House flipping is a form of real estate investing where you buy a property, improve it, and then quickly sell it for a profit.
The strategy behind it is to buy a home that’s distressed, undergoing foreclosure, or undervalued for other reasons. After purchasing the home, you make the repairs and renovations to boost its value and then sell it immediately. House flipping is also known as a “fix and flip.”
There are tons of great reasons to become a house flipper. Here are some of our favorites:
Flipping houses can be very profitable, and you don’t have to be a full-time flipper to enjoy full-time profits. If you flip two houses a year and make $30,000 in profits from each, you’ll enjoy $60,000 in additional revenue.
Flipping houses provides you with many freedoms you can’t get with other jobs. You can be your own boss, or co-run a house flipping business with a partner. You can choose to work on your schedule and pace, and take vacations whenever you’d like. House flippers can also work from anywhere, and even remotely, under certain circumstances.
Anyone can break into real estate investing. You don’t need to go to school or get a license to buy and refurbish a property.
However, you will benefit from having real estate investment or construction experience, or at least connections to people with these skills. We recommend working with an investor-friendly real estate agent, especially when you’re just starting out. They can help you determine if a property is worth buying, its potential, and what repairs and renovations they’d recommend. Also, they’ll be incredibly helpful during the buying/selling process.
You’ll get a ton of investment property experience when flipping homes, including an intimate knowledge of the real estate market, construction, and design. This experience will be transferable to other forms of investing, including rental property investing, real estate notes, multifamily, and more.
But that’s not all!
You’ll also learn the basics of running your own business and everything associated with it.
House flipping is much cheaper than many other small business ventures. It doesn’t require you to have any equipment, inventory, or employees. You need capital for a down payment and money for repairs and renovations, but there are a number of ways to get access to that capital, even if you don’t have lots of cash in savings.
Like marriage, the first step in your real estate adventure is commitment. It’s easy to get excited about house flipping or landlording—but can you actually commit to going the distance? House flipping isn’t a hobby. It’s a business that can dramatically affect your financial future, positively and negatively. Don’t go into this thing willy-nilly.
Decide you are going to do this. You’re 100% committed to learning everything you need to learn to get there. Then—and only then—should you move on to step two.
Don’t dive into the flipping game without doing some background research first. Here’s what you need to know.
Education is a lifelong pursuit—but spend some extra time learning before jumping into a house flip. Don’t pay $50,000 for some kind of guru training camp. But you should take your education seriously and buckle down to learn the basics.
One last word of caution: Don’t get caught in this cycle for too long. You’ll never know everything, so dive into the education for a short while, learn all you can, and then move on.
Without the right math going into a flip, you’ll never get the right money coming out of it. Understanding math is the number one most important trait in a successful flip because math determines how much you should pay, how much work to put into the property, and how much you expect to get out.
Don’t move on until you understand the math.
Next, take a look at the market and decide where the best place to flip will be. In some areas, $300,000 for a home would be absurdly cheap. In other places, $300,000 would be absurdly expensive. Every market is different, so you need to have a good handle on the market you plan to flip in. Ask yourself these questions.
Do a thorough job of understanding your local market. Walk through as many open houses as you can, spend time on your computer or phone and go on as many virtual tours you can, and meet with local experts to discuss the state of the local market and economy.
Then, cycle back to the math and see if flipping makes sense in that area.
You can’t flip a house alone. Yes, ambitious investors can do the bulk of the work themselves—but you’ll still need a lender and a real estate agent.
At this point, you’re excited to get started. Don’t put the cart before the horse. First, ask yourself a very basic question: How are you going to pay for this flip?
There are a lot of different strategies you can use to finance your next house flip. Here are a few of the more common methods.
You have many different options, but you’ll need to pick one to move on. Finalize whatever source you plan on using before shopping for your investment property, so you can quickly jump on it. In today’s hot market, speed is key in getting a great deal.
