If you’re an avid HGTV viewer, you’ve likely caught a couple of the network’s house flipping shows. Inspired by these entertaining and informative programs, you’ve decided to try your luck in the industry. The only problem is none of the shows you’ve watched tell you where to start.
The good news is you don’t have to shelve your house flipping ambitions. This article reveals how to start a house flipping business, outlining several actionable steps you can take. Read on to go from not having a business to making your first profit as a house flipper.
- Can You Make Money From a House Flipping Business?
- Starting a House Flipping Business in 9 Steps
- Essential House Flipping Tools
- Frequently Asked Questions
- Wrapping Up
Can You Make Money From a House Flipping Business?
Absolutely! You can make a decent profit on each flip. According to the Statista Research Department, U.S. house flippers made an average gross profit of $62,000 per flip in the third quarter of 2022.
How much you can earn will depend on several factors, including:
- How well you can spot potential properties
- Whether you’re able to keep your costs down
- Whether you’re selling in one of the leading markets
To expand on the final point, Statista identified Pennsylvania and Pittsburgh as two markets in the U.S. with the highest gross return on investment in Q3 2022. According to the data firm, Pittsburgh had nearly 117% in gross average ROI. Those returns are incredible and are indicative of this business model’s profit potential.
How Much Do You Need to Start a House Flipping Business?
You’ll need between $30,000 and $60,000 in capital when flipping homes. The bulk of this money will go toward the down payment for the house and the cost of renovating it. We’ve explained the costs of flipping a house in more detail elsewhere on this site.
You can save money by doing some of the renovations yourself. You’ll need DIY skills, which you can pick up from specific schools in the U.S. Additionally, obtaining a real estate license, whether as a broker or agent, exempts you from paying commissions, which equals more savings.
Also, if you balked at the above figures, you’ll be happy to know that there are more affordable ways to participate in the housing market. For example, you could start as a real estate wholesaler and flip house contracts instead.
Starting a House Flipping Business in 9 Steps
Here’s how you can start your house flipping business in nine steps:
Step 1: Conduct Market Research
The first step to starting any business is to conduct research, and that goes double for a business as capital-intensive as house flipping. Without researching, you may set yourself up for failure.
Conducting market research is important for a number of reasons. For one, it helps you determine whether the real estate market you plan to enter is viable. For another, research makes budgeting easier. You can tell how much funding you’ll need and what expenses you’ll incur when launching your house flipping project.
Begin your research by contacting realtors in the area you want to sell in. These professionals are privy to current market information and can be instrumental in you knowing how to find a house to flip. A search online should provide a list of companies you can contact.
In addition, you’ll need to ensure you don’t break any laws when you eventually begin operations. While you can find this information yourself, hiring a legal professional to do the research for you will save you time and cover all the bases.
A lawyer can also help you during the negotiation phase and will ensure you comply with Federal Housing Administration rules. And if you need a real estate license to flip houses in your state, your lawyer can look that up for you.
Finally, you can browse through the listings on property-focused websites to get a sense of the local real estate market. Pay attention to prices, property types, locations, and other factors (such as low crime rates) your potential competitors use to attract buyers.
Step 2: Do the Numbers
Having done your research, the next step is to create a budget based on the expenses involved in your first house flip. A million and one things can go wrong when flipping houses, so you have to account for foreseen and unforeseen costs.
To start, you’ll need to decide on a figure that’ll represent the down payment for your fix-and-flip project. Additionally, you should know what you’re willing to spend as renovation costs and, by association, contractor fees. Since marketing is a major part of selling properties, you’ll need to factor advertisement costs into your budget.
On the admin side of things, you need to budget for permits and licensing fees. You’ll also need to pay for traditional or commercial property insurance. And there are fees involved when registering a business entity, business name, and domain for a potential website.
When doing your numbers, consider using a house flip calculator. It makes the number-crunching process easier. For example, you can use one to calculate your average net profit for flipping a house and determine a project’s profitability. If you finance your flip with a traditional bank loan, you can also factor interest rates into your calculations.
