Flipping a house– sounds easy enough right?
Not so fast! When you flip a house, it requires a lot more than simply buying, renovating, and selling your investment properties. And it definitely requires a lot more work than those trending HGTV shows entail.
However, the popularity of house flipping has led real estate investors to either find extreme success or failures in the house flipping market. According to David Ramsey, “In the second quarter of 2021, the number of house flips reached 80,000. That’s almost 5% of all home sales or one out of every 20 transactions!”
If you intend to start flipping houses, it’s best to know what you’re getting yourself into and how to profit from your real estate investment. Knowing the pros and cons is the best way to make informed real estate investing decisions.
The tips provided in this article will help you meet these challenges and help you to make the most profit possible from your flips. But first, what does flipping a house even mean?
What is House Flipping?
The purpose of flipping a house is to gain an investment property by buying a house that you do not intend to make your home. Essentially, your goal in flipping houses is to purchase a fixer-upper, invest in upgrading the property, and sell the home for more money than you purchased it for.
At the end of the day, house flippers are essentially real estate investors. The goal is to find an affordable house where the purchase price and overall housing costs are low but in the right location, and then renovate and update the property so that the overall home value increases.
It’s a time investment, to say the least, which is why finding the right property is important.
Step One: Find a Real Estate Agent
Finding the ideal purchase price for your property, minus the cost of repairs, is a job in itself. The best practice in the house flipping market is to find a real estate agent with lots of experience who can help you with your real estate investing needs.
Real estate agents specialize in their ability to find you a good deal and can help navigate the carrying costs and interest rates that accompany your property loan (should you need one). It’s also a great idea to build a relationship with your real estate agent so that when the time comes for your house flip sale, you know that your real estate agent has your best interest at heart.
Understand the Market
Another reason to work with a real estate agent when you are looking to flip a house is that they understand the housing market- past, present, and future.
The market value of a property will vary based on the neighborhood and expected location population growth. Marketing costs for a house in an up-and-coming neighborhood, for example, will cost a significant amount more than in an old neighborhood with little room to build.
When you are in the business of flipping houses, the closing costs, property taxes, and other carrying costs are all impacted by WHERE you choose to invest. The best house-flippers choose an area that has future potential with low-interest payments in order to make a huge profit.
Step Two: Understand the Financial Risk
The biggest deterrent to flipping homes is that it can be extremely difficult to find profitable deals. As a flipper, you have to be able to identify profitable properties and find creative ways to improve them.
When you commit to flipping a house for profit, your commitment also includes the cost of repairs and renovations. Flipping houses is often also called a “fix and flip” for that very reason.
Before you purchase a house, contact a general contractor to give you a rough estimate of the total costs of renovations you have in mind. They’ll be able to help you navigate where your money NEEDS to be spent and where your WANTS can be allocated.
The cost of repairs could diminish your profits, and you could find your house flipping business becoming a financing nightmare.
A house flip could cause you to lose money after paying closing costs, paying interest on loans taken to repair, and underestimating the number of renovations needed to add value to the property. Whether you are taking out a loan, or plan to pay cash, it’s best to understand exactly what price point you are looking for before you commit to flipping a house.
The 70% Rule
A great way to help you calculate what your perfect purchase price to flip a house should be is to use money guru Dave Ramsey’s 70% Rule. This rule states that the initial purchase price of a property should be 70% of the house’s after-repair value (minus the costs of renovations).
Remember, if you are going to be a real estate investor and flip houses, you want your gross profit to make sense. By following the 70% guideline, you can determine the amount of loan you may need to purchase your home. You’ll have an understanding of what you’re paying for and how much you’ll need to sell your house for in order to make a profit.
Step Three: Buy Your Investment Property
Now that you’ve completed the research, it’s time to buy! When it comes time to pay for your investment, remember that the cost will include real estate agent commissions and taxes within the process, so make sure to budget accordingly.
If your income can expense the cost of a fix-and-flip business, then you are in the clear! It’s time to finalize the sale and get to work.
Welcome to the first step along your actual flipping journey: Curb Appeal.
Step Four: Elevate Your Curb Appeal
First impressions can make or break your house flipping experience and can sway the impressions of your buyers. It may be hard to process that simple landscaping can deter or attract your buyers, but since the pandemic the number of houses being bought based on online photos has increased significantly.
People are buying homes sight-unseen in order to ensure they have a place to live in an up-and-coming neighborhood. They often search for homes that do not need renovations or updates, so being in the business of house flipping could be a lucrative way to supplement your income!
If you want to add value to your home and want to attract the right buyers, start the process by cleaning up your driveway and walkway. Find plants to line the walkway leading to your front door and add a fresh coat of paint!
Simply refreshing the existing coat of paint can slough off years from a home’s looks!
Step Five: Add Eco-Friendly Substitutes
We live in an age where a majority of new home buyers are concerned about the environment and let’s face it, old light fixtures and outdated appliances can lead to an empty money pit if not replaced.
Many expenses allocated to home interior renovations start with replacing old appliances with energy-efficient ones. This will not only look more modern in your new home but will also save your future buyers money on their electricity bill– sounds like a pretty sweet deal for whoever you sell your newly-flipped home to!
Step Six: Renovate
Now comes the fun part of flipping houses. While other costs have been set aside for general electric work and landscaping, the interior of the house is where you get to let your creativity soar!
Thanks to social media ideas, the money one would normally spend on hiring external contractors can now be spent on DIY projects throughout the house at half the cost.
If you are willing to put some elbow grease and time into new flooring or bathroom renovations, you’ll be saving a lot of money and you’ll add extreme value to your home!
Kitchen updates are especially lucrative in the renovation game. Plus, it could be as simple as just refinishing your countertops and adding a little paint!
Paint, Paint, Paint
Just because you are updating your kitchen doesn’t mean that you need to completely gut and replace every fixture. Kitchen cabinets, for example, can look new and improved with a few small steps that require zero replacements.
A little paint here and there can add elegance and style to cabinets that leave your future home buyers eager to enjoy.
Choosing a lighter shade can brighten a room and appear to add space, while darker shades can add drama and make decorations stand out. Either way, the money you invest in adding a fresh coat of paint to your home will pay for itself when comes time to sell.
Step Seven: Maximize Your Space
Similar to the need to maximize your space while living in an apartment, your goal when flipping a house is to make every space in your home feel large and spacious. Square footage on paper can look small, but once you show your finished masterpiece to potential buyers, that square footage number will look much larger in person.
When you’re done with your renovations, you’ll want to sell your house for a profit– the Flip.
At that point, you should hold an open house to get multiple offers. Make sure each offer is in writing and includes contingencies, e.g., repairs, financing, date of possession, and other provisions. Once all the offers are in, take the highest offer and close on it. Congratulations! You’ve just successfully flipped a house!
If you are looking to rent out your newly renovated home, it is important to work with a company you can trust. At DJW Property Management, we will treat your investment property like our own! Give us a call today and we’ll help you achieve your house flipping goals!