At this point, you understand what makes a good deal good and have financing lined up. You’re ready to rock. However, you don’t need to do it all yourself. You need to find one team member: a real estate agent. Why? Because they’re free.
Yep, your seller pays the agent. So why not use one?
Your agent can open doors, write up offers, find comparable sales so you know what properties are really worth, and so much more. Engaging the agent who listed the property is a newbie mistake. If you do, you’ll be dealing with the seller’s agent, who has a legal obligation to encourage you to pay the most possible. This is like having an attorney who represents both the plaintiff and defendant in the same case. Do you really want that person helping you? Nope. Find a buyer’s agent.
One caveat here: If you plan to use direct mail to find your first flip—aka sending letters to thousands of individuals, hoping a small percentage will turn into deals—you don’t want an agent. The same applies if you are looking to buy homes FSBO (for sale by owner). Real estate agents are perfect if you plan to buy homes from the multiple listing service (MLS), where most homes are listed.
Before you start seriously searching, it’s good to think critically about what makes a deal right for you. This requires both good analytical skills and some time spent considering what fits in your portfolio—or, if you’re just starting in real estate investing, what you want said portfolio to look like.
First, funnel all the possible choices down to specifics. This is when your education and market research come in handy. You want to flip houses that people want to buy—so what kind of homes are they buying, and where? Think about things like:
Congratulations, that’s enough criteria to start filtering the properties on the market. Sometimes, however, a two-bedroom home could become a three-bedroom, or a one-bath house could become a two-bath, so keep your criteria broad.
Once you’ve made some decisions, let your agent know. They can set you up with automatic emails, which will alert you when suitable properties come on the market.
This is an important step in the process, so don’t skip it. It’s time to start doing some deal analysis on real properties.
Investing is a numbers game. Every property has a price that makes it a great deal. Your job is to find that sweet spot.
Let’s say you run the numbers and decide that you could pay $150,000 for a particular house. But it’s listed at $275,000—you can skip that one. However, if it’s been listed at $190,000 for the past four months, maybe the sellers will go down to $150,000. If it’s at $160,000, you probably have an easy deal to put together (But there may be reasons why the deal’s so easy!).
Before submitting an offer, you need to be extremely confident in your ability to judge a property’s potential. Head over to Zillow, Redfin, or Realtor.com and start pulling numbers for potential properties that look like good options. Do your best to make good assumptions about the rehab costs and other potential expenses. (It’s more important to understand the process of analyzing these deals than to know the exact values right now.) This way, you’ll know what to do when you get a real potential deal across your desk.
Additionally, get out there and start physically looking at homes. Walk through as many as you can. Ask a lot of questions and learn as much as you can. This will not only help you find the best properties, but it will also motivate you, too.
In addition to looking on the MLS, it’s not a bad idea either to get in your car and start driving around, hunting for potential deals.
In the real estate investing industry, we often call this “driving for dollars.” Look for properties that are vacant or need some serious cosmetic help. If you can find the owners through public records, you’ll often find them very willing to sell for a great deal.
After walking through and analyzing dozens of properties and talking with your agent about your needs, eventually you’ll find the perfect flip. You may find one right away, or it may take months. Don’t worry about how long it takes—focus on finding the best deal possible. You don’t want anxiety to impede your financial future. Be patient and stick to your criteria.
Don’t let emotion take over the deal.
Excitement is inevitable. After all, you’ve put a lot of work into this project and you really want to see everything come together. However, this is no time to toss out everything you’ve learned. Stay calm, stick to your numbers, and get ready for the real excitement to start.
Once you’ve identified a great property for your fix and flip, it’s time to move on to the next step—often the most anxiety-inducing. Yep, it’s time to make an offer and get under contract. Here’s how.
Typically, the buyer will present the seller with a proposal in real estate negotiations. It includes things like:
If you found the property through your real estate agent, they’ll help you through this entire process. It’s actually fairly easy. However, if you found the property yourself—such as through social, word of mouth, driving for dollars, or direct mail—you won’t have the luxury of a real estate agent on your side.
