Flipping houses is more popular than ever. Thanks to the popularity of home renovation shows, taking a dilapidated house and turning it into a sellable home now seems like a fun and profitable weekend hobby rather than the risky, time-consuming endeavor it actually is.
That’s not to say it shouldn’t be done or that it can’t be rewarding. You just need to know what you’re getting yourself into when you take on a fixer-upper.
What Is House Flipping?
House flipping is when you buy a property as a real estate investment with the intention to hold onto it for a short time and then sell (or flip) it for a profit.
Fixer-uppers have risen in popularity over recent years, with 7.1% of all U.S. home sales categorized as house flips in 2020. A property is considered a flip when the home was purchased and sold within 12 months.
Types Of House Flipping
There are two main methods of real estate investing to consider when flipping a house.
This is what you’re likely picturing right now: An investor buys a property, renovates and updates the house and then sells it for a profit. This process usually happens very quickly, ideally within the span of a few months.
This type of flip is when an investor buys a property in a market where home values are rising quickly. The investor typically doesn’t make any updates but waits for the home to appreciate and sells it months later at its appreciated price.
Financing Your Real Estate Flip
In this article, we’re going to focus on flix-and-flips and give you tips you can use throughout the process, from choosing a property, to making renovations, to selling it for a profit. But before you can do any of that, the first step is to secure financing. There are several options you can consider, depending on your financial situation and the scale of your project.
Obviously, the most straightforward solution would be to pay for the house you plan on flipping in cash. If you can help it, it’s best to avoid going into debt to fund a house flip. That said, you should also avoid using money earmarked for other, more important purposes, like your retirement funds.
If you don’t happen to have that kind of cash lying around or don’t fancy spending your entire savings on a house flip, you’ll probably want to look into getting a loan. It is possible to obtain a traditional mortgage for a house flip; however, this route is not without its challenges.
The first and biggest obstacle to using a mortgage for a house flip is time. It takes time for lenders to evaluate your financial background and obtain the necessary documentation to approve the loan. This can pose problems given how quickly investment properties move off the market. You will also need to consider mortgage down payments, which can lessen the funds in your pocket to renovate.
Hard Money Loans
Not all lenders will offer mortgages for house flips. If a mortgage won’t work, you may have to look to less traditional forms of lending, such as a hard money loan.
Hard money loans are short-term loans from private lenders. They can come with interest rates as high as 15%. While you should be careful and consider all aspects anytime you consider borrowing money, these loans can be useful for house flippers who need the funds to purchase property. Just be sure you’re working with a reputable lender!
If you own your own home, you could also consider getting a home equity loan or a home equity line of credit (HELOC). These loans allow you to utilize one of your most valuable assets – your home – but because of this they can also be quite risky, as your home is used as collateral on the loan. Rocket Mortgage® does not offer home equity loans or home equity lines of credit.
If you plan on financing your flip with a loan, be sure to consider all the costs and fees you’ll incur, and how that will cut into your profits from the flip.
How To Flip A House
People often associate house flipping with demolition and design, but although that is a crucial part of the process, your project really begins before you even purchase a property.
Study And Learn The Market
To successfully flip a house, you must become an expert on the real estate market you’re going to be selling in. If you don’t, you risk putting more money in than you’ll end up getting out.
Understanding the process and how to interact with the real estate market will help you know how much you should spend buying the house, how to identify the home’s potential value and how to price the house when you’re ready to put it back on the market.
It’s important not to try and increase the value so much that the house becomes overbuilt for the neighborhood it’s in. When this happens, the house becomes harder to sell because houses tend to be valued similarly within neighborhoods. To avoid this, you need to do your research. Learn about what features make a home more marketable in your area and focus on repairs that will increase market value.
Find A House To Flip
In addition to online listings, real estate investors can look for fixer-uppers in several ways. Exploring local foreclosures, auctions and short sales can be a great way to find promising property in your area for a low price.
Create A Budget
In house flipping, budget is king. Every choice you make should serve your goal of generating a profit. To generate that profit, you need to figure out what your overall budget will be, and how much you can spend on each facet of it. When building your budget, be sure to consider the following factors.
- Purchase price: Figuring out how much you can spend on a property is your first task. This will help you price everything else in your budget.
- Cost of repairs and labor: Bring in the experts. Schedule a property inspection with a qualified inspector before you buy, and have contractors give you estimates on the work that needs to be done.
