The Beginner’s Guide to Flipping Houses for Profit
OK, let’s get back to basics.
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If you are just getting into flipping houses for profit, there's much to learn, no doubt. So I may have bad news for you: you can't learn how to do it a single weekend course.
You can’t learn how to do it by reading one article on a blog either (although there are tons of great articles from good writers right here on BiggerPockets). You also can’t do it by watching one episode of house flipping reality TV.
Contrary to what the gurus would have you believe, house flipping is not easy. But it’s obviously possible to be successful as a flipper, and the best way to learn is by doing it on your own, making mistakes along the way, and learning from them. That said, it’s important to have safeguards in place to make sure that you minimize your downside risk.
Is it as easy as people say? No way.
But there are ways you can shorten your learning curve, avoid the major pitfalls, and still come out with a nice profit. And of course, the more you do it, just like anything in life, the better you get at it. Experience, after all, is the greatest teacher.
The Different Definitions of House Flipping
So before we get into the “how tos,” let’s clarify the definition of house flipping first.
When people refer to "flipping houses," many are referring to the process of buying deeply distressed properties at auction, from foreclosure, or bank short sales at a deep discount, then quickly flipping (aka selling) that property to a homeowner without much in the way of renovations. Although this kind of house flipping is popular and potentially lucrative, this not the kind of house flipping we are referring to here.
That kind of flipping relies on quick sales and even quicker profits. Unfortunately, at the same time, this kind of flipping has given the real estate investing industry a bit of a black eye in the process. Not only is that kind of flipping oftentimes irresponsible (reason No. 1 not to do it), but there is also less profit in it than traditional buy, renovate, and flip house flipping.
When you buy a distressed property, make no real improvements, then quickly “flip it” to a buyer, you really don’t add a whole lot of value to the end-user. But when you buy a distressed property, beautifully renovate, and then sell it, you are adding real value. And with that real value, comes even greater profit potential. That is the kind of house flipping that provides excellent living spaces for families and individuals while also helping to strengthen the emerging housing recovery.
Additionally, house flipping is oftentimes referred to and sometimes confused with wholesaling. Wholesaling real estate is often called "flipping" because a wholesaler flips a contract to a real estate investor, who then does whatever they want to do with the property. I use wholesalers quite a lot and find them to be tremendously helpful resources for many of my house flips.
Neither of these kinds of house flipping are what my definition entails, but we’ll get into that in just a moment.
Flipping Houses for Profit: Not as Simple as They Say
Learning any kind of real estate investing, whether it's flipping houses or buying homes to buy and hold, is not simple. It's capital-intensive and is a lot of hard work. In traditional renovation-style house flipping, you need cash to buy the house, cash to make the improvements, and then hopefully to get it all back (and then some) to make it worthwhile to you.
I am not going to kid you. All these factors make house flipping a risky investment—one that’s not for everyone. It’s fast paced and fraught with potential risks, but when you do it right, the profit margins are very sweet indeed.
So whether you are just starting out flipping houses or are thinking about getting into it on a part-time or full-time basis, there are some beginner’s steps that will help to shorten your learning curve and get you flipping houses profitably in a short period of time.
House Flipping Steps for Beginners
Step #1: Assess Your Cash Situation
When first learning all about flipping houses for profit, you need to take stock of your own financial resources. You need to know how much money you have to invest on your own or whether you’ll need to find investors.
Finding investors is an art unto itself, but knowing how much cash you have to invest before you begin is the logical first step. If you have money to invest in real estate, this is certainly a bonus. However, if you don’t, there are a myriad of ways to flip houses with no money of your own using banks, private money lenders, and other means.
One great way to get started flipping houses if you don’t have the money to do it all on your own is to find a joint venture partner (or partners) who have money to invest. Splitting your first house flip profits with other partners is a great way to start, while building some momentum and getting your first attempt under your belt.
Sure, you’ll have to split profits, but it’s far better to get 50 percent of something than 100 percent of nothing.