So if this is your first time, it is recommended that you hire an attorney or a real estate agent to review the paperwork and ensure you aren’t missing out on anything.
A “contingency” refers to the parts of a legal offer that are “escape clauses.” In other words, these are things that let you walk away from the deal without losing your earnest money. For example, you might have a contingency that says, “This offer is contingent upon my cat fitting through the cat door”—though I wouldn’t recommend it. Too many contingencies make a seller reluctant to accept your offer, but too few can put you in a difficult place.
So what contingencies should you include? Here are the most common.
Keep in mind that the fewer contingencies you have, the greater chance your offer will be accepted. Many investors choose to avoid contingencies altogether to make their offers stronger. This obviously opens the investor to greater risk, so I only recommend this for experienced investors.
After you submit your offer, it’s time to wait.
Usually, the seller will send a counteroffer (via your agent, if you have one) that explains what they want from the transaction. You can choose to accept, reject, or send them a counteroffer. But the seller can also simply accept your offer and end negotiations, though this is generally not the case.
During negotiations, it’s vital that you stick to your predetermined numbers. Emotions run high during this phase, and you may be tempted to raise your price, making the numbers unworkable. Don’t do this! Stick with what you know will work—and be willing to lose the deal if you can’t reach an agreement.
In the end, one of two scenarios will occur:
If you can’t come to an agreement, the deal may not be lost. I’ve bought numerous rental properties that were originally turned down. I once offered $65,000 on a property, and the offer was rejected. Six months later, however, after numerous price drops, I offered $45,000, and it was accepted! So don’t be afraid to wait it out. Stick to your number, and maybe later—whether that’s weeks, months, or years—the seller will be more motivated.
Once both parties agree on a price and terms, you’ll need to pay the earnest money to make it all official.
Some agents prefer you give this money with the offer, but I try to wait until an offer is accepted before handing my money over to someone I don’t know. This is especially important when you make a lot of offers. Regardless of whether you’re working with a real estate agent or directly with a seller, this money is never held by the seller themselves. This money should be kept by a third party—typically the title company or an attorney who will be closing the deal.
Next, the paperwork moves over to either a title/escrow company or an attorney, depending on your state. From this point forward, I’ll probably just refer to title companies, but if you are in a state that uses attorneys, they serve the same function.
The title company is responsible for getting the deal closed. They will check the property for liens or other problems with the title, as well as prepare documents and schedule times for everyone to sign the paperwork.
Typically, if you are working with a real estate agent, your agent will suggest their favorite company—or the seller may ask that you use their favorite. If you work directly with a seller, don’t be afraid to ask a few agents which company they prefer.
You’re under contract. Hooray! While you wait for the deal to close, it’s time to get your ducks in a row so you can start work immediately once you have your keys.
Once the house is under contract, hire a professional inspector immediately to look through the property. Unless you are a contractor yourself, this is not a place to cut corners. A qualified, licensed home inspector can tell you a lot about the property you are about to buy—including the things you probably wouldn’t notice yourself, such as the wiring, plumbing, and roof condition.
I recommend physically being at the property during the inspection—and asking a lot of questions. The information you learn will serve you for years as you pursue flipping houses more efficiently.
A home inspection typically runs between $400 and $600 for a typical single-family home and higher for multifamily properties. Again, this is no place to skimp.
One final note on the inspection: A home inspector’s job is to find problems, so don’t be scared when you get a 20-page list. I’ve never purchased a property that didn’t have at least 50 things needing fixing. No property is perfect. You’re looking for properties that have no major problems, such as a bad roof or foundation unless you’re already budgeted to fix that problem up.
You also may not want to fix every single thing in the inspection report. The inspector will usually let you know what’s most important and what’s just a good idea. For example, you’ll probably want to fix a roof leak, but you may not want to fix a bent gutter on the back of the home.
