House flipping can make you thousands of dollars in profits. It can also leave you with less than nothing if you aren’t careful. Flipping houses is for the professional (beginner and expert) with the right experience and knowledge.
If you’re just starting, congratulations! You’ve made an incredible investment decision, but before you start, consider these important factors.
Cash Is King
Financing is available for house flipping, but you’ll need a large down payment. If you can’t buy the home in cash, make sure you have at least some cash available.
Finding financing at traditional lenders may be tricky. Banks and mortgage lenders have strict guidelines because investment financing is risky. Hard money lenders, on the other hand, have more flexible guidelines with their primary focus on the property itself.
Save up cash for a down payment, refinance your primary residence, or join forces and create a partnership. The more money you put down, the better financing terms you’ll find. Aim for a 20 to 30 percent down payment for the best results.
Know The Right Terms
Buying and selling homes involves financing, renovations, marketing, and legalities. When you look for a home, look for home’s priced low that you can fix up and sell for more, walking away with a profit.
This requires knowledge of home values, how to market for the area, and what legal ramifications you’ll run into, such as clear (or not) title, transferring the title, and paying the necessary taxes and fees.
Assemble a professional team that works with you on your house flipping projects.
Create Your Team
The ‘dream team’ when flipping houses includes:
- A knowledgeable and experienced real estate agent that understands rehab projects
- Trustworthy, affordable, and experienced contractors
- Attorneys that work with house flipping projects
- Appraisers with knowledge of after-repaired values
Together your team should help you find the most profitable homes to flip. A real estate agent helps you find the homes, the contractors do the work, attorneys make sure everything is legal, and appraisers let you know if a home is or isn’t worth the cost.
Don’t Forget The Neighborhood
Making renovations without knowing the neighborhood ‘vibe’ may leave you with a home you can’t sell. Renovate the home so that it fits into the neighborhood rather than sticks out. The home’s value depends on the homes around it. You may not see a return on your investment if you put too much into it.
Working with your real estate agent and the appraiser is crucial. They can guide you to the right homes, advise you on its condition, and whether the value and market are there to make it a profitable transaction.
Create A Plan
Before buying a home to flip, create a plan which includes:
- Your budget – How much do you want to spend on a home and renovations?
- Timeline – How fast do you need to sell the home to make your money back?
- Real estate agent – Will you use a real estate agent or look on your own?
Get the details aligned before you look for a home because once you find it, the clock starts ticking.
Know The 70% Rule
Knowing how much to invest in a flipped home is important. Invest too much and you walk away with no profit.
The 70% rule helps you stay on track.
Find out the after-repair value of the subject home. This is the value after you renovate/repair it. Multiply that number by 70% and deduct the cost of renovations (from your contractor). The number you’re left with is the maximum amount you should pay for the home.
For example, if the after-repaired value of a home is $200,000 and your contractor quoted $35,000 for the renovations, you should spend no more than $105,000 on the home to ensure you walk away with a profit.
House Flipping Is Possible
Anyone can flip houses. It’s a fun and profitable career or side hustle for millions of people throughout the country. Before you start, do your homework, create your team, and know your plan. With the right steps, you too can be successful at house flipping, diversifying your investments, and setting yourself up for a nice retirement.