Real estate investing is a lucrative wealth-building strategy to set you up for financial freedom, but only when it’s done right.
With the recent increase in home ownership in the U.S. there are more extensive opportunities for real estate investors to earn more money by reselling an investment property they fixed.
We call this strategy house flipping. While heaps of technicalities are involved in flipping houses, it’s an opportunity open to all beginners willing and able to get their hands on the real estate market.
So here’s a primer on house flipping and how, with the right team and the right attitude, you can begin this exciting journey.
- What Is House Flipping?
- 11 Steps To Flip Houses From Scratch
- Step 1: Identify Your Funding Source
- Step 2: Evaluate Your Credit Score
- Step 3: Pick An Excellent Location
- Step 4: Check Home Sales and Foreclosures
- Step 5: Talk To a Real Estate Agent
- Step 6: Finalize Your Project and Budget Plan
- Step 7: Schedule An Ocular Inspection
- Step 8: Make the Offer
- Step 9: Find Reliable Contractors
- Step 10: Obtain Necessary Permits
- Step 11: Flip Your Property
- Pros and Cons of House Flipping
- Common Mistakes to Avoid When House Flipping
- Frequently Asked Questions
- Wrapping Up
What Is House Flipping?
The basic idea behind house flipping is to find properties that need repairs, buy low, and sell high. It’s a legitimate real estate investment strategy that offers significant profit margins.
House flippers begin by finding the right property, doing the necessary renovations, and putting it out for sale at a higher price than its original purchase value, plus renovation costs.
Speed and timing play a critical role in home flipping. The faster you can resell the property, the higher your potential maximum profit.
This is because you save yourself from the holding costs associated with keeping the property under your care, like utilities, property taxes, and homeowners insurance.
11 Steps To Flip Houses From Scratch
Now that we’ve established the profitability potential of flipping houses, it’s time to discuss how to proceed. Here are eleven steps to include in your checklist:
Step 1: Identify Your Funding Source
Capital is the primary foundation of any real estate investor, and as a would-be house flipper, this must be your first order of business.
Common funding options include personal finance, hard money lenders, crowdfunding, private lenders, and bank loans.
A key factor to remember when choosing a funding source is the differences in home flipping costs per location. Your preferred funding option also has to approve the properties you buy before you can get to the following steps.
Step 2: Evaluate Your Credit Score
Unless you have significant cash reserves to flip houses, you’ll likely need to get a loan to shoulder the project’s estimated costs from purchase to resell.
Having a high credit score is a primary aspect lenders look at before granting you money. You can use Equifax’s credit scoring model to assess your creditworthiness:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-700: Very Good
- 800-850: Excellent
There’s no shortcut to boosting credit scores at once, but there are baby steps you can take to improve them over time, such as timely bill payments, keeping old accounts open, consolidating debt, and reviewing credit reports regularly.
Step 3: Pick An Excellent Location
What states have the best ROI (return on investment) for flipping houses?
According to NASDAQ, the top five states that led 2022’s list based on average gross profit are Delaware, Maryland, New Jersey, Massachusetts, and Virginia.
Obviously, this data is an overview of the industry as a whole, so you don’t have to immediately pack up and move to one of these states. There are excellent properties around the country you can buy low with better-earning potential and less competition.
Your local neighborhood is as worthy a starting point for property shopping as anywhere else!
Step 4: Check Home Sales and Foreclosures
Home foreclosures are rising across the U.S. This can be a window opportunity to acquire low-cost properties to flip.
ATTOM Data Solutions reports a total of 185,580 foreclosure filings around the country, a 13% increase from last year’s and a staggering 185% increase from the same period in 2021.
Some of the most reliable websites to find foreclosed properties include Foreclosure, Realtytrac, Redfin, Equator, and Zillow.
Step 5: Talk To a Real Estate Agent
If researching and handling all the legwork sounds too daunting for your first dip into the house-flipping business, hiring experts to do it for you also works.
A real estate agent can process agreement and lease records, set appointments, and organize marketing campaigns for property listing.
With a 5% to 6% commission cut from your home’s sale price, it’s a pretty reasonable deal considering the hassle-free transactions they can provide you.
Step 6: Finalize Your Project and Budget Plan
Once you’ve found the right property to flip, next on your list is to get your flipping business plan written.
This is when you delve into the initial purchase details and identify the costs associated with each step. Your plan should also highlight the professionals you expect to work with and a clear timeframe for the house flip project.
You can use the 70% rule in house flipping to create your budget plan. What it does is identify the ballpark figure you must spend on a property to guarantee profit.
Here’s the formula: Home’s ARV (after repair value) X 70% – the cost of repairs = the limit of how much you should spend for the house
Putting this in figures, if your home’s after repair value is $200,000 and you’re projecting repair costs of $30,000, then the rule says you shouldn’t spend beyond $110,000.
Step 7: Schedule An Ocular Inspection
A beautiful, stable exterior doesn’t always translate to a solid home structure. Take advantage of the property visit and ensure you bring a professional home inspector to examine the place.
Crucial areas and elements to check during an inspection include:
- Fire and safety
- Parking lot
- Windows and sinks
- Flooring and carpeting
- Walls and ceilings
- Deck, patio, or balcony
- Infestation issues
- Lead and asbestos abatement status (for older houses)
Step 8: Make the Offer
Once satisfied with your property choice, it’s time to make the offer. Get a real estate attorney to draft contracts and work on all legal technicalities.
This includes the transfer of the property deed to your name along with the terms and conditions that both seller and buyer have to adhere to keep the transaction valid.