After the inspection, you will have one of three choices:
If everything looks good, you’ll sign a document letting the sellers know you accept the condition. But what if there are serious, game-changing problems?
I would recommend not pursuing step two without considering step three first. For example, let’s say you discovered that the home needs to be totally re-wired. Don’t immediately run. Instead, ask the seller to fix the problem or credit you the cost after closing. After all, now the seller knows about the problem. Legally, they’ll have to disclose the problem to future buyers—so attempt to salvage the deal if possible.
Make a detailed list of everything that needs to be completed on the project in order to get it ready to sell.
You could complete this step before the offer is accepted, but I usually only create a “light” scope of work. Why waste time on deals that won’t ever happen? Plus, the inspection will provide a detailed list of problems that you can refer to.
If you don’t plan to do the work yourself, work with a qualified contractor to bid out these tasks. You don’t want to buy the property and suddenly realize your to-do list is much more expensive than anticipated. This is the fastest way to lose a lot of money and fail at your house-flipping business.
This step could actually be done at any point beforehand—but now is a great time, if you haven’t already hired a contractor. If work is needed and you don’t plan to DIY, it’s time to find some dependable contractors.
I recommend approaching it like a business by proactively seeking out the best contractors.
The best way to find a good contractor is via a referral from another real estate investor, house flipper, or property manager. Always get multiple bids from different contractors—but don’t assume that cheapest equals best. I believe there are three (loosely defined) types of contractors.
Be sure to get all bids in writing—and with details. If the contractor says they will paint the exterior for $2,500, does that include the doors? Does that include pressure washing? Get down to the nitty-gritty and get it all in writing. It will save everyone stress in the future.
You will likely need several different contractors to do different parts of the job. Be sure to coordinate who will do what and when. Also, determine how you will pay the contractor.
There are a number of tasks you’ll need to complete during your due diligence period. For example, during this time, you will want to:
It’s also important to create a schedule for completing the flip. As the person in charge, you must ensure work is getting done quickly—which means planning the flip’s different phases with your contractors to ensure there are no “dead days” where nothing gets done.
Finally, all your work is about to pay off. But it’s not the end of the journey—it’s just the beginning!
Your title and escrow company will schedule a time for you to come in and sign the paperwork. Depending on your state’s laws and traditions, you may or may not actually sit down with the seller at the closing table. At this time, the money from your lender (or your checking account) will be wired to the title company (or attorney), who is responsible for making sure the correct amount is paid to each party.
Finally, the title company will send the deed to the county to be recorded. Property ownership will officially pass to you!
Congratulations—you are an investment property owner! Now it’s time to get to work.
Hopefully, you organized your rehab schedule during due diligence, so everything should run smoothly. Just kidding: Flipping houses is never easy! But proper prep does make things move along more smoothly. Your contractor should be ready to dive in on day one.
Unless you hire a project manager, your job is to ensure the contractors are doing the work that they’re supposed to when it’s supposed to be done. Contractors are notorious for taking significantly longer than they originally said—and without pressure from you, they’ll take even longer.
You’ll also need to ensure bills are being paid, including the utilities, contractors, and supplies. Keeping a close eye on the bills ensures you stay on budget. But keep in mind that budgeting can be one of the most frustrating parts of house flipping—especially if you’re not prepared.
Go overboard on organization. There may be hundreds of receipts, bids, and documents floating around, but take a few moments every single day to organize them and enter them into a spreadsheet so you can keep track of your spending.
Once all the contractors finish, I create a final “punch list” of things that they forget.
No matter how good the contractor is, they will miss some small details. It’s your job to go in, create a punch list, and get those things knocked out as quickly as possible. And don’t pay the contractor until this is all done!