Step 3: Create a House Flipping Business Plan
You’ll need to have an extensive house flipping business plan if you want to launch a successful business.
Your business plan lets you put your thoughts down on paper—you can set your business goals, outline the steps you need to take to achieve them, and identify threats and opportunities. It’ll also contain data from the research you did in Step 1, such as competitor and market analysis, as well as your budget and financial projections.
At the minimum, the business plan should have the following sections:
- Executive Summary: It summarizes your plan in its entirety. You’ll write this section last (after you’ve completed your business plan).
- Mission and Vision: You set out what your business venture will strive to achieve.
- Market Analysis: It’ll contain your assessment of any trends you identified while researching the local market.
- Competitor Analysis: Your analysis of the competition will identify the strengths and weaknesses they have relative to yours and highlight your competitive advantage.
- Operations: It includes all the actions and tools you’ll need to identify, renovate, and sell investment properties.
- Financials: Your investors will be interested in this section. They’ll want to know how you plan to spend any business loans your company obtains.
There are several reasons why you need a house flipping business plan. The most prominent one is that it can serve as a guide that keeps you focused and on track.
Also, a house flipping business plan will be invaluable when you’re looking for funding. It’ll inspire confidence in your lenders that you’ve done your research and have a plan to pay back their money.
Step 4: Set Up Your Business
With your plan out of the way, it’s time to set up the business, which involves the following:
- Choosing a name and business entity
- Registering the business
- Obtaining an EIN and other licenses and permits
- Opening a business bank account
- Choosing your branding
Your business needs a name to be identifiable and distinguishable from other existing businesses. As such, you’ll need to make sure the one you choose isn’t already taken.
You can check the U.S. Patent and Trademark Office database to determine whether a possible name is already trademarked. If you plan to operate online, a domain registrar like NameCheap can help you determine the domain name availability. You can also search online to see whether another business is using the “doing business as” (DBA) name you want.
Next, you’ll need to choose a business structure. There are several, but the most recommended are corporations and LLCs. These structures protect against claims on your personal assets in the event that a house flipping deal goes awry. Depending on the one you choose, you’ll need to file paperwork and obtain a general business license.
Note that mixing personal and business funds is a huge no-no, which means you’ll need to open a business bank account. Aside from being the sensible thing to do, separating the funds will also have tax benefits. Incidentally, you can’t open one without getting an employer identification number (EIN), which helps you in getting loans and a credit card.
Lastly, you’ll need to get a logo for your business to build a brand. Your logo needs to be minimalist yet memorable as you’ll use it on your website, business cards, social media pages, letterheads, and so on. Regarding how you’ll get one, you can hire a graphic designer on a freelancing website like Upwork to design it for you.
Step 5: Get Funded
House flipping businesses need capital to exist, and yours isn’t any different. Luckily, you have several options for raising the capital you need, including:
- Home Equity Loan or HELOC: Do you own your own home? If “yes,” you might be eligible for a home equity loan or a home equity line of credit (HELOC). You’ll need a decent credit score and low debt to qualify, but the upside to this financing option is that you can get a low rate and fair contract terms.
- Hard Money Loan: This financing option is best for a real estate investor with a low credit score. If that’s you, take heart because these lenders don’t extend financing based on your credit score. With that said, please note that hard money loans usually have high fees and can be short-term.
- Friends and Family: Consider borrowing from friends and family. The upside to this option is that your financiers might not ask you to pay interest on the principal sum. However, this may not be an option for you if you prefer to keep your house flipping business hush-hush.
Depending on your project’s complexity, you might also need to consider combining the three funding options and adding a couple more. Other options outside of traditional loans include dipping into your retirement savings and charging your business credit card. If you’d like to learn more about this subject, read our detailed article on how to get a loan to flip a house.
Step 6: Get Insured
Although setting up a corporation or LLC will protect your assets, you can’t have too much