12 Best House-Flipping Tips for First-Time Investors

You might’ve heard that flipping houses is an excellent business to get into. If you’re looking closely at this business model now, you might be looking for some pointers to help you get started.

This article provides twelve house-flipping tips for first-time investors like you.

As a bonus, we reveal four common mistakes you’ll want to avoid when flipping houses to help you confidently take your first step into the house-flipping market.

House-Flipping – A Brief Refresher

House-flipping is the process of buying a house, renovating it, and selling it for a profit. Unlike traditional real estate investing, you don’t hold onto the property until it increases in value. Instead, you put it on the market as soon as the renovations are complete.

The key to success here is to purchase a property that shouldn’t cost too much to renovate. At the same time, when you’ve completed the renovations, they should increase its value, allowing you to sell it for more than you paid for it.

Our house-flipping checklist can help you get a snapshot of all the items you need to give this business a go. 

1. Know Your Figures

Before putting down money to buy a house, make sure you do the math. Work out the property’s after-repair value (ARV), or else the other figures you calculate will be inaccurate.

ARV refers to a property’s estimated value after it’s undergone renovation. Real estate investors use it to determine whether a property will fetch them a profit after they’ve deducted renovation costs.

When you’ve determined a property’s ARV, it’s a good idea to abide by the 70% rule, which dictates you shouldn’t pay more than 70% of a property’s ARV after you’ve deducted its estimated repair cost (ERC).

For example, suppose a property’s ARV is $200,000 while its ERC is $10,000, then you shouldn’t pay more than $130,000 for it.

The calculation goes as follows:

$200,000 (ARV) x 0.7 (70%) = $140,000

$140,000 - $10,000 (ERC) = $130,000

Consider using a house flip calculator when doing your calculations to get more accurate results.

2. Curb Your Ambition (In the Beginning)

As a beginner house flipper, it’s best not to take on too much too soon. The first house you flip shouldn’t be too complicated to improve or cost a fortune in renovations. 

For example, a project that requires you to do extensive electrical work, adjust square footage, move walls around, or other complicated work is a no-no and you’d be wise to pass on it. 

Creating a house-flipping business plan can help you stay on track and keep your ambitions in check. When you’ve successfully completed and sold your first flip and have more money to play with, you can scale your efforts.

3. Research the Neighborhood

Once you’ve decided on a property, consider visiting its neighborhood to research new developments. Pop into open houses and attend virtual tours to take note of the finishings and layouts competitor investors are using to entice buyers. 

Also, monitor how long the properties remain on the market before they’re bought and the price activity of these listings.

Your findings will provide data that can help you sell your fixer-upper quickly. You’ll know what types of renovations can help your house sell, the price you should set, and how quickly you can expect to get it off the market. 

4. Do Your Market Research

Market research is probably the least glamorous aspect of house-flipping. However, smart real estate investors know they’ll save money in the long run if they put in the time and effort. 

Researching your area’s property market ensures you get the house’s full market value when you sell later on. It also helps you price your development realistically, ensuring you attract buyers. You’ll understand the average net profit for flipping a house in the area, make informed purchase decisions, and also identify the real estate trend there.

If the idea of research puts you off, you always have the option of hiring a real estate agent who’s well-versed in the area you’re interested in investing.

5. Work With a Familiar Contractor

When flipping a house for the first time, make sure you work with a contractor you know because working with the right team is a huge part of succeeding in this business.

A contractor you know is most likely one you can trust to propose cost-effective renovations that’ll keep your costs down, letting you get a higher profit margin when you sell. 

Also, the relationship can develop into a long-term one that’s beneficial to both parties. While your contractor gets a steady stream of work, you get to maximize profit on each house flip via lower fees and cost savings. 

6. Look Beyond Realtors

Realtors aren’t your only hope for finding the right property. You can also learn about good deals through a property wholesaler. They are professionals who look for properties that require discounted repairs. You can join their email list to stay in the loop about new deals.

Finding a wholesaler is straightforward. You can do a Google search using the keywords “We Buy Homes” before typing the city you’re interested in buying into, then contact the wholesalers to ask them to be added to their cash buyer list. They’ll notify you any time they find a discounted house.

Beyond wholesalers, you can also join the city government’s auction list to keep track of monthly auctions in your city. Every month, city governments auction property sitting on the land they hold, meaning their auction list can be an excellent place to learn about available deals.

7. Define Your Partnerships Clearly

If you’ve entered into a partnership to flip houses, you’d be wise to get the terms of the collaboration down on paper. Going into business based on a handshake and words isn’t wise because unrecorded commitments and responsibilities tend to be forgotten. You and your partners need to define your responsibilities and obligations from the outset. 

In addition, you should have a plan established that lays out the steps to take when a partner wants out, such as including a buy-out clause or some other exit mechanism. It’s also a good idea to include penalties in your partnership agreement as they may help regulate the parties’ behavior. 

Nobody likes to think how a partnership will end as soon as you shake on it, but these plans could potentially help save time (and money) in case a party backs out.

8. Avoid Debt Financing Where Possible

House-flipping is an inherently risky business. 

For example, there’s no guarantee you’ll be able to sell the house quickly and at your desired asking price. Renovations might take longer than scheduled, extending the time it takes to get the property to market. 

