How to Get Started Flipping Houses
There is a difference between flipping a house and flipping houses. You can flip a house without a business, but successfully flipping houses requires building a business that is bigger than a single ambitious individual. There are many ways to add value to a single house. If you want to get started flipping houses rather than just a house, you will need to build a business that flips houses.
There are four primary opportunities to add value to a house.
It’s very difficult to create any competitive advantage in any of these areas without some volume, and volume requires a business.
Let’s get started flipping houses!
It’s often said, “You make your money when you buy.” While that might be overly simplistic, buying at a discount is the most obvious place to add value. People don’t give away houses though. You will have to connect directly with sellers who have a distressed house they want to exchange for cash.
Connecting with the right sellers at the right time requires a marketing system and marketing budgets are fueled by volume. Whether you invest time into low tech marketing like yard signs and networking or you plug into sophisticated franchise systems, you will need to flip more than one house at a time to justify the commitment.
“Start by focusing on one specific lead source and become really good at it. Then, add another and another until you have multiple sources of leads that can fuel a house flipping business.”
Perhaps, the most difficult part of flipping houses is analyzing deals quickly and accurately. With most good opportunities, the window of opportunity is very short. It’s not enough to spend days creating accurate numbers. Neither is it enough to analyze quickly if the numbers aren’t accurate. For this business, the analysis must be both fast and accurate. Slow and accurate systems are just as problematic as fast and unreliable systems.
One of the most important ways to create a competitive advantage is understanding the numbers in a deep, thorough way.
There are three numbers you’ll need to understand:
- After Repair Value (ARV)
- Remodel Cost
After Repair Value
Accurately projecting the After Repair Value requires local market expertise and an unbiased process. Invest time in understanding the market and there are no shortcuts.
No house is the same, so practice comping properties.
When you comp a property, you are comparing it to similar properties in the same neighborhood to find the value. Practice develops an understanding in how to comp the nuances that determine value in your market.
Most deals have a unique characteristic that must be valued or devalued. It could be parking, the lot, or unfinished square footage. How accurately you value those nuances will often be the difference between winning and losing on flips.
It’s helpful to have an analytical agent, but remember that your agent has a vested interest in you purchasing houses and isn’t the one who will lose money if the analysis is flawed. If an agent throws out fast, round numbers without a nuanced process, this is an example of a fast, inaccurate system that could cause you problems.
Remodel costs are especially difficult because you won’t have time for a bidding process. You’ll need to generate accurate construction numbers with information that is always limited. You’ll never be able to see behind every wall or predict every material you’ll need. As with agents, contractors have a vested interest in your purchase, but they won’t be the ones to lose money if your remodel budget is wrong. You’ll need to develop an understanding of the big line items so you can both identify them and accurately budget for them.
Invest time calculating the costs of potential roofs, floors, HVAC systems, foundations, kitchens, and bathrooms. Like anything, this takes either practice or an expert you can really trust. The problem with experts is that they may not be available when you need their expertise. If they are good then they are busy.
The best way to get busy people to make you a priority is to have a large volume of work.
That’s the rub with flipping houses. You need volume to attract quality partners, but you need quality partners to do volume. As you are starting on your own, you will be no one’s priority so you’ll need to invest time in learning so you can lean on yourself as your ecosystem of partners.
The last piece of analysis is quantifying risk. No two properties have the same risk and this is something most real estate investors don’t understand. Risk matters and if you don’t account for it, you will end up offering too much for high risk properties and not enough for low risk properties.
Most analysis spreadsheets do not calculate risk. Instead, they will use a blanket “70% Rule” or a “75% Rule”. The truth is some properties should require more margin than others because their risk level is higher.
You can begin to understand risk by studying properties in your market that are left unsold for long periods of time.
Pay attention to the characteristics of these houses and that will help you identify risk. Quantifying that risk is especially difficult. As you start flipping houses, focus on the source of risk and then begin learning how to quantify it.
Your analysis needs to quickly and accurately predict the After Repair Value, remodel costs, and risk. It’s that easy and that difficult. You won’t be able to rely on experts because you won’t be their priority until you establish a certain amount of volume. As you start, you’ll need to put in the hours of research and practice to build your own expertise.
One you have leads and can analyze them, you’ll need capital to purchase them. In this capital-intensive business, capital is often the enemy of volume. But, volume is important so you’ll need capital to acquire volume. The good news is your inventory will be real property and it’s easier to get funding for houses than it is for most other kinds of inventory like shoes or widgets.
The reason so many people have built wealth through real estate is because it’s possible to use other people’s money to acquire real estate. The problem is the “other people” want you to have experience and the only way to get experience is to have access to their money. The “other people” can be hard money lenders, banks, or wealthy individuals. As you’ll find, they all value experience and will usually want you to have more of your own money in deals until you are experienced.
It’s possible to buy real estate with no money, but it’s especially difficult when you don’t have any experience.
Most people begin by partnering with friends and family. While this is a good way to get started, it’s not always the best idea long-term. You need to plan beyond that because these partnerships can fall apart quickly and leave you with no source of capital when you begin to grow and need it most.
Establish a relationship with commercial loan officers at local banks. Local banks have more discretion than national banks. If you have put the time into understanding lead generation and analysis, you will learn to sell yourself and find a local bank that will do a cash out refi with you. You can use cash out refis to recycle capital you funded with family and friends. This allows you to increase your volume in a very important way.
Deals in a competitive market will require fast cash offers so figuring out how to create value by funding cash deals will be a vital part of getting started flipping houses.
When you flip houses, you are in the business of adding value with construction. In the most simplistic terms, you must add more value than you spend. This is often easier done on Pinterest and HGTV than it is in real life. Your value adds might be beautiful kitchens, but your expenses are difficult contractors and an average of 323 unique materials you’ll purchase for every house.
Successfully flipping houses hinges on creating more value than you spend in materials and labor.
You will increase the value side by making good decisions on what to do, as well as, what not to do. You will decrease the expense side by setting up your contractor for success. If you get both sides wrong in a normal market, you will lose money. If you can get both sides right, you can make money flipping houses.
Making good decisions will be easier if you’ve done the market research and have a deep understanding of what repairs add the most value in your local market. Reducing expenses and setting up your contractor for success is a lot more complicated. If you are starting out on your own, you’ll learn how to best manage contractors with time, but you can get a head start by doing two things when you are starting.
Spend more time than you think you should on planning every detail of your first flip.
We call this “getting to 100%”. By forcing yourself to make every decision from paint colors to vanities, you’ll set everyone up for success. You’ll be able to limit trips to Lowe’s by getting the bulk of your materials ordered in the beginning and your contractor will be able to plan the workflow.
Don’t change your mind.
Making the decisions at the beginning is the first half of the battle. The second half is sticking with those decisions. Every time you make a change, it slows down the contractor and slow contractors add to expenses.
When starting out flipping houses, focus on making the decisions at the beginning and sticking with your choices even when there’s a beautiful new idea on your Instagram feed. You can always use that idea on your next house.
Like any business, flipping houses requires skill in several key areas because those skills will create competitive advantages. It can be overwhelming, so focus on the four critical areas where you can create the most value.