- 70% rule: In real estate, you never want to spend more on a property than 70% of the after-repair value (ARV) minus the cost of repairs. ARV is the projected value of the home after repairs and renovations have been completed. For example, if you think you could sell a home for $250,000 after fixing it up and your general contractor says you’ll need to put in around $50,000 in repairs, you shouldn’t pay more than $125,000 for the property.
Keep in mind that you won’t just be paying the costs of purchasing the property and reviving it. While you hold onto the property and wait for a buyer, you’ll likely have other costs as well, such as loan payments or property taxes. Then you’ll pay costs associated with the selling of the house, including agent fees and closing costs.
Prioritize The Right Renovations
The renovations you do must boost the value of the home. But how can you know what will add value?
After you’ve completed all the necessary repairs, you’ll need to make a lot of aesthetic decisions about how you want the house to look. When you’re prioritizing your renovations, focus on updates that will look clean and modern while sticking within your budget.
- Increase space and light: Buyers look for warm, inviting spaces, so small, dark rooms are the enemy! You can increase your property’s appeal by knocking down walls to create an open floor plan or adding skylights to provide more natural light in the space.
- Update or renovate the kitchen: Kitchens can become outdated quickly, making this one of the first rooms investors evaluate when trying to increase the home value.
- Refresh the bathroom: Bathrooms also show their age. Although some bathrooms may need a full remodel, you can spruce up your bathroom on a budget by adding new fixtures, cabinets and a fresh coat of paint.
- Invest in new paint and flooring: It seems basic but minimizing visible wear and tear can change the entire feel of the home.
- Add curb appeal: First impressions matter so the exterior of your home is just as important as the interior. Consider fresh landscaping and make sure all paint and siding is up to par.
If you’re still stumped on where to start, a real estate agent or experienced flipper in your city can help give you some clues as to what the must-haves are for homes in the area.
Sell At A Profit
If you want to save money in real estate agent fees, you can choose to sell the property yourself – but don’t underestimate the value of an experienced agent. In some markets, choosing to sell your own property may delay the sale and add additional stress and money to your project. Consider the time and energy it takes to show the house and ask yourself if you have the time and experience needed to do so successfully. If not, we recommend hiring a professional to ensure you get the best return on your investment.
House Flipping Mistakes To Avoid
With so much money on the line, it’s best to avoid learning about the house flipping process through trial and error. Here are some common mistakes first-time flippers make, and how to avoid them.
- Overpaying on the property: If you pay too much initially, it’s hard to make up for later on. Make sure you’re observing the 70% rule mentioned above.
- Not having enough time or money: Flipping a house is a time-consuming and expensive project. Gather as much information as you can when creating your budget and make space for unforeseen costs. Don’t make assumptions – get estimates from professionals and be realistic about your abilities and time frame.
- Not being handy enough: Sweat equity is where you make your money, so you need to be sure you have the DIY skills to drive your project. When you tear down a wall or install a lighting fixture yourself, you’re saving yourself the cost of having to hire someone to do it. If you have to hire a contractor for every little thing, you aren’t going to make much of a profit, meaning you should be at least somewhat skilled in home renovations.
- Getting too emotional: It’s easy to get caught up in every decision you have to make and think that everything needs to be top quality, but this can slow down the process and lead you to spending money on things that ultimately don’t matter. Your goal should be to get the house looking nice as swiftly as possible while sticking to your budget.
- Forgetting to factor in taxes: You’ve completed your first successful flip and made a good chunk of change off it. All’s well that ends well! But don’t let those dollar signs in your eyes blind you to reality. If you made money on your house flip, you’ll need to pay taxes on it. If you plan to start flipping houses, we recommend speaking with a tax advisor who can look at your circumstances and tell you how the additional income will affect you.
Is Flipping A House A Good Investment?
As with any investment, there are no guarantee. To be successful, you must balance the potential risks and rewards of flipping a house.
- Potential to make a sizable profit
- Turn-around time can be faster than other forms of investing
- Opportunity to learn new skills related to construction, real estate and negotiations
- Potential to lose a lot of money
- Requires sweat equity
- Process can be stressful and time consuming
- Can be difficult to secure funding
The Bottom Line
House flipping can be a great investment opportunity for the right person. If you’re looking for a safe-bet investment where you can keep your money and leave it alone for long periods of time, this isn’t what you’re looking for.
If, however, you like working with your hands and are looking to take on a challenging project that can generate a profit, you might find flipping to be a fulfilling and worthy investment.