And if you’re a real estate investor who plans to use debt to finance your project, you’ll be adding an additional layer of risk in the form of interest payments.

Having to pay interest on a loan isn’t the best for several reasons. For one, the pressure of accruals can cause you to make rash decisions when you’re unable to sell on time. Also, you can’t maximize profits, as you’ll have to use a portion of the gross profit from the sale to service the interest.

Financing your project with cash can help prevent losing money to interest accrual. Still, if getting a loan to flip a house is your only option, be sure to research the market to find a financing opportunity that works best for you.

9. Have an Exit Strategy

Despite your best efforts, a project might not work out. Before it comes to that, you need to define what exiting means to you and how you’ll free yourself from a deteriorating situation to avoid a loss. 

Will you seek additional funding if you’re close to running out of budget? Are you willing to lower your price and possibly sell at a loss if potential buyers won’t meet your asking price? If you can’t sell, are you willing to rent out the property instead?

Time is money in the real estate market and, the longer a property remains in development hell or on the market, the more your costs pile up. Therefore, make sure you have an exit strategy, so you know what to do when your best-laid plans can’t come to fruition.

10. Keep an Eye Out for Pre-Foreclosures

Pre-foreclosure is when a property owner is behind on their mortgage payments. The bank hasn’t foreclosed on the property yet or put it up for auction to get its money back. These properties not only offer excellent deals but can also save you the money you’d otherwise spend on repair costs. 

Pre-foreclosed properties are usually in decent condition since the owners are still occupying them and have been maintaining these properties during their stay. 

An additional benefit pre-foreclosed homes offer is they’re easier to raise financing for than foreclosed homes. This benefit will apply to you if you decide to go the debt-financing route.

11. Plan for the Worst, Hope for the Best

There are a million and one things that could go wrong during a flip, each one eating into your rehab budget. If you want to succeed in this business, you have to be more realistic than optimistic.

Planning for the worst entails anticipating delays, having enough cash on hand for unforeseen expenses, and having backup contractors in case your primary one drops out of the project. If you don’t have to resort to any of the above contingency plans, you’re golden. However, not putting them in place shouldn’t be an option.

12. Pick Up a Real Estate Agent License

Finally, if you’re interested in flipping houses long-term, it’s worth looking into getting a real estate agent license. Getting one provides many benefits. The main ones are you can save on commissions, host open houses, and view properties without pre-scheduling with a realtor.

The last benefit mentioned above is crucial because it lets you access newly-listed properties quickly. That head start means you can make offers before other buyers get wind of a hot property.

Common House-Flipping Mistakes to Avoid

Flipping houses can be profitable when you know what you’re doing. The reverse can also be true. Here are four house-flipping mistakes to avoid.

1. Underestimating How Challenging It Can Be

One of the most common mistakes aspiring house flippers make is that they underestimate how difficult this business can be. They learn from house flip shows that the business can be profitable, they don’t need a license to do it, and then go from there. 

In reality, this business is anything but straightforward. Successful house-flipping takes time, money, and expertise. You can lose money if you don’t have a solid house-flipping plan to lay out all the steps. 

There are many moving parts and factors to consider when you’re trying to flip a house. Don’t make the mistake of underestimating what it takes to successfully achieve a house flip.

2. Putting a Part-Time Effort Into a Full-Time Business

While there’s nothing wrong with holding down a job between house flips, you should know that it’ll be challenging to juggle the two long-term. 

House-flipping is a time-intensive endeavor, and giving it a part-time effort will prove stressful over time. 

For example, construction issues are bound to crop up on site, and they’ll require your presence there. 

If your full-time job doesn’t give you the flexibility or time to step away and attend to such matters, it could hamper your progress.

3. Using an Insufficient Budget

When launching any business, you can never have too much money to run your day-to-day operations, especially in the real estate market. There are several materials to purchase for renovations, a hundred things that could go wrong, and many people to pay. 

When setting your budget, it’s better to overestimate the money you’ll need than to come up short later. Consider tripling your budget to have surplus money, which will be handy when unexpected expenses begin rearing their ugly heads.

4. Not Building a Competent Team

It’s next to impossible to achieve a successful house flip alone. On the contrary, there are several key people you’ll need to work with during your real estate investing process to make it a success. Some of these players include real estate agents, renovation contractors, bankers, and even lawyers.

Make sure you choose experienced and trustworthy professionals with excellent track records. These people will be integral to making your investment property ambitions a reality and helping you navigate the pitfalls you’ll encounter on the journey there.

Final Thoughts

These house-flipping tips should get you off to a good start. It’s important that you aren’t too ambitious in the beginning, or else you risk your budget clashing with reality. Speaking of budgets, make sure not to underestimate how much the project will cost. An excellent way to do that is to abide by the 70% rule after working out the property’s ARV.

Also, if you’ve got a day job, having a competent team in place might take some of the burden off of juggling the two. However, in the long-term, you’ll want to decide whether to give this business more of your time or find another way to invest and build wealth.

What are your thoughts on house-flipping? Do you feel ready to get started? Let us know your thoughts in the comment, and don’t forget to share this article with other newbie house flippers!