Step #2: Start Building Your House Flipping Team
As soon as you finalize your cash situation, the next step is to start building your house flipping team. This team will help you find, fix, and sell the property. The collective wisdom and expertise will surely help you reach your house flip goals that much faster.
No matter your level of experience, you simply will not be able to do everything on your own. So enlisting your own mastermind group will not only help you be more productive, but it will also help you work through the inevitable problems and challenges that you’ll face.
Your team—at the very least—should be comprised of real estate brokers, contractors, architects, insurance specialists, accountants, and money lenders. All these professionals can help you figure everything out faster and get you making money flipping houses quicker than you would on your own.
Step #3: Find a Good House to Flip
Finding a suitable property to flip is certainly a challenge. This is especially true if you have decided to look in a specific geographic area you’ve fully researched that is situated in an area that interests you. Ideally, you should be able to buy the house for a low price, eyeball it to be able to rehab it quickly and relatively cheaply, so you can sell it at a higher price (and obviously make a profit). Knowing all these aspects in order to make the profit, you’ll need to rely heavily on your house flip team from step No. 2 above.
A good real estate agent can assist you in finding houses to flip. You may want to focus on properties that theoretically won't need expensive repairs. Alternatively, you can focus on properties that do need more extensive repairs, but the repairs will substantially increase the equity. Both real estate agents and real estate wholesalers can help you in finding both kinds of properties.
Step #4: Do the House Flipping Math
When doing your initial house flipping analysis, you can do a little “napkin math" to estimate if the house is a winner. The first thing you need to do is determine the potential selling price of the house when it's all fixed up. This is what's known as after repair value (or ARV). Then simply subtract the purchase price, repairs, and all your monthly carrying costs. What you have left is your profit.
If all this initial math points to profitability, then you may have an excellent house flip on your hands. You should consider purchasing it!
Step #5: Manage the Rehab Tightly
Once you do purchase the house, don't solely rely on your contractor to handle and supervise all the repairs. Make sure you manage this process tightly if you are doing the management on your own. Better yet, hire a professional contractor to oversee all the rehabilitation—especially if the rehab is extensive. Make sure you personally supervise the repairs to ensure that they are being carried out properly and on budget.
In the end, your profit largely depends on what you pay for the house initially, but making sure that the repair costs stay within your budget is equally, if not more, important. Likewise, overextending yourself by doing more than your budget allows on the rehab or taking your eye off the ball and allowing your contractor to run free are two of the quickest ways to ensure that your profits will go up in smoke.
Step #6: Work Fast, Make Profit
Time is of the essence when flipping houses for profit. It’s a race against the clock because the longer the rehab takes or the longer the house sits on the market once it’s done, the less profit you make. Soft costs, such as financing payments, insurance payments, town taxes, utilities, and any and all other carrying costs—all which have to be paid at regular intervals—will add up and diminish your profits.
It’s simple: the shorter the time you hold onto your investors’ money, the better your profits will be. So make your improvements fast.
Do the job well, but do it fast. Make sure your contractors do the job on budget and on time, and hire good real estate agents to help you price the final product so it sells quickly.
In all of our house flips, we estimate six months from purchase to sale but factor in a few additional months of expenses to make sure we profit on each and every flip we do.
The Bottom Line
Contrary to what many people think, rapidly appreciating markets are not a necessary ingredient for house-flipping success. As long as you stick to a disciplined set of rules, as big— if not bigger— profits can be made in slower markets, as well. Because it is such a short-term style of real estate investing, house flipping is largely immune to extreme market fluctuations. Successful house flipping can be done under any kind of prevailing market conditions as a result.
When you think about it, house flipping is one of the least risky types of real estate investing there is! When you buy right, do a good job on the rehab, stick to your budget, and put an end product on the market that shows beautifully and is priced right, you will make a profit every time.
What do you think about house flipping? Do you have any tips to tell the beginners?
Leave a comment below and let me know!