When it comes to real estate investing, house flipping is more popular than ever. TV shows on networks like HGTV have made it even more appealing – even to those who’ve never dipped their toes in the real estate investing waters before.
While the TV shows make it look simple and, dare I say, even fun, they condense months of hard work into a 30-minute show. All for your entertainment. Though a house flip isn’t always as fun, easy, and profitable as the shows make it seem, it can be a satisfying endeavor. And it works out great for many real estate investors.
I mean, who doesn’t love the idea of taking an old, ugly, run-down house and turning it into a charming, updated home? And for a profit to boot. Flipping a house can be a great way to make money in real estate.
But before you cross that threshold, so to speak, there are basic steps you should take to make your house flip a success. The key is to take your time and do things right from the beginning.
What is house flipping?
House flipping is when you buy a house (usually below market value) and sell it for a profit within a short period (less than a year). The key is to buy low and sell high – as fast as you can while still doing quality work.
That’s the simple explanation.
Finding a home to buy for less than market value isn’t always easy (but it can be done!). Buying a house at a low price usually means the home needs extensive repairs, updates, or maintenance. And it takes time, money, and work to get the home ready to sell. To make a profit, you have to resell the house for more than the total cost of the home, the repairs, and the real estate transaction fees.
How to flip a house: 6 best steps for success
A miscalculation of time and money (or poor workmanship) can turn an otherwise successful flip into a disaster. The worst case scenario is that a house flip ends up costing you money.
For your house flip to be a success, you have to buy the right property. And you have to know what to do every step of the way. The following steps will help you successfully navigate your house flipping venture.
Step 1: Get your financing in order
There are many creative ways you can finance a house flip. No matter what method you plan to use, think it through and plan it out before you find a house to buy.
- Standard loan. If you finance your house flip through a bank or credit union, get pre-approval before you’re ready to make an offer.
- Private money loan. Also referred to as hard money, private money is money borrowed from someone not affiliated with a financial institution. Private lenders offer short term loans for the purchase and renovation of investment property. If you plan to use a private money lender, connect with a local group of investors before you start finding properties.
- Cash savings. If you have enough cash to finance your own house-flipping project, it will save you on interest. But be realistic about all costs. And make sure you’re comfortable tying up your money for as long as it takes to sell the house.
Step 2: Find and analyze properties
Work with a real estate agent who knows your market – and knows it well. It’s best if you can find an agent who also invests in real estate. They will help you find properties. And they’ll run realistic comparisons to help you make an informed decision on a home’s after repaired value (ARV).
Working with a knowledgeable real estate agent pays off in the long run. You have a pro that can help you evaluate house flips. And you also have a knowledgeable expert to turn to when it comes time to market and sell your home.
Learn about your local market. A great real estate agent is invaluable, but having your own knowledge of the local real estate market is a necessity. You will need to be able to run quick, back of the napkin, figures on properties to decide if they are worth considering. Without some knowledge of your market, it’s difficult to filter the good deals from the bad.
Run the numbers. When you’re serious about buying a property – and before you sign on the dotted line – create a realistic budget of all expenses for the project. And then tack on a little extra. There are always surprises with any renovation project, so make sure you budget for them.
- Use the 70% rule. The 70% rule is one way to determine how much you can pay for a flip home. Here’s how it works: Figure out the after repair value (ARV) of the house. Then multiply that value by 70% and subtract out the repair costs. It’s a good idea to offer less than this amount when starting negotiations.
Buy right. In real estate, the money is made when you buy. With a flip, this is true, but you have the cost of repairs to consider as well. If you discover a house needs thousands more in repairs than what you estimate, it adds to your costs and cuts into your profits. Worst case scenario? You lose money.
Step 3: Plan your renovations and repairs
Make realistic renovation plans. Don’t price yourself out of your market by paying for high-end everything. Remember, you won’t be living there. As fun as it is to choose top of the line finishes, it’s important to remember that flipping is a business. Stick with your budget.
Your real estate market, the age and size of the home, and the neighborhood will all be factors in determining the appropriate renovations and finishes. Look at comparable homes to help you make decisions.
Kitchen and bathroom updates yield better returns than the rest of the house. You can still make a home super nice, but you might have to pick and choose the most important places to spend money.
Sometimes, rather than gutting and reworking the entire kitchen layout, you might be better off to stick to the current floorplan – and update the cabinets, countertops, floors and/or appliances. Or instead of hardwood floors throughout, you could use laminate flooring and carpet in the bedrooms.
Set a timeline. Time is of the essence when you’re flipping a house. The longer you own a home, the more your holding costs. Holding costs include utilities, insurance, interest, taxes, and maintenance.
Though it might not seem like much, each day you own a property, holding costs add up. If you hold it for several months, your holding costs will be in the thousands.
A timeline will help you organize, decide which contractors to hire, and push to get things done on time.
Step 4: Get permits and hire contractors
Follow your local building codes. Get the appropriate permits before starting the work. It might be tempting to skip this step and think that you can do the work yourself. But there is a reason building codes and permits exist – for your safety and the safety of the buyer who will live in the home.
Many people end up in the hospital each year to treat injuries related to DIY projects. Some mistakes put the people that work or live in the home at risk for injury. For example, an error on an electrical repair could result in a fire.
Before starting work on your flip, plan to follow your local building codes. Most local governments require a permit before beginning work on any large project. You need a permit for anything that alters a building’s structure or involves electrical and plumbing work.
A licensed professional is required to do work that amateurs shouldn’t attempt. During and after work is complete, the department that issued the permit must inspect and sign off on the completed work.
Pulling permits and following building codes demonstrates your investment in doing quality work. If you’re known for quality work, you will find buyers, other investors, and contractors who want to work with you. You build a business people in the community can trust – and that’s important to any successful business.
Hire contractors. The success of a flip is dependant on the quality and reliability of contractors. From inspections – to bids – to getting the work done on time, contractors are an essential part of any flip.
You can hire your own contractors. Or you can hire a general contractor to oversee the entire project for you. If you decide to manage the project yourself, you have to be able to handle a large project with lots of moving parts. If this isn’t your thing, it’s best to hire someone to do it for you.
Not all contractors are created equal. It can be hard to know who to hire. Get referrals and check references, as well as insurance. Hiring contractors on your first project takes time. But with each subsequent flip, you will build a list of reliable contractors.
Step 5: Do the work
If you are managing the flip yourself, you have to organize and coordinate the work. A specific timeline is useful – you should know the order of tasks and which contractors will do those tasks.
That said, things won’t always go according to plan. There will be work that needs done that you didn’t plan on – and contractors won’t always be there on schedule. Plan on adjusting your timeline as you go.
If you do some of the work yourself, be realistic about your skills. If the most work you’ve ever done on a house is painting, you shouldn’t plan on DIYing a cabinet installation.
And it’s important to remember how much the extra time could cost you. Sometimes it pays to hire out work, even if you have the skillset to do it yourself.
Step 6: Market and sell the house
You’re proud of the transformation you’ve seen in your flip! This is the step you’ve worked so hard for.
Market and price the home right from the start. You want to generate the most interest out of the gate to sell it fast. Remember the longer you hold the house, the more it costs you.
Staging is a cost-effective method to sell a house faster. Staged homes sell faster, for more money than unstaged homes.1 Staging gives buyers a great first impression. Plus it allows them to picture themselves living in the house.