House flipping is a unique investment opportunity to help you earn more money. However, while some real estate investments are passive, house flipping is more active, allowing you to vet and purchase homes, fix them up by working with contractors, and partner with realtors to sell the finished property. Many people have joined the industry with the rise of reality television shows about successful house flippers. Still, since they don’t have the right experience or expertise, they often find themselves overspending and getting too little from the sale of the home to make a profit. There are many ways to invest in real estate, but house flipping can be rewarding and earn you more money if you’re willing to take on the risk.
What is House Flipping?
Flipping houses is when you purchase an older or outdated home and invest in it to make it more modern before reselling it for a profit. House flipping is a business based around buying low and selling high, and the key to success is speed; the faster you fix up and sell a home, the faster you can move on to the next, earning more money throughout the year.
Tips for Flipping Houses
Getting into house flipping is easy in theory but quite difficult in practice. Since most first-time investors don’t have the funds to purchase a home with cash, you must have the ability to take out a loan. Once you determine that you can afford to purchase a home and fix it up, follow these tips:
Set a Budget
Setting a budget is important to ensure you don’t overspend and eat into your profits. Once you acquire the funds to purchase a home and have enough set aside to fix up the home, every decision you make must stay within your budget to ensure you make a profit once the home is sold. There are many financial decisions to make, including how much you want to spend on fixing a house up, and these decisions should be made before you purchase the home to ensure you have enough money to fix it.
When setting your budget, aim for 20% profit when you sell the house. You’ll need to know an estimate of how much you’ll be able to sell a home for. For example, there’s no use fixing up a home with the most premium products to drive up the price when buyers in the area aren’t willing to pay for them. Instead, check how many similar homes in the area sell to ensure you can profit on a home before buying it and spending your money to fix it up. While you won’t be paying off the home loan immediately, you should still consider how much house you can afford.
If you plan to make a living out of becoming a house flipper, you may choose to pay off the loan immediately or use the money from a sale to purchase the next house in cash. Therefore, the more you can make on a home, the more you have to spend later on.
Know What to Look For
Finding the least expensive home in an expensive neighborhood is key to being a successful house flipper. Ultimately, the better the neighborhood, the higher your profit margins. In addition, you should only focus on homes that require cosmetic updates like new paint, cabinets, wall decorations, and updated countertops. Believe it or not, these simple fixes have high returns on investment (ROI), so having an eye for design can be crucial to your success.
Once you become a more experienced house flipper, you can begin to form relationships with contractors to flip houses that require more than cosmetic repairs. For example, you can start knocking down walls, repairing electrical and plumbing issues, and building additions to increase the home’s sales price.
Getting a House-Flipping Loan
As we’ve already discussed, most people require loans to ensure they can purchase a home to flip. Getting a loan for flipping a house is different from getting a mortgage for a primary residence. If you can’t pay for a house in cash, you can get a hard money loan through a private lender to cover the cost of the property and repairs.
Expect the Unexpected
Renovations don’t always go to plan. Not only will you have to manage multiple contractors and companies, but it’s easy to go over budget, especially if the house ends up having issues you hadn’t planned for. So always allow for some padding in your budget to pay for unexpected expenses for when these setbacks occur.
In addition, you should always expect the unexpected in terms of how fast the house will sell. While you may think that fixing a house up will make it sell faster, that’s not always the case. Having a plan B by putting the house up for rent and looking for tenants can help you reduce your monthly expenses and break even until you can sell the house for more money.
Find Professionals You Can Trust
Building relationships with professionals and contractors is key to ensuring your project gets completed on time and under budget. Unfortunately, many contractors can be untrustworthy, leaving you with unfinished work. Always complete a background check on your contractors and ask for references to ensure you find the right company for the job.
House flippers need insurance even though they won’t be living in the home. Insurance will add to the cost of the flip, so you’ll lose money on your investment for every month you own the home, giving you the incentive to sell quickly. When flipping a home, consider these types of insurance:
- Vacant building policy
- General liability
- Builder’s risk policy
Since most homeowners insurers don’t offer these types of insurance, you’ll need to look for a specialized provider.
Your profit depends on your ability to flip and sell the house as fast as possible. Since there are many monthly costs, such as insurance and your monthly loan bill, selling faster means a higher profit. Once the house is ready to sell, you must market the property to get the maximum ROI. You can work with realtors to attract buyers, but you’ll reduce your profit by paying them a commission once the house is sold. However, a realtor may be well worth it to ensure your house gets sold quickly.
When pricing the home, be realistic. While you may have put in a few months of hard work, buyers won’t care. Instead, you must sell based on what the house is actually worth and what people are willing to pay. Look for similar homes in the area to give you a rough idea about how much houses can sell for. If your home contains more premium items, you may be able to list for a higher price, but the higher you list, the more you may alienate buyers. Unrealistic prices mean the home will stay on the market longer, increasing all the costs associated with owning the home.
House flipping isn’t as easy as they make it look on television. If you want to become a house flipper, you must learn from the many mistakes you’ll make. Therefore, it’s always best to keep your day job until you’re confident in your ability to buy, flip, and sell houses quickly.
The guest article was written by Megan Isola. She holds a Bachelor of Science in Hospitality and a minor in Business Marketing from Cal State University Chico. She enjoys going to concerts, trying new restaurants, and hanging out with friends.