Flipping a home averaged a gross profit of $65,000 in 2018.
That number may sound appealing, but a house flipping business isn’t an easy way to make a quick buck. It comes with major risks and significant financial requirements.
Successfully flipping a house requires a thorough knowledge of the local real estate market. Making financially sound decisions helps you maximize your profits.
Before you make an offer on a home, read these tips for starting a house flipping business.
Create a House Flipping Business Plan
Even if you flip your first home as a side project, it’s still a business and needs a business plan to go with it. Your plan outlines your goals and plans for the company. It increases the chances of your flip being profitable by guiding how you approach the business.
Your business plan should outline your goals, the type of properties you plan to flip, how many projects you plan to take on in a year, and your return on investment goal. Include market analysis information and your financing plans.
It’s also a good idea to include your plans for marketing and selling your home. Do you plan to hire a real estate agent to sell it, or will you sell it yourself? How will you market your business to help your homes sell faster?
Analyze Your Finances
Flipping houses requires access to money, either through financing or cash on hand. Starting out as a new flipper can be challenging. Many established flippers have capital on hand and can find new properties easily with we buy houses type advertisements.
Financing your investment property is an option, but you’ll typically need a 20% down payment for the purchase. This may limit the type of house you can purchase for your first flip. It’s much easier to come up with 20% of a $100,000 home than it is for a $750,000 home.
Calculate the amount of cash you have available to go toward your first purchase. If you’re planning to get funding, you’ll need good credit to qualify. Visit with a loan officer to see if you’ll qualify for investment funding, so you know what your financial options are before you make a home offer.
Research the Market
Understanding your local real estate market helps you find a home with the greatest profit potential. Look at the types of homes that are selling well in your area. Are certain neighborhoods, home styles, or price ranges drawing the most buyers?
When you narrow it down to specific neighborhoods, look at recent home sales to find the average sale prices. Your flip needs to fit in that selling range once you make your repairs so it’s not overpriced.
Assess Your Skills
How much of the renovation work can you complete yourself? If you have previous DIY experience, you can knock out most of the cosmetic stuff without hiring a pro. Anything you can complete saves you money on the renovation, which increases the profits from the flip.
Be honest about your ability to handle different jobs. You don’t want to take on more than you can realistically handle. If you’ve never worked with granite, installing your own countertops is likely outside of your capabilities.
The quality of the work is crucial to getting the highest price possible for your home when you sell it. If your tile has uneven grout lines or your kitchen cabinet paint job is bubbly, buyers will notice.
Specialty projects may also require specialized tools. Buying those tools adds to your overall renovation budget. Hiring a professional who already has the necessary tools could save you money when you figure in those extra costs.
Another consideration is your available time. If you’re renovating the house on top of a full-time job, take that into consideration when deciding which tasks to complete yourself. Unless you have a lot of experience, renovation projects will take you longer to complete than a professional.
Some work needs to be handled by professionals, especially tasks such as plumbing and electrical work. You may be better off paying for other jobs, too, such as drywall, if you’re not familiar with the process.
Doing the work yourself takes a lot longer than a seasoned pro who does it all day. This can extend your flip timeline significantly and cost you more money in the end.
You’re also more likely to run into problems or make a mistake. If you end up paying a pro to fix your work anyway, you’ll spend more overall. It’s faster and easier to let someone else do the work you’re not qualified to handle.
Start growing a list of trusted contractors now. Start with people you know in those industries. Research contractors by checking online reviews to ensure the people you hire can do the work correctly.
You may need contractors with specific skills, such as an electrician, plumber, drywall company, or landscaper. If you’re planning structural changes or home additions, you may need an architect. A handyman can complete easier jobs that you’re not comfortable handling yourself.
Starting your house-flipping career with a total gut job that has structural issues can set you up for failure. Redoing everything can be overwhelming. You’re more likely to need a lot of contractors, and the timeline will be longer.
Test out house flipping with a home that just needs cosmetic fixes. If you’re handy with a paintbrush and saw, you can handle most of the work yourself. This gives you more profit potential, and you can flip the house faster.
The 70% rule is a general guideline for choosing a house. The idea is you shouldn’t buy a house to flip that costs you more than 70% of the after-repair value less the cost of the repairs. Your max purchase price should be $72,500 on a home with an ARV of $125,000 that needs $15,000 in repairs because $125,000 x 0.7 = $87,500 – $15,000 = $72,500.
Use the 70% rule, and consider how much work needs to go into the home when selecting your first property to flip.
Create a Plan
Once you secure the home, create a detailed plan of what you’re going to do. It’s tempting to go overboard or change everything about the home, but remember your goal is to make a profit. There’s always something else you can do, but stick to the most profitable renovations and things that need to be completed.
Break down your available renovation budget based on those projects. You may need to change your renovation plans to fit your budget at this point. Opting for laminate floors instead of hardwood or scaling down your landscaping plans are examples.
Establish a Timeline
The key to profitability when flipping houses is efficiency. The longer you own the home, the less profit you’re making, especially if you financed the property. You’re paying interest until the home changes hands, and you’re paying for insurance, utilities, and taxes.
Creating a timeline for the renovations helps you minimize that time frame, but it needs to be realistic. You’re setting yourself up for missed deadlines if you’re unrealistic in your expectations.
Start by making a list of every repair or renovation you plan to do. Break down each part of the renovation into steps. If you’re redoing the walls, that might include removing wallpaper, patching cracks and holes, priming and painting the walls, and installing trim.
Allow enough time for each step in every project you’re planning. Consider how the projects impact each other. You might need an electrician to redo the wiring before you can install your new light fixtures, or you may need to wait until after your cabinets are installed to do the backsplash.
Set completion dates for each part of the renovation based on those details. Allow for buffer days in your timeline to account for delays, which will happen. Factors outside of your control, such as weather, late materials, contractor delays, or unexpected problems you need to fix first, often derail the timeline.
Grow Your Network
Growing a large network before you flip gives your finished homes more exposure. Even if you hire a real estate agent to handle the sale, doing your own promoting helps you find a new buyer faster.
Let your friends, family, coworkers, and other acquaintances know about your new venture. They likely know people who are in the market for a new house.
Grow your social media presence to build a buyer’s network beyond your current contact list. Use your flipping business social media page to show progress or share information about home improvement projects. Connect with your contractors on social media, and help promote one another.
When your flip is finished, you can use your social media pages to promote it. Include quality photos of your home, or post a video walk-through to attract potential buyers.
Consider Getting a Real Estate License
You don’t need one to flip homes, but getting a real estate license can save you money and give you a better knowledge base. Being a real estate agent gains you access to the MLS, where you can see accurate listings that are currently available.
Getting a license also helps you better understand the buying and selling process. This can help you make better decisions with your flips and better position your home for a quick sale. You can complete an accurate market analysis and check out comparable properties to help with your flip.
Start Flipping Houses
Do you have the time, cash, and home improvement knowledge to start a house flipping business? It’s not without its risks, but flipping houses can be a profitable venture as a side business and eventually a full-time business. Check out more articles in our home improvement section to find ideas for your first home flip.