoughts on Flipping Houses
Data from ATTOM, a top curator of real estate data, shows a sharp increase in the number of flipped houses in Q2 2022, which is 10% of all home sales. The industry is growing, and you can be a successful flipper and make a lot of money. Use this guide to navigate this rewarding but challenging market, and increase your chances of success.
Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.
Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.