Here is an example punch list to give you a better understanding of how yours might look:
Painting:
Flooring:
Electrical:
Plumbing:
Doors and windows:
Cabinetry and countertops:
HVAC system:
Thanks to your hard work and dedication—and, let’s be honest, money—the in-need-of-rehab property you purchased is now ready to go back on the market. Here’s how to get the most money from your flip.
Staging is the practice of placing furniture, wall art, knickknacks, and other objects throughout the home to make it look more lived-in. Although it may seem counterintuitive, most real estate experts agree that staged homes sell faster and for more money.
You can hire professional staging companies to replace your flip with furniture. You can also save money by heading to your local furniture rental company—the rent-to-own ones—and having them stage the home for you for several months.
If you have a tight budget, consider just installing cheap curtains and picking up inexpensive house plants. Small changes can do wonders.
Finally, the property is finished—and it looks fantastic. It’s time to list the home for sale. Although you could list it “for sale by owner,” most investors list it with a real estate agent who can place it on the MLS for maximum exposure.
You will sign an agreement with a listing agent that spells out things like the sale price, the commission, and how long the listing agreement will last.
Before actually listing the home, your agent will look at comparable properties in the neighborhood that have recently sold and come up with a great listing price. Although you looked at the comps when you started the whole process, the real estate market may have changed. Make sure you reevaluate your pricing strategy to ensure you’re being competitive.
While the home is on the market, there aren’t a ton of things you personally can do besides maintaining the home and answering your agent’s questions when they come up.
However, your agent can do quite a bit—so make sure they are! Ask for weekly reports (or better yet, have a phone conversation about the progress at least once per week) and ensure your agent is prioritizing your property.
It may feel like time to break out the Champagne, but keep that cork closed.
In my experience, 50% of offers don’t turn into sales. Don’t count your chickens before they hatch.
Instead, look at the offer for what it is: a business proposal. How does it look financially? Are they offering enough—or is it a lowball? What about contingencies? Are the buyers pre-approved for a loan? Do they appear to be serious?
Review the offer with a (figurative) magnifying glass and discuss it with your spouse, agent, and investing partner.
Chances are you won’t simply accept the offer as presented—though there is no rule that says you can’t if it’s a great offer. Instead, you’ll probably want to “counter” the offer with one suits your strategy better. Most real estate buyers and sellers expect a little back-and-forth, so don’t be afraid to counter with a slightly higher number. Most buyers won’t run for the hills.
The paperwork may go back and forth a few times, and in the end you’ll either have a signed deal, or the agreement will fail and you’ll both go your own ways. Hopefully, however, you find success and can move on.
Just as you did your due diligence, now your buyer will do the same. They’ll probably hire a professional inspector to walk through the property and find every problem they can.
I’ll offer the same advice here as I did earlier: An inspector’s job is to find every problem. Even after a complete rehab, the buyer will likely get back several pages of problems. The buyer may ask you to fix a lot of those problems, and the choice is yours as to whether or not you will. If you don’t, they may walk away from the deal. Consider each repair carefully and do what you can to keep the deal together.
During this process, the buyer will also be finalizing their financing and doing the necessary steps needed to buy the home.
You will likely communicate with the title company or attorney several times concerning loan payoff amounts. Be as prompt as possible in returning phone calls to ensure the sale goes as smoothly as possible.
On the day of closing—or several days before—you will sit down at a big table and sign the closing documents at the title company. Inspect this paperwork carefully for mistakes. If you find any errors, immediately address them with the closing agent.
The title company will handle all the payments, accepting the incoming funds from the buyer and paying off your loan on the property. They’ll give you a cashier’s check (or a bank wire) for the difference.
One final note: These funds are not all yours to keep. Instead, any profit needs to be shared with the government when tax time comes. House flipping is generally considered “active” income and therefore taxed at the highest levels. However, good tax planning can help avoid a good portion of the taxes due—so be sure to seek out a qualified tax professional before selling your flip.
Finally, take your profit and sink it into the next flip. Or use it as a cash infusion to buy rental properties or real estate notes. House flipping can be a lot of fun, but it is active income, so continue to build up your passive income at the same time to create real wealth.