Step 9: Find Reliable Contractors
Flipping houses involves understanding what your potential buyers are looking for. Two critical dealbreakers include property aesthetics and functionality.
As a home flipper, you must find reliable contractors who can handle home repairs and provide the property with a new appearance using high-quality materials.
A general rule when hiring contractors is to choose those with stellar reviews, verifiable licenses and insurance, and reasonable packages for labor and cost.
Step 10: Obtain Necessary Permits
There aren’t any specific permits required to flip houses, but there are ones needed for renovations.
This can vary per state or municipality, but most types of renovations that require a permit include:
- Installation of new electrical wiring
- Parking a dumpster truck on a public street for the entire duration of the remodeling
- Building a deck
- Load-bearing wall demolition
- Square-foot home expansion
- Fence installation over a certain height approved by the local government
- Repairing a part of any public sewer line
- Siding projects
In some cases, your local government may also require permits for the following procedures:
- Minor plumbing work
- Non-load-bearing wall demolition
Step 11: Flip Your Property
You can start reselling the property after all renovations and final inspections are complete.
If you’re hiring a real estate agent, they can help put out the property on trusted listing sites and find potential buyers so you won’t have to struggle with closing deals.
Pros and Cons of House Flipping
Like any real estate business, flipping houses comes with its pros and cons. It can help generate quick profit, but it can also derail your finances when done incorrectly.
Here are the pros and cons to consider before going all in on a house-flipping project:
Pros of House Flipping
- Quick Profit: Seasoned house flippers can sell quickly between three to six months after home repairs. Many beginners may hold the property for up to a year. The faster you sell, the more decent profit you get.
- Networking Opportunities: House flipping involves coordinating with stakeholders like real estate agents, homeowners, and lawyers. This helps widen your professional network, which you can later tap into for other business ventures.
- Flexible Time: Flipping homes can be done part-time, but making it a full-time job is an open game, especially if you’ve had previous successes in the field.
- Insights to Real Estate Market: Home flippers get first-hand data about real estate investing conditions, buyers’ demand, and unexplored opportunities in specific neighborhoods.
- Portfolio Diversification: Real estate remains a favored long-term investment option among financial experts. Property investments have lesser financial risk, with better appreciation value over time than riskier asset classes, like equity and cryptocurrency.
Cons of House Flipping
- Unexpected Repair Costs: Issues like mold and termites are a few unforeseen factors that can cost you more when you’re fixing a house. These unanticipated problems during the renovation project can easily add to your expenses.
- Hefty Holding Costs: Nobody can guarantee instant sale after your repairs despite your best efforts. Demand can fluctuate; the longer the property’s under your name, the more it’ll cost you.
- High Stress: This is especially true for first-time flippers. Every step can feel overwhelming, with the looming possibility of being unable to sell the property causing you anxiety and stress.
- Increased Property Taxes: Property values increase after renovation, but so do the taxes. Tax rates are dependent on the state of the property and the duration of ownership.
Common Mistakes to Avoid When House Flipping
As promising as house flipping is, many real estate investors fall into its common pitfalls that cost them more money than actual profit. Here are mistakes to be mindful of when flipping houses:
Mistake #1 – Failing to Set an Adequate Budget
Knowing the property’s acquisition cost is one, but the total expense you’ll spend throughout the flip project is more than that.
Failing to factor in carrying costs and interest rates for loans while holding the property often results in investors taking on additional loans, which is a blow to their net profit.
Mistake #2 – Ignoring Market Demands
Finding a buyer is all about fulfilling what they want for their home. It’s not about you redesigning the entire place based on what you think will sell.
Many beginner flippers ignore the theme and overall feel of the neighborhood in making renovation decisions. Sure, personality matters, but unless you know exactly what works for your buyers, going neutral is always recommended.
Mistake #3 – Skipping Inspection
There’s no way to tell how solid the foundation of a property is until you ask a home inspection professional to look at it. Ironically, some flippers skip this step.
This mistake leads to the late discovery of severe issues like infestation and faulty wiring, which eventually adds to an investor’s expense.
Mistake #4 – Over-improving the Property
Over-improving is costly and unnecessary. The best strategy is to remodel a property to mirror the top-selling homes within the neighborhood.
Unfortunately, some beginner flippers go overboard and end up going way over their budget for very little payoff.
Mistake #5 – Going DIY and Not Consulting Professionals
There’s nothing wrong with being hands-on in flipping a house, but there comes a point when you need professional input to proceed.
Reputable tradespeople have exclusive access to contacts that make flipping easier. In many cases, doing it all yourself only results in wasted time, effort, and money.
Frequently Asked Questions
Do You Need a Real Estate License to Flip Houses?
No, you don’t need to personally get a real estate license when flipping a house. You can hire an agent to handle the deals and pay up the agreed commission rate once they close the deal.
How Much Can You Earn Flipping Houses?
Flipping net profit fluctuates yearly in relation to market trends, but as of 2022, house flippers profited an average of $67,900 per flip.
Property locations with the highest value are California, Washington DC, New York, and Seattle.
House flipping can be a fun and challenging business for a beginner real estate investor. It brings real profit fast and allows you to build a career or business.
Get a feel of the real estate market in your neighborhood and see if there’s a high demand for new homes. You can find a property that suits your budget and has great potential right in your own backyard!
Use this guide to start flipping homes from scratch and let us know if you have more insights to add in the comments below. And if you know someone who’s into real estate, feel free to share this guide!