Everything You Need to Know About Flipping Houses
Flipping houses can be an exciting and profitable venture, especially if you want to get into real estate investing and have the know-how to take on significant renovations. However, it’s not for the faint of heart. You’ll need to finance your flip, budget for renovations and stick to a project plan. We’ll help you navigate the essential steps of the house flipping process, from finding the right house to turning a profit when the renovation is complete.
What Is House Flipping and How Does It Work?
House flipping is a real estate venture that entails a complete or partial home renovation in a short period of time. If you plan to flip a house, this isn’t a home you will live in. You’re looking for a fixer-upper to overhaul into a market-ready home that you will sell for profit. Successful house flippers buy low, stick to a renovation budget and sell for a higher price. Many want to find a house with just enough wear and tear to scare the average buyer away. At the same time, it’s crucial to avoid properties that require too much work or come with costly hidden issues.
Flipping a House: Step-by-Step
Flipping a house requires financial planning, real estate expertise, and in many cases, construction know-how and sweat equity. We’ve broken the house-flipping process down into these seven key steps:
1. Determine Your Financing
In an ideal scenario, you could purchase and renovate your flip with cash. However, that might be a tall order if you’re just starting. If you’ve built up equity in your current home, you might be able to finance the project, or make a down payment, by tapping into a home equity line of credit (HELOC). You may also be able to secure financing through a hard money loan (a short-term, asset-backed loan) or a private lender. These loans typically come with higher interest rates; you’ll want to crunch the numbers to understand your payments and how much money you’ll need to put down.
2. Research Your Real Estate Market
To turn a profit flipping houses, you’ll need to understand the real estate market in your area and its various neighborhoods. More specifically, you’ll want to buy in places where people want to live, ideally where the inventory of move-in-ready homes is low. Start by researching typical list prices for comparable homes in the area. Since you’ve established a budget, you’ll want to ensure you can list the renovated home at a competitive price while maintaining a good profit margin.
3. Assemble an All-Star Team
It’s unlikely that you’ll be able to handle all the work involved in a house flip alone. A great real estate agent can help you find potential homes to flip, and assist with listing the house after your renovations are complete. In most cases, you’ll also work with a general contractor to handle the rehab, a lender for financing, and a home inspector to help identify any unknown issues before purchase.
4. Find the Right House
As with everything in real estate, location matters. A home in a desirable area is more likely to sell quickly, and you don’t want the house to sit on the market for weeks and months after you list it. In addition to searching homes for sale, some flippers also target houses that are off the market by reaching out to the current homeowner. Ensuring that community regulations won’t interfere with your construction plans is wise. As you view potential homes, check if they are subject to specific zoning rules or an HOA with particular guidelines.
5. Estimate Your Renovation Costs
With house flipping, you want to ensure that you’re establishing a profitable investment strategy. Generally, your total expenses should equal roughly 70% of the list price when all work is completed. This includes the purchase price of the house, as well as costs related to all improvements and repairs. When you view potential homes, bring your general contractor along so that he can assess the investment property and estimate renovation costs. Your real estate agent is a resource here as well. You can ask them to pull comparable sales in the area so that you know what your home will be worth after all the work is complete.
6. Renovate the Property
You’ve found a house you can renovate for a profit, and now the heavy lifting begins. Work with your general contractor to assemble a detailed list of all the work that needs to be done. You’ll want to estimate the cost and timeline for each item on the list to fully understand the scope of the renovation. Be sure to budget time for local regulations as well. You’ll want to build extra time into your project schedule if the scope of work will require a building permit, inspections or approvals.
7. Sell the House for a Profit
After the renovation is complete, it’s time to get your home listed and on the market. A real estate agent can help you set the right price and add the home to the multiple listing service (MLS). They can also provide guidance on staging the house and having photos taken so that it looks as good as possible to potential buyers.
How Long Does It Take to Flip a House?
It’s best to turn your chosen property over as quickly as possible. While some projects may need minor repairs and a fresh coat of paint, Visio Lending, a mortgage lender based in Austin, Texas, indicates that a new house flipper can expect a 12 to 18-month total timeline. At the same time, someone with a few flips under their belt may be able to navigate flipping a house in as little as six to 12 months.