There you have it: 30 steps for completing the perfect house flip!
If you’re serious about flipping houses, don’t rely on this blog post alone. Dive into the educational world of house flipping by checking out The Book on Flipping Houses by J. Scott.
Don’t let your flip become a flop. Here are some of the most common mistakes novices and pro flippers make:
Never jump a deal without first securing financing. Making $40,000 in repairs and renovations is much harder if you only have $15,000 to spend. You have plenty of loan options available—many of which we will cover later in this post. Just don’t forget to factor interest into your bottom line.
House flipping is a popular way to invest in real estate, but it’s important to consider the timeline for buying a house when deciding if it’s the right strategy for you. The longer you own the home, the more it will cost you. Repairs and renovations often bite into your nights and weekends. Marketing your home and finding buyers also takes a lot of time. If you’re unable to devote the hours required to maximize your profits or outsource the work to professionals, the potential returns on your investment may quickly dwindle.
Time should be a driving factor for house flippers, but it’s not the only one. Rushing the process can lead to costly mistakes. Take the time necessary to hire the right people and make the most of your budget. Sometimes taking an extra month can net you tens of thousands in gross profits.
Rehabbing a home requires more than a few hammered nails and a fresh coat of paint. Distressed properties need a lot of work, especially if there are structural issues. Hire an inspector to thoroughly examine the property and list everything that needs to be done. Chances are you won’t be able to fix everything by yourself. If you can’t, hire experts who can!
Real estate investors often simplify their investment strategies by living by the mantra “buy low and sell high.” When it comes to flipping houses, there’s a lot more to it.
In this section, we’ll cover the 70% rule and all the costs associated with flipping a house.
Angela is considering buying a triplex and renting out the other two units for $1,200 each. She’s budgeting $100 a month in operating expenses and $150 in capital expenditures. She also assumes each unit may be vacant for one month a year.
One of the easiest ways to assess whether you should buy a home is to use the 70% rule. Your home’s purchase price should equal 70% or less of the property’s after-repair value (ARV) minus repairs and renovations. Simply put:
ARV x 70% – Repairs and Renovations = Maximum purchase price
Following the 70% rule will minimize your chances of taking on added financial risks by overspending on a property.
Let’s say Elena finds a fixer-upper on sale for $235,000. She knows that comparable homes in the neighborhood are worth $400,000, and her power team estimates the cost of repairs and renovations will be $40,000.
$400,000 x 70% – $40,000 = $240,000
If Elena purchases this at $235,000, she will be under the 70% rule by $5,000. By that logic, the gross profit for flipping this house is $125,000 ($400,000 – $235,000 – $40,000).
The key term here is “gross profit.” Most of us would love to make a $125,000 profit on every house we flip, but repairs and renovations aren’t the only costs. You also have to consider:
We’ll continue to use Elena’s scenario when determining what’s included in each:
Purchase costs are fixed expenses that contribute to the purchase of a property. In addition to Elena’s down payment, her purchase costs include:
Know your comps and know your area. The more you understand why people are paying the price they’re paying for local comps, the better you can design a house to fit the price point and secure an above-market offer! Learn more from James:
The fixer-upper isn’t Elena’s primary residence, and your fixer-upper probably isn’t. Regardless, Elena is responsible for paying the holding costs. These include:
Homeowners association fees (HOAs): There will be HOA fees if the neighborhood or condominium has an HOA. Read the HOA bylaws carefully. Some neighborhoods have strict property requirements, including paint colors, lawn care regulations, and noise restrictions. Let’s assume Elena’s unit has an HOA. Let’s assume her fees are $150/mo.
Keeping all this in mind, let’s assume Elena holds her property for four months or ? of the year:
Identifying all your expenses is a lot to take in. However, it’s necessary to do the math to determine how much you’ll walk away with at the end of a sale.
