Do you want to know how to flip a house for profit? Your not the only one. The latest research found on Trulia showed that flipping houses has been growing year in and year out. In 2016 just over six percent of all home sales were homes that were flipped. that is the highest percentage in over a dozen years.
There are so many house flipping shows on TV today and watching them it is easy to see why it seems so easy to purchase, fix up and flip a house for profit.
What Is House Flipping?
House flipping a science, art or can anyone do it? Flipping a house is when a real estate investor buys a home, may or may not fix it up and then sells it for a profit. In order for a house to be considered a flip, it must be purchased with the intention of quickly reselling for a profit. The time frame between the initial purchase, fix up and sale is typically from six months to a year. Larger projects can take as much as 18 and up to 24 months.
There are two versions of flipping a house:
- The first is when an investor buys a property that has potential to increase in value with the right repairs, updates or re-positioning. After completing the repair work, the investor makes money from selling the home for a much higher price than what it was originally purchased it for.
- The second type of house flipping is when a home is purchased in a market that has rapidly rising home values. In this scenario, no updates are necessary. The investor holds the property for a few months and then is able to resell it for a profit with no additional fix up or work.
Most of the Fix and Flip scenarios today lean towards the first type. This is because in most cases even minor repairs will result in a higher resale price. It is also easier to find a house in today’s market that has not been rennovated in a while and updating it with today’s modern conveniences can bring an investor a substantial upside.
Is Flipping a House a Good Investment?
Flipping a house may sound easy, but can it be that lucrative? Given the right scenario flipping a house can be a great investment. Just like any other investment the more information you have the better off you will be and the more likely your investment will result in success.
How to Flip a House in 5 Easy Steps
House flipping can be a risky endeavor, and it’s easy to see why utilizing someone else’s money may be an advantage. First there is less money out of pocket, leaving you excess capital in the event of an emergency. Having lower out of pocket funds you can carry your property for a longer period of time allowing you maneuver, make additional course corrections and make last minute changes that can result in a successful investment.
Let’s imagine at a real-life scenario: You purchase a house to flip for $100,000. You finance an additional $50,000 in renovation s for $45,000 and sell the house for $200,000 to keep a nice profit. Sounds like a great plan, right?
Now add unexpected repair costs an extra $5,000. And then renovations take three months instead of two, costing you an extra $3,000. When you list the home, it sits on the market for a month before you’re forced to drop the price and sell it for $190,000. A month later you close and get your payout.
Here’s how that breaks down:
Selling Price: $190,000
- Purchase Price $100,000
- Purchase Loan: $90,000
- Renovation Cost: $50,000
- Renovation loan $45,000 +$3000
- Estimated Interest Paid Over Eight Months: $13,500
- Closing Costs: $8,000
- $174,500 Cost $190,000 selling price. Profit $16,000 with overruns and delays.
You invested $15,000 in your own cash and you made a profit of $16,000.00. That’s over a hundred percent profit.
Pretty good for your first investment fix and flip home.
Step 2: Know your Market
A lot of house flippers get over excited about their first or next project and can tend to ignore the less glamorous side of the business. If you don’t have a good understanding of the market, though, you could run into the following issue:
If you don’t know your market than how do you know if you are getting a good deal. You can look on Zillow and see what their estimate of current value is, but will that help. do you know the square footage of the houses in the neighborhood, the interior finishes and what other like houses in the neighborhood sold for? Your vision for the home must fit the reality of the neighborhood and the ability for the neighborhoods residences to afford the home that you create.
You always want the price of the house that you rennovate to be able to sell at the low end of the market value. The best way to understand the value of your investment property is to find a local expert real estate agent. If you want to know the top agents in your area contact email@example.com and we can recommend the most successful agents in your area.
Your agent can help you target your home search to the right neighborhoods based on your price point, budget for renovations, and desired profit. They can also recommend local resources and contractors. If your contractors are unresponsive it can deal you finishing your home in a timely manner and really affect your profit potential.
It pays to work with a real estate agent who knows the market like the back of their hand. And then when you’re ready to sell, your agent can use their knowledge to price the house competitively so that you get top dollar. Working with a rock star agent can help you make a smart investment that keeps your finances on track.
Step 3: Make a Budget for Your House Flip
Don’t wait until after you purchase an investment property to make a budget. Know your price range for purchasing a home, making any repairs, completing renovation projects, and selling it before you seal the deal.
Even after identifying a home send your contractor over immediately to give you a list of repairs and a budget. Your lender is going to require these and you cannot be sure that your investment is a good one prior to having a contract give you an estimate. When starting I would recommend getting 2-3 estimates to be sure they are correct and to identify a reliable vendor. Typically not the cheapest or the most expensive. You should have at least 2 price quotes within a few dollars prior to making a selection.
Be sure to also order a professional inspection of your property.
Step 4: Invest in Smart Renovations
Make sure the rennovations that you choose actually match what is selling in the neighborhood. Every area is different and you need to know what is popular in your neighborhood. Dont get overzealous and put a Viking stove in your rennovated home if you will not be able to recoup your investment.
Don’t forget that big renovations—like kitchens and bathrooms—can easily make or break your flip. Take the kitchen, for example. According to the 2017 Cost vs. Value report, the average amount spent on a major kitchen remodel is $62,158. The average recouped is only $40,560. That’s not the kind of ROI you want to see when you’re flipping a house.
If you’re renovating a house that you hope to sell for $220,000, don’t put $60,000 into custom cabinet installations, high-end finishes and that dream kitchen island! Instead, consider a smarter renovation that focuses on refinishing the existing cabinets, adding granite counters and replacing appliances. You’ll spend less, with a lot higher likelihood of recouping your costs.
While you might invest in a couple big updates on a flip, don’t underestimate the power of the obvious. A fresh coat of paint or new carpet can do wonders. Also something often overlooked is the landscaping. Look at the block that your on and see what the exterior of the other houses look like. Some sod or a few trees or plants properly placed can change the entire look of your property. I remember one time taking a house in Florida where every house on the block was flat with straight driveways. We did nothing to the house but paint and built up the front of the house with fill, put down fresh sod and a circular driveway. A $26,000 investment resulting in $90,000 in profit. When you looked down the block every driveway was straight and flat and the only house that stood out was ours.
Step 5: Real Estate Guidance From A Local Realtor with Investment Expertise
Local real estate expertise is key especially on your first investment home. They can not only help with local area expertise but may have buyers in their pocket that will be willing to purchase your home.