Each stage of your flip will require time and attention. There are a handful of variables that can impact your total timeline. You’ll want to factor in the time necessary to obtain construction permits for your renovation (if needed) and the cost and availability of the building materials to get the job done. When your renovation is complete, there’s also the time, effort and money that goes toward selling the home.
Do You Need a Real Estate License to Flip Houses?
The short answer is no, but having one could help in the long run. Though obtaining a real estate license isn’t a requirement, it opens doors that make your house-flipping journey more efficient and cost effective. Being your own agent means you could keep any commissions that would otherwise be paid to your agent when you buy or sell. As a licensed agent, you can also gain access to the MLS database of active listings.
That said, negotiating a home purchase (or sale) takes time and effort. What’s more, if you’re focused on home renovations, you may not have the time to market your freshly updated home and field calls and emails from prospective buyers. In these instances, an established real estate agent with the resources to help you locate (or list) your house will allow you to focus on the renovation process.
What You Need to Find and Flip Houses?
Money: There are many ways to finance your flip, from home equity and personal loans to cash payments. It’s essential to be mindful of your bankroll throughout the process to mitigate potential overspending and maximize your return potential.
Time: It can be easy to underestimate how long house flipping takes. From start to finish, the average timeline extends at least 6 months. And it’s not a process you want to rush through. The average flipper should aim to turn over somewhere between two and seven homes per year, according to Flippingprosperity.com.
Skill: When you buy a property, use your handiness to your advantage but don’t overestimate your abilities. Seek counsel from reliable and experienced contractors and inspectors to ensure all renovations are safe and up to code.
Patience: The thrill of house flipping comes with unpredictability. Variables like finding the right property and renovating can be time-consuming and don’t always go as planned. A little patience can go a long way.
How Financing Works When You Flip Houses
Experienced flippers often follow the 70% rule, paying no more than 70% of a property’s after-repair value (ARV) minus the cost of home repairs. This includes all renovation costs and the purchase price of the home. So, if a property’s ARV is $400,000 and it needs $30,000 worth of repairs, the most a house flipper would offer is $250,000. The formula helps flippers avoid overspending at purchase and ensures a greater chance of profitability when they put the house back on the market.
Do I Need to Pay Cash to Flip a House?
You don’t necessarily need to pay all cash to flip a house, but your financing options are not nearly as flexible as they would be if you were buying a primary residence. Lenders associate flipping a home with greater risk, so it’s likely that you will need a significant down payment and be subject to higher interest rates.
Can You Flip a House with No Money?
In most cases it will be challenging to flip a house with no money. However, you can find alternative ways to finance your flip if you have a solid professional network and good credit.
3 Options to Finance a House Flip
1. Hard Money Loans
A hard money loan is an asset-backed, short-term loan from a private company. Hard money loans are often used for quick real estate transactions, such as a house flip. However, the interest rates are usually higher than average. These loans focus on the property’s value as collateral, with loan terms typically lasting one to two years.
2. Home Equity Line of Credit (HELOC)
If you’ve built significant equity in your primary residence, you may be able to tap into a HELOC to finance your flip or make a down payment. Remember that you can typically only finance up to 80% of your home’s value with a HELOC, including the balance of your mortgage.
3. Private Money Loans
A private money lender is an individual who wants to be a real estate investor, and is willing to provide the funds necessary for your flip at an agreed upon interest rate. Securing funds through a private money lender may be your best option if you want to flip a house with no money. However, this approach requires a great deal of trust. If you can find the right individual to back your project, you can finance the purchase price of the flip and the entire cost of renovations.
House-Flipping Mistakes
Flipping homes can be a lucrative career if you play your cards right. But dipping your toes in real estate can also be fickle and expensive, so avoiding common blunders is wise.
Don’t take your cues from the TV shows. House flipping is challenging and time consuming, so don’t underestimate the workload or try to do it alone. It’s not worth it to forgo the home inspection when you buy. Your home inspector can often evaluate things like structural issues and water damage from outside the property. Most importantly, know what local homebuyers want, but avoid over-improving the property. Look for cost-effective fixes throughout the restoration process and don’t forget about curb appeal. A little landscaping in the front yard can go a long way.
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- Common House Flipping Mistakes to Avoid
- Overestimating the workload or your ability
- Forgoing a home inspection
- Misjudging the housing market conditions
- Over-improving the property
- Ignoring curb appeal
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