Let’s add all the costs together and subject from the ARV to determine Elena’s net profit for this flip:
After adding everything together, Elena’s net profit is $68,233. If Elena flipped and fixed just two homes with these margins, she’ll make six figures before taxes for the whole year!
AFC Mortgage Group can help you find the ideal financing for your flip and final takeout loan!
When you flip a home, getting a traditional mortgage isn’t a great option for most investors. While you have some traditional loan options, such as renovation and construction loans, you’re usually better off with a short-term loan. Traditional mortgages are bound by the guidelines of Fannie Mae and Freddie Mac, which are government-sponsored enterprises that purchase real estate notes from lenders. If traditional lenders want to sell a note, they have to abide by Fannie and Freddie’s rules, and many distressed properties (the best ones to fix and flip) fail to meet these requirements. That said, your main options include:
A hard money loan is a short-term loan you can get from private lenders or individuals, instead of conventional lenders, such as banks and credit unions.
Hard money loans accept physical assets as collateral, instead of focusing on your financial history. This collateral is usually the property you’re buying, other real estate properties you own, or something else that’s tangible and of equivalent value. Keep in mind that, because a tangible asset(s) is involved, your hard money lender can take ownership of them if you default on your loan.
A key benefit of hard money loans is that they are secured loans that require you to jump through fewer hoops. Traditional loans have a rigorous approval process that can take a month or longer, while you can get approval for a hard money loan and receive cash-in-hand in just a couple days. Time is money when it comes to flipping houses, so real estate investors often have to move quickly.
Also, because hard money loans are short-term (repayment periods often range between 3/mos and 1yr), they usually have higher interest rates. In 2022, hard money loan rates are usually around 10% – 12%.
Private lenders can be pretty much anyone with extra capital and an interest in investing with you. They can be another real estate investor, your former college roommate, a loved one, an angel investor, etc.
Private money loans require even fewer hoops to jump through than hard money loans, and they can be even greater in flexibility. The only true limits are the confines of the law.
Bridge loans help you “bridge” the gap between when you need funding and when you secure permanent financing. They are usually more common when you’re simultaneously buying and selling a home, but they can also finance your fixing and flipping endeavor.
Terms can vary greatly, but most bridge loans share the following characteristics:
Portfolio lenders are smaller banks that don’t work with Fannie, Freddie, or some other major institution. These banks can define their own lending criteria. In other words, they can lend to anyone they want. That said, most portfolio lenders will still care about your financial situation (they won’t want to see a bankruptcy, foreclosure, or large unpaid debts on your credit), but they’ll also consider your real estate experience and the specific deal you’re trying to get financed.
Many portfolio lenders are experts in evaluating investment deals, so if they’re confident the investment is solid, they’ll be less concerned about the borrower defaulting on the loan. They have already verified that the property value will cover the balance of the loan. Portfolio lenders also aren’t in the business of foreclosing on real estate, so they aren’t hoping you’ll default on your loan.
HELOCs act as a second mortgage and are typically used for repairing and renovating your home. However, they can also be useful in other financial situations, like financing a fix and flip.
HELOCs usually offer longer repayment periods, better rates, and lower closing costs than bridge loans. Be sure to read the fine print before taking out a HELOC, since some come with prepayment fees.
Home equity loans allow you to borrow against your current home’s equity, using it as collateral. These loans offer longer-term financing, and you can often get one at a lower interest rate compared to a hard money loan.
HGTV shows can lead you to believe that a house flip is easy and glamorous. It’s not. You have to do your research to know if you’re buying and selling at the right price. The repairs needed require physical labor, and you’ll need the right team of people to do aspects of the flip you can’t. Also, if things go wrong, you could lose money instead of turning a profit.
Here are ten strategies to help you make the most of your flip:
Much of your first flip will be a learning experience. Don’t make newbie mistakes on a luxury property. Look for homes with lower price points to start. They’re easier to maintain, and much easier to sell. Also, when something inevitably goes wrong, it won’t hurt your pocketbook as much as if you were flipping a small mansion.
