In order to get started in house flipping, you must understand real estate. The TV shows make it look easy, but they are only showing a portion of the process. There are so many variables involved that must be managed. The more you prepare for your first flip, the more likely you are to profit. In this blog, we’ll explain more about how this process works.
What Does “Flipping” Mean?
“Flipping” is the process of purchasing a home, doing repairs/renovations, and quickly selling for a profit. For many, this has become a profitable industry and many more want to get started. If you have the knowledge, funding, and ability to do renovations, you are well on your way to becoming a house flipper.
Getting Started with Flipping Houses
Below, we’ll go over the five steps you must go through to become successful at house flipping:
Do Your Research
The first step is to know the market. You won’t be able to get a good deal if you don’t understand the current market conditions. First, research the market and find out where people are interested in living and any popular housing trends. Consider partnering with a realtor- they can help you understand the market, determine necessary repairs, and help you time the sale of the property. The truth is, many house flippers are also licensed real estate agents, which makes perfect sense.
You must also be familiar with the class ranking system used by real estate investors to rank neighborhoods:
- Class A: top of the market, highest prices
- Class B & C: middle- and working-class neighborhoods
- Class D: poorest areas, lowest prices
For your first flip, you should choose Class B & C neighborhoods. These properties are more affordable and will move faster than a home in a Class A neighborhood and won’t have the potential issues that come with homes in Class D neighborhoods.
Before you consider purchasing a property, you’ll need the money to flip the house. If possible, purchase the property with cash to avoid accruing debt and paying interest on the property before it sells.
If you don’t have the cash available, consider asking family and friends to go in with you on the flip. You may also obtain funding from crowdfunding sites that offer ways to get the flip funded by investors.
If this sounds like too much risk, there are other ways you can fund your flip. Most mortgage products can’t be used for house flipping. However, other options include:
- Cash-out refinance
- Home equity line of credit
- Hard money loan
In addition to purchasing the home, you need the funds to pay for the renovation. Be sure to budget for this because this can make or break your flip.
Make Smart Investments
Before you purchase a house to flip, you need to understand what you’re getting into. In addition to understanding the market, you need to know the renovations required and the costs associated with those renovations to make a smart investment.
Consider networking with other real estate investors to find out if they can recommend contractors and inspectors. If you are handy, you may be able to handle some of the renovations yourself.
Of course, you don’t just have to budget money for repairs, you’ll also need to budget time, especially if you’ve taken out a loan to purchase the property. Each day that the property doesn’t sell, you’re paying more taxes, insurance, and interest. Be aware that sometimes the timing doesn’t align perfectly, and delays can cost a lot.
Find & Purchase Property
Once you’ve done all of the above, it’s time to make an offer. Be sure to work out your numbers ahead of time so that you have some wiggle room. Once you find the right property, you need to move quickly. Put in an offer and down payment because you can’t start working until you close and you can’t close until the offer is accepted.
In some cases, closing happens quickly, but it may take several months- depending on the situation. Either way, you want to have contractors on standby, ready to get started as soon as the property is yours.
Sell & Make a Profit
The whole point of flipping houses is to make a profit. Once the renovations are done, it’s time to sell the property and get paid for your hard work. Make sure the property is priced competitively. Work with an agent that knows the market and can quickly sell the property. Selling is what makes all of this time and effort worth it.
What Does it Cost to Flip a House?
The cost varies from one property to another. If you find a home in a popular neighborhood with a lower price, you may be able to make a lot. Then again, if the house requires a lot of work, you may not make as much. Also, you may find a great price on a home that doesn’t require a lot of work but if the market isn’t great, you may be sitting on it for a while.
There are several things you must consider when flipping houses. Most flippers follow the 70% rule to determine if the house is a good investment. Here’s how to calculate the 70% rule:
- Estimate after repair value
- Estimate the cost of repairs
- Take 70% of the after-repair value and subtract repair costs
- This will tell you the maximum you should pay for the house, to begin with
How Long Does a Flip Take?
When you are trying to determine whether or not flipping houses is a good idea, you must consider how long it will take. According to experts, it takes about 6 months, but you must understand the factors involved- which can help speed up the process.
The time it takes to purchase a home can vary. Some of the best properties for flipping don’t remain on the market very long. Therefore, you need to have a flexible schedule and always be vigilant. Once you find the right property, it takes a little over 1 month to complete the process.
The time it takes to renovate depends on the home. Some require only minor improvements, while others require more extensive work before you can sell. If you plan to do it all yourself, it may take more time than it would to hire professionals.
Once again, the time needed to sell the property depends on whether you list it yourself or you hire someone. A professional will likely be able to sell it quicker than you can.
The TV shows make flipping houses look easy and glamorous. However, there’s a lot more to it than they show you. If you are interested in getting started in this lucrative industry, keep these tips in mind. In addition, contact the professionals at Point High Finance to learn more about your financing options for funding your purchase and renovations.