So you’re interested and ready to do some house flipping. House flipping, understood as buying a house, fixing it up, and selling it again for profit, is a highly rewarding process. With careful planning and proper budgeting, flipping houses can be a lucrative side hustle or even a full time job. In this article I’ll take you through each step of house flipping your first so you can go into your first investment feeling prepared and ready!
1. Plan Ahead.
The first step to flipping houses is to plan ahead. If you’re doing this with a partner or a team, meet ahead to discuss budget and timeline. Best case scenario, you should put together a structured business plan that will keep everyone on the same page.
When budgeting, give yourself a lot of elbow room for surprise costs. You may need to pay for extra repairs, unforeseen fees, additional materials and permits. It’s better to have over budgeted than under. You don’t want to find yourself in a tough spot half way through the process.
In terms of timelines, it’s typical to take four to six months to flip a home. Since you are new, it does not hurt to add two additional months to your timeline. Timelines can be more quick or more slow depending on a number of factors such as number of team members and the quality of the contractor.
2. Save Up or Get a Loan.
Financing the flip can be done a number of ways. One way is to use your own savings. This is the most difficult and most timely option.
The other way is to get a loan. In order to get a loan you’ll need good credit. You want a low interest rate on your loan. The interest rate will be higher depending on the quality of your credit score.
Also, many hard money lenders will lend based on what the house will be valued at the end of the renovation, but they want to see that you have money to pay for their fees or repair funds set aside. Check local hard money lenders for details.
If you’re short on cash and would like to take advantage of the equity you’ve put into your own personal home, you can take out a HELOC. HELOC stands for Home Equity Line of Credit and is basically a second mortgage. It is a common funding option amongst real estate investors.
If you have no capital at all and you’re not sure where to start, you can check out my article, How to Invest in Real Estate with $0.
3. House Flipping Ready: Time to Find a Home.
With the right capital, the next step in house flipping is to find the right piece of property to flip. This can be the most fun part of the job. Who doesn’t love to house hunt?
Location
When looking for a home, there are numerous factors to consider before purchasing. The first is finding a home that’s in the right location. Notice trends in the area. Is your market oversaturated? Are there markets that can be tapped?
When you are looking in markets that have not yet been “discovered,” do your due diligence. There may be a reason why certain areas aren’t having renovations. For example, look up the safety report. It may be high on crime and it will be hard to sell a home in an unsafe area.
Property Foundations
The actual home needs to have certain factors, too. For example, the home needs to have a great foundation. HGTV star Joanna Gaines once said in an interview, “Every home has potential but ultimately the potential has to meet the total renovation budget realistically. Always get an inspection to make sure the home is structurally sound; we’ve seen foundation issues that will cost up to $20,000. If the cost of the structural issues is cutting too much into the total renovation budget, we know it’s not ‘the one’ and encourage our clients to keep looking.”
Just as Joanna said, you have to make sure the home is structurally sound. Take a look at the roof, check for mold and make sure the septic system is in good shape. If you can afford to fix these things, great. But for your first flip it’s best to avoid homes with high repair costs.
Today I renovate properties with a lot of structural issues, foundation, roof, plumbing, etc, but I have the right team. When I got started, my first flip, it was just a basic rehab. Remodel bathrooms & kitchen, update flooring, new paint and landscape, etc. You should do the same.
Price is Right
At the end of the day this is about making a profit for yourself. So the price needs to be right. It needs to be under market value. Before you make an offer, consider ARV (after repair value.) The general rule in flipping is known as the 70% rule. The 70% rule goes like this:
[After Repair Value (x) .7] – [Repair Costs] = [Price of Home]
So, the after repair value is multiplied by .7 (that’s the 70%) and then you minus the repair costs. You’re left with how much you can spend on a home.
You don’t need to only rely on the 70% rule. Take a look at comps in the area too, other flips in the neighborhood. How did they do? This is another reason to do your flip locally. You need to know the area.
The key is to estimate the ARV from the very beginning and be sure houses can sell at that price. Then stay in budget. I still use the 70% rule, but lately as the market is becoming more competitive, I decided to invest based on return of money.
As an example I want to make 20% profit of the money invested in the deal. So if the total purchase price and renovation cost are $200,000, I want to make at least $40,000 in profit. I estimate closing costs when I buy it and sell it between 8-10%. This includes 6% realtor fees, plus title company fees, mortgage fees and junk fees.
So lets compare both ways to analyze a house using the 70% rule and the 20% profit with an estimated $50,000 in repairs.
If the property ARV is $270,000 using the 70% rule your purchase price needs to be calculated using this equation:
$270,000 * 70% – $50,000 = $139,0000 (purchase price)
With the 20% profit the purchase price needs to be calculated as follows:
$270,0000 – $27,000 in closing costs or 10% – $40,0000 profit – $50,000 in repairs = $153,000 (purchase price)
This will allow me to know where I need to be and remain competitive.
House Flipping 101
Where to Sell
There are many ways you can find homes for sale for your first flip. The most common way is online. Sites like Zillow and realtor.com are easy to navigate and always updating. You could go the foreclosure route, but know that that route might save you money but it certainly won’t save you time. It will take longer to close on a foreclosure deal.
You can also work with a wholesaler. Since you’re new, finding a wholesaler might be a little tough. You’re still working on building up your network. But a wholesaler is great because they are basically headhunters for flippers. They’ll bring perfect homes for a flip right to you. You can read more about wholesaling here.
What I do is to market using different methods that you can find in our marketing blog, then I work directly with sellers.
Home Inspection
Hire a home inspector. The home inspector will let you know what needs fixing and this is particularly important for a new flipper to do. I suggest hiring a home inspector that is independent of the real estate agent.
Make a Deal
Negotiate on price and then make an offer. I can’t say this enough – this is where you will make your money. Make a competitive offer but be realistic about what you can afford.
4. Find a Contractor & Get to Work
Finding a contractor is integral to the house flipping process. You can watch our video for tips on how to find a contractor and how to qualify a contractor here. I will share two tips now:
1. Find contractors at other renovation properties
2. When hiring a contractor, ask to see examples of past work or visit their current work sites
When it comes to getting started on work, be again mindful of your budget and on making a profit. Thus, when choosing materials for rehab you don’t need to pick super fancy finishes or decor. Homeowners can add their own personal touches once the home is theirs.
You can also update little things yourself, like doorknobs and light fixtures. No need to up your bill with your contractor for putting in the lightbulbs.
You can check our youtube video of working with contractors.
5. Re-list & Sell
Once the renovations are done it’s time to sell. You can work with a realtor or sell on your own. Remember, a ~3% commission goes to the realtor. (Something else to add to your budget.)
When selling, think in the mind of a buyer. You may want to stage your property. Take good care of the land and plant some flowers in the front yard. Curb appeal is an important selling point.
Conclusion
In conclusion, approach your first flip with patience. Budget everything beforehand. Prepare for things to be more expensive and for the process to take longer than expected. This will be a team effort. You’ll be working contractors, perhaps realtors and maybe other investors. And most importantly, approach with confidence and optimism!
Where are you planning to do your first house flipping? Share with me in the comments!