House flipping is a numbers game. If your potential buy breaks the 70% rule, it’s not worth it. When you pay too much, you can lose money on a property. Even if you see amazing potential in a fixer-upper, you have to remain objective. Sometimes, your dream flip just isn’t worth the financial risk.
Be conservative when estimating how much you think things will cost. Expect your renovation budget to be higher than anticipated, your hold time will be longer than planned, and your sale price may be lower than desired—just in case. Not even the most experienced house flippers can accurately predict these factors, so expect that things may cost more than you anticipate.
The mantra of real estate especially holds true when flipping houses. Look for distressed homes in popular or up-and-coming neighborhoods.
Zillow, Redfin, and other popular sites that use the multiple listing service (MLS) can get highly competitive, especially if you’re looking in a popular area. You can still score an amazing deal, but these shouldn’t be the only channels to use. Look for email lists for properties via wholesale and auctions, search for pre-foreclosures, and befriend real estate agents constantly eyeing the market.
Speaking of competitors, look at other competing properties in your area. Do they have vinyl floors or hardwood? Do they have cheap countertops or granite? Do they have white appliances or stainless steel? You want your products to be as nice as your competitors, with one or two extras to make your unit more desirable.
Having the nicest house in the neighborhood might be a point of pride, but it won’t optimize your profits. Not only does over-renovating eat into your gains, but most buyers aren’t willing to pay for the nicest property in the area.
That said, never skimp on quality in a renovation, either. If a prospective buyer sees you cut a corner, they will assume you’ve also cut others. Strike a balance between putting out a quality product without overspending.
Motivated sellers are another amazing, often underutilized channel. Run campaigns through direct mail, Google, social media, and/or email marketing with targeted ads that’ll engage sellers. You can avoid bidding wars with other flippers, and score amazing deals—especially when you find sellers that want to be done owning a property. In many cases, this is great for relationship building and your personal brand. If you can really help someone, they’re likely to let others know how.
If marketing isn’t your forte, hire an experienced team to help!
You can renovate the most immaculate kitchen anyone has ever seen, but if your lawn is patchy, yellowing, or diseased, many potential buyers won’t step through the front door. Curb appeal is critical, so maintain your lawn right from day one. Soil, sod, weeds—do whatever you need to do to ensure your property’s exterior is as beautiful as its interior. Damaged lawns can take a month or two to bounce back, so don’t make tending to it an afterthought.
Remember your power team? Put them to work! The money you’ll save by outsourcing projects that you’re not proficient in can make a huge difference. If you don’t already have a network of agents, general contractors, electricians, painters, etc., it’s time to build one.
You shouldn’t invest $20,000 in a stock because you like the name. You do rigorous research, and learn as much as you before making a big financial decision.
Have an exit plan in place before purchasing a fixer-upper. You can do this by:
You can also hold onto the property, rent it out, and enjoy a stream of passive income. If you go this route and take out a loan, we recommend switching to a conventional mortgage to reduce your interest rate.
When you sell, take the net profit and knowledge you gained—but don’t forget that you owe taxes on those net gains.
As a house flipper, you’re buying and selling a commodity—just like if you were selling furniture, clothing, or cars. You’ll likely pay the same percentage in taxes as if those gains came from income from a full-time job or another type of business. You’ll likely have to pay an additional 15% in self-employment taxes on at least part of your income. We highly recommend consulting with a qualified accountant or CPA who can help you structure your business in a way that allows you to pay the least taxes possible.
Even after paying taxes, if you followed the 70% rule like Elena did in the example we used, you’re going to make a good return. You can use profits to look for another property to invest in. The experience you gain when house flipping is invaluable. The better you get, the more money you can make.
Become homeowners. AFC Mortgage Group will help you navigate the loan process, secure financing, and purchase your dream home.
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