The process of flipping houses is not as glamorous as its end product. While most people only get to see the picture-perfect, magazine-ready interiors that attract plenty of buyers, embarking on a house flip can be a daunting endeavor. Be prepared to literally get your hands dirty and invest your blood, sweat, and tears if you intend to make it in this career.
But before you get into that, allow us to walk you through the process and the possibilities that are in store for you.
Flipping homes is an investment strategy similar to stock trading: buy low, sell high.
However, unlike stocks where the only control point you have is your entry and exit from the market, in flipping homes, you get to name the price you sell it for. This can be accomplished by performing upgrades that increase the market value of the property through closely following housing market trends in your area.
A typical flip takes about six months. This includes buying the fixer upper, renovating it, putting it back on the market, and successfully selling it. Turning a profit on your investment within half a year is an attractive prospect, so let's see...
According to Attom Data Solutions, leading curator of information relating to real estate,8.4% of all home sales the past year were flips. This only means one thing: a willing and receptive market is there for claiming.
A little caveat though, flipping houses is a competitive market growing every year, thanks to the popularity of home flipping shows. This has resulted in thinner profit margins since a lot more people are sharing the pie. Additionally, the rise in median price of homes across the country contributes to diminishing returns.
The average return on investment (ROI) is now half of what you would have made six years ago (26.9% versus 51.4%). This translates to an average gross profit of $67,900 per flip.
Subtracting the closing costs, real estate commissions, holding costs, repair costs, financing costs (if any), and other selling costs leaves you with an average net profit of $30,000.
While it is only half of how much you'd make in a year working a regular job at an office, home flipping gives you an opportunity to scale--something that isn't possible with a job having a 40-hour workweek. You can only work so many hours and get paid for it. On the other hand, fixing and flipping multiple houses has a huge profit potential.
Flip enough houses, and you can instantly double or triple your income as long as you're ready to put in the work.
A common saying in real estate investing circles goes: "Money is made when you buy, not when you sell."
Before flipping a house, do your due diligence to make sure it is profitable. Here are some green flags to look for when scouting real estate listings:
Location is the most important factor that prospective home buyers look at when in the market for a new home. Even if the house has a perfect layout and you added incredible features, if it's located in a bad neighborhood or in a flood-prone area, you'd have a tough time trying to sell it.
You should also keep an eye out for shifts in buyer preference. To illustrate, more people are keen to move into the suburbs these days as a result of relaxed workplace policies following the pandemic.
Zoning dictates how an area is to be developed. If the area is zoned for quality schools, your flip can have a promising resale value. What's more, you're also more likely to attract high-income buyers looking for a home that can retain and grow its value. Additionally, areas with projected high economic growth also equal a substantial appreciation in future values.
How do you find out about these future plans?
Get in touch with your local zoning officials. You can also network with other investors familiar with the area. In addition to possibly being privy to this information, you can also pick up valuable insights from these veteran players of the real estate game.
This doesn't mean instantly jumping into the first bargain deal you come across. You'd want to make sure you're purchasing the investment property at the right price. Even if the purchase price is at a deep discount, you'd still write it off as a loss if it proves to be unsellable, or if the repair costs are enormously higher than anticipated.
So how do you know it is the right property?
There's a nifty little guideline you can follow: 70% rule in real estate. It gives you the maximum purchase price you can shell out to acquire the house to guarantee a healthy net profit. The rule states you must spend no more than 70% of the prospective property's After Repair Value (ARV) less all the costs incurred from the flip.
Figuring out these values and costs is the tricky part, so here are some tips:
House flipping can be very financially rewarding. The chance to earn upwards of 25% on your money is within a very short period is certainly enticing, and so much better than just parking it in a bank.
Now, you're at the closing table about to purchase your investment property.
So far, it has ticked all the boxes above: a nice suburban location close to restaurants, grocery stores, schools, and parks being sold at a very investor-friendly price.
Should you proceed with the purchase?
Before signing on the dotted line, you must be aware of the possibility that you can lose the money invested into the project.
Here are some of the risks house flipper face, and how to mitigate them:
The cost to flip a house depends on several factors: property type and condition, location, and scope of renovations. As a rule of thumb, you must budget 10% of the property's acquisition price for flipping costs.
But, to get a clear picture of how much you must set aside for the flip, let's break down the costs:
Purchase price: although this is the largest investment required to initiate the process, there's no need to over-extend yourself. Apply the 70% rule when making your offer.
Closing costs: since ownership will be transferred to you, expect to pay around 3-6% of the sales price to cover title fees, insurance fees, commissions, insurance, and other costs. Do note that once you sell the property, you will need to pay the closing costs again.
Renovation costs: material and labor costs will depend on the condition of the home. Depending on the scope of rehab, it can range from the low five-digits to over a hundred thousand dollars.
Carrying costs: taxes, HOA fees, insurance, utilities, and mortgage payments, if you financed the purchase and renovations. You can peg this figure at around 10-15% of the rehab cost.
Other costs: this includes miscellaneous costs such as marketing and staging fees, and real estate agent commissions if you enlist their help selling the property.
Successful real estate investors don't shy away from research.
They spend hours and hours finding and learning about "hot" areas so that they can avoid it. While these areas may have the greatest number of buyers, it also has the fiercest competition. Furthermore, houses here are more expensive, so your budget can get wrecked by acquisition costs alone.
So, although it may sound counterintuitive, you want to invest in areas adjacent to the "hot" neighborhood.
Since competition is flocking elsewhere, there's plenty of opportunities for you to find diamonds in the rough. When it's time for you to sell, you can easily find buyers willing to trade proximity for relatively cheaper.
Browsing Pinterest boards, reading real estate magazines and realtor reports, and good ol' networking can keep you abreast on what's "in".
Keeping this in mind as you do the renovations increases your chances of being able to sell your flipped home faster.
For highly-experienced house flippers with a veteran construction crew on retainer, the average time spent flipping a house is around 3-6 months, equivalent to 2-4 houses a year. For reasonably experienced flippers, house flips can be completed within 6-12 months. However, if you're pretty green, flipping houses can take up to 18 months.
Flipping houses is not an easy business to get into: it has a steep learning curve and requires a significant investment of time and resources. At the start, as you're building up your experience , it can feel like you're working full-time for a part-time income.
But as long as you have the grit to stick with it, soon enough it will get easier for you with the know-how you acquired. Eventually, you'll be able to flip two houses or more at a time, exponentially increasing your income.
Pro-tip: If you want to speed things up a little, find yourself a mentor who can provide you with professional guidance. Nothing beats wisdom that comes with experience, but it also doesn't say that you can't use other people's experience in your journey!
If you don't have enough money to get started on your career as a house flipper, you might be wondering if it's possible to take out a loan to get started.
The short answer is yes.
But do note that a loan can impose a significant financial burden, and the road towards the glittering payoff is not easy. For starters, your loan needs to cover both the purchase and the rehab costs, so it will be more expensive. Additionally, traditional lenders tend to avoid fixer uppers due to the risk that they may not be able to sell it in case you default, resulting in them losing money.
Therefore, the most viable option is a hard money loan. The drawbacks are the high interest rates and expensive origination fees. So before getting a loan, make sure to crunch the numbers so you won't have problems later on.
The allure of flipping houses comes from the process of transforming an "ugly" fixer upper into a beautiful home. It's why those HGTV shows are so popular. Of course, it also doesn't hurt that home flipping gives you the opportunity to make significant returns on your investment in as little as 3 months!
The key to a profitable and rewarding flip is finding the right property, and here at Property Leads, we can help you accomplish that! We know how valuable time is--each of us only gets 24 hours of it per day!
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