Follow this step-by-step guide and be prepared to start flipping houses with confidence.
Real estate investment is personally fulfilling and professionally lucrative. But it’s also extremely difficult if you don’t know what you’re doing. The following tips serve as a primer for any aspiring property investor looking to start flipping houses.
1. Do your homework
Research the real estate market where you’ll be investing. Buying the right house in the right neighborhood at the right price is key to making money on a flip.
- Pick the right neighborhood. In a flip, location is key. The city and state where you flip may offer different returns and the individual neighborhoods will too. Most people focus flips in up-and-coming neighborhoods to capitalize on rising home values and buyer interest. Be aware of the school district, which can affect a home’s value. Consider access, too. Some areas are prized for walkability, others for nearness to public transportation, still others for having easy access to highways. Figure out where your potential flip fits into the neighborhood and how that will affect the final sale price.
- Understand your future buyer. Will a two-story appeal in a neighborhood full of seniors? How about a family-sized home in an area with poorly rated schools? Since your aim is to appeal to as many buyers as possible with your flip, it’s a good idea to buy a property that’s got a lot to offer to a wide swath of interested buyers, but especially to your target buyer.
- Know the comps. It’s important to understand what other houses in the neighborhood are selling for and why. If comparable homes in the area are selling for $250,000, you may have a hard time selling a flipped house for over $300,000. Many experts recommend you aim for homes that will sell in the bottom to mid-point of the market. When assessing how much you can sell it after the flip, make sure you’re comparing apples to apples. A 2,000-square-foot home with only one bathroom may not be as appealing (or sell for as much) as one with 2.5 baths, even if it’s in better shape. While homes that are otherwise similar may sell differently due to placement on a busy street.
- Look out for red flags. Ugly paint or sad landscaping aren’t the no-gos when flipping. Instead, think twice about a home that needs a new roof or new electrical wiring, which can be costly. If your flip needs extensive work, make sure your budget allows for both the time that work will take and the price tag. Also beware of homes with less ideal placement, like backing up to a garbage-strewn lot, as they can be hard to sell and are often priced less than other comparables.
2. Get realistic about financing
While it’s possible to finance a flip without any money down, it’s not always recommended, especially if you’re new to flipping. That’s because the more money you borrow for a flip, the more you’ll be in trouble if something goes sideways.
- Look under your own financial hood. Take an unbiased look at your financial landscape and your appetite for risk. How much money do you have in reserve? How much can you afford to lose? Is there equity in a home you already own? Do you have a good credit score or a solid relationship with a lender?
- Seek preapproval for financing. Reach out to potential lenders before you find your first house to flip. That way you know exactly what financing you have access to and if the terms of that financing will work with your plan for renovating and selling.
- Know the types of financing available. You can get a traditional bank loan for a flip or use a home equity line of credit to finance one, but those aren’t the only options. A hard money loan is popular with flippers because it allows you to borrow against the after repair value (ARV) of the home—but with terms that are usually short (often 12 months) and with high interest rates. Private financing is an option if you have personal connections who want to help you finance your flip.
3. Run your flip like a business (because it is)
Buying a home to flip isn’t like buying a home to live in where you might put in an offer because you fall in love. With flipping, it’s all about the numbers.
- Start with the 70% rule. Following this rule, you should not pay more than 70% of the After Repair Value (ARV) of a property, or what the house can be sold for after completing all work and renovations. Think of this number as a starting point.
- Run the exact numbers. Your financial model is only as good as the numbers you put into it. Beyond your down payment, be sure to account for closing costs, carrying costs, cost of repairs, and any costs related to staging and reselling the property.
- Be careful with renovations. Just because you put $60,000 worth of renovations into a home doesn’t mean you’ll recoup that $60,000 come sale time. Be smart and budget-conscious when renovating and upgrading. Remodeling Magazine has a comprehensive database of renovation types that’s broken down by geographical area and by low-, mid-, or high-end renovation. For instance, a $3,695 garage door replacement retains 94.5% of its ROI while a $21,377 mid-range bathroom remodel retains just 64%. Keep in mind that first impressions and quick improvements often pay off handsomely, both inside and outside.
4. Assemble your support team
Unless you’re planning on doing all the work yourself, you’re going to want to have a strong, trusted team behind you. That’s everyone from your financing team to your contractor to plumber to landscaper. Don’t choose the first person you meet. Get recommendations, vet your team thoroughly (both by meeting them in person and by calling references), and check in often to make sure your team stays on track.
- Business advisor/mentor: It can help to have someone who’s “been there, done that” guide you in your first flip. Whether you mentor with an experienced flipper, or hire someone as a consultant, or even head down to your local Small Business Administration for help drawing up a business plan, don’t be afraid to ask those with experience for advice.
- Real estate agent. Using an agent with an intimate knowledge of all of the above—and flipping—can save you a lot of heartache. It’s helpful to have an expert on your side in the buying and selling process.
- General contractor: Most flippers use a general contractor to keep the project moving, especially if renovations move beyond cosmetic. In some cases, general contractors are a legal requirement. Be sure the one you choose is licensed and bonded. Of all the people on your team, this one is key. Delays in repairs or shoddy work can sink your flip.
- Subcontractors: In some cases you might choose to act as your own general contractor and subcontract out to plumbers, electricians, and such. This is more work on your part, but it may save you money.
- Lawyer: You may want to have a lawyer on hand to look over all the paperwork that comes with flipping, from real estate to lender paperwork to contractor agreements.