House flipping is emerging as one of the best ways to make money for investors these days. Compared to 2017, in which merely 5.7% of the total homes were flipped, 7.5% of homes flipped in the initial quarter of 2020.
Whether you are considering tax benefits or year-round rental income, flipping houses is a smart way to earn some profit in the field of real estate in short term. However, on the other hand, the entire process of house flipping is too hectic.
Are you new to the concept of flipping houses? This might add to the chances of losing money if you don’t learn how to effectively flip a house.
Here is a detailed description regarding what flipping houses actually means, and a step-by-step process on house flipping before you step into the business.
What Is A House-Flipping?
Before starting with the entire process of house flipping, let us first understand what the term actually means. Flipping houses is one of the fastest moneymaking real estate investment strategies, which involve purchasing a property, renovating, and selling the same for earning some profit.
The house flippers purchase homes that the owners aren’t able to sell or renovate. After purchasing the house, they improve the condition of the house by renovating it keeping in mind the future demands of the buyers. Finally, when the house is ready, they sell it to the potential buyers in a ready to move-in condition.
No doubt, the entire process of house flipping is complicated, but once you understand the concept, you are surely going to earn profits.
What Are The Smart Things To Research Before Starting?
Are you new to flipping houses? Here are some smart things to research before you enter for the flipping process.
Be Financially Ready To Invest In Property
Before starting with flipping houses, you need to be financially stable or capable of cash or mortgage on an investment property. Here are some financial requirements you can expect to have some finances in your favour before you start looking for a property. The first step towards the preparations includes 620 + credit score, 20% + down payment, six months of reserves, and two years of W-2s.
Searching And Purchasing A House For Flipping
Once you are ready with the finances, the next step is to look for a property or house for flipping. And for getting in the right deal, it is better to look for an established agent in the field of real estate who is experienced with flipping houses. For having the best real estate agent in your favor, you can look for recommendations from your friends and family members or go through online reviews. You can also go for multiple listing services and look for the right agent as per your requirements. Once the right agent is found, you are sure to get the right property for flipping.
Renovate On Your Own Or Hire Contractors
The next smart step in the research is to think about the renovation. Will you do the renovation on your own or will hire professional contractors for the process? This is what you need to focus on. For this, check what work the property needs, how much DIY repairing is possible, are you having sufficient time for renovation, and lastly, do you enjoy renovating a house or not. When you are ready with all these answers, you would be ready with the right decision regarding the renovation. At present, if you want to know important things about home renovation, read here:
Step-By-Step Guide to Flipping Houses
Now that you are ready with a smart way of investing in flipping houses, here is a step-by-step guide on flipping houses that would make your entire process easy and convenient.
Research On The Range Of The Real Estate Market:
Not every area or locality gives you good returns on flipping houses. Every area comes with different pricing and hence, it is advised to start with an area that is suitable for your investment. When you are ready with cash or mortgage in hand, look for an affordable market for investing your money for positive returns. For first-time investors, it is recommended to start with low-income neighbourhoods with low margins and reduced risks. Once you are redy with the entire process and additional earnings, you can continue with expensive neighbourhoods in the future.
Let’s take an example to make this simple for you. Suppose you are having $15000 on hand to start your work. In this situation, you shouldn’t start with a locality with home rates ranging from $800000 or above. This is because you will have to pay a 20% down payment for the property, which surely runs out of your budget.
Know Your Budget And Create A Business Plan:
Real estate investors looking for flipping houses work as entrepreneurs. In addition, this means before starting with flipping houses, they need to have a strong business plan and a proper budget. Similar to any other business, you need to have a business plan, which is simple and easy to understand including a budget, timeline, and project scope. Having a basic budget helps in determining a range of investment properties you can shop from as per your financial capabilities.
And for setting up a proper budget, you need to determine the total cost for the entire process of house flipping. The total cost to be calculated includes buying renovation materials, cost of hiring contractors, marketing, utilities, and insurance. Again, having a timeline for the project is equally important. The timeline also depends on the project and the required renovations and repairs the house needs. So, design a business plan and set a budget for flipping houses.
Fund Your Finance Before You Need It:
Worked on an effective business plan and an approximate budget? The next step towards successful flipping houses is to get your finances ready. No matter whether you are thinking to start with a small house or a big one, having minor renovations or major, the financial investment is a must when looking for flipping houses. Hence, before starting with flipping houses, you need to keep your finances ready on an early basis. For this, initiate by working on different financing options according to your requirements keeping in mind the advantages and disadvantages of every option.
Again, if you are planning to work on flipping houses with limited cash, it is important to learn about how to flip houses with limited or zero money. There are various loan options available in the market like hard money loans, private money loans, home equity loans, and business lines of credit. Compare all the loan plans, the loan requirements, and the interest rates. You can also look for financing from wholesaling, partnering, or even seller financing with other investors in the market.
Network With The Best Contractors:
Flipping houses is not the task of a single individual. It requires a professional team of best contractors for which you need to start establishing good contacts with contractors and other professionals. The team of professionals includes a lender, a real estate agent, a general contractor, a plumber, an electrician, a painter, etc.
While preparing your entire team, make sure all the professionals involved are licensed, insured, and bonded. Hence, there are few mistakes that you must avoid while choosing contractors. Have a look:
There are some contractors that work with an entire team that handles the renovation process effectively. Look for referrals when hiring the best contractors, compare their pricing, and their work quality before you finalize the best contractor suitable to your budget. To plan a workforce for your renovation, you might get some help from here:
Select The House To Flip:
For having a good deal in your pocket, selecting a house is the next crucial step. This not only includes buying a house with low market value but looking for one that comes with sufficient margins capable to cover all your renovation and other expenses like closing costs, realtor fees, etc. You can look for a Realtor who would help in looking for the best deals online or a wholesaler to find deal off-market.
In the search for the right house for flipping, a real estate agent holds an essential role. He would be helpful while touring different homes in a particular location as per your investment budget. When you find out a home that fits your search, make sure you call a general contractor to know the estimated renovation cost. Once you are ready with the cost and other details, you can finally make up whether the house would give you potential returns or not for making an offer.
Purchase The House:
Got your house finally! Great! It’s the right time to proceed with the purchasing process. No doubt, working with investment property lenders would give you quick results compared to the homeowner lenders, the entire process is still time-consuming. Before initiating the documentation, it is advised to get a home inspection done to learn about the costs before you run out of your budget while paying for the fixes.
If the total cost of fixes is too expensive compared to your budget, you can leave the deal and look for another house that suits your requirements. But if the property is suitable for your requirements and budget, you can step forward and initiate the buying process. While working on the buying process, make sure you check every documentation and other legal papers properly.
Renovate The House:
Purchased a suitable house? Ready with the contractors? If yes, the next step ahead is to start with the renovations. When renovating the house, it is important that you consider the budget and timeline strictly. From the very first day of renovation, you would be paying interest, taxes, insurance, utilities, and other relevant costs. Hence, make sure the renovation process gets completed on time without any delay. This would also help in ending up your loan at the earliest.
Here are some of the economical ways to renovate your homes with style:
Look for quick renovating ideas like refinishing cabinets, selecting cheaper shower tiles, going simple with the kitchen designs, etc. But when it comes to safety issues, make sure you don’t stick to your budget and spend the required amount. So, get in touch with the contractors and start with the renovations at the earliest to end up either on time or earlier.
Sell The House:
The final step in the process of the flipping house is to simply sell the house after renovation is over. Again, in this step, you might get the help of a good real estate agent having detailed knowledge about the local housing market to get you the best price. The agent would bring you the right buyers looking for a house as per your renovated house. As you have gone through the entire process of buying the house, carrying, and lastly renovating the house, you can now come up with a reasonable price that would help you earn good profits.
Once the house enters the market for sale, make sure you consider every offer capable of covering the total amount you have spent on the renovation of the house.
Some Common House Flipping Mistakes to Be Avoided
So, have you gone through the entire process of flipping houses systematically? Just as learning the process of house flipping important, it is equally important to learn about some common mistakes people make in flipping houses to avoid them. Here is the list of some mistakes you need to avoid:
- While hunting for a house for flipping, make sure you finalize a house with fewer problems or minor cosmetic fixes as selecting a house with big fixes would increase the renovation cost
- Before hiring a team for renovation, work on the possible areas with DIY renovation facilities as this would help in maximizing your profits once the project is ready
- During the renovation, don’t get carried out with the thoughts and ideas from others or websites. Be aware of your budget and stick to the estimates you have worked on
- When improving the property, make sure you don’t end up with luxurious finishes as this can lead to losing money to a great extent when flipping the house
- While adjusting the fixing cost, make sure you consider the safety issues very well and spend required amount for it to avoid any future issues
- When planning to flip the house, don’t forget to consider the contingency charges which is approximately 10%, that would be added to your budget at the time of selling the house
The Bottom Line
Certainly, going for the very first flipping house deal can be a little stressful, carrying out the entire process with the help of experts in the field, lenders, contractors, home inspectors, and even agents can reduce the stress levels to a great extent. Flipping houses is a buying and selling process that adds to your profit margins, but it is wrapped with high risks too.
So, make sure you understand the entire house flipping process properly, carry out required preparations, and select the right team before you begin with home-hunting. Hope these tips help you with positive results in your very first attempt at house flipping.
Image Courtesy: Image 3, Image 11
Author Bio
Sai Charan Gundreddi – Sai Charan Gundreddi is an author and a freelance content writing specialist with over 3 years of experience in the field. A writer by day and a reader by night, he is loathe to discuss Hinderer in the third person, but can be persuaded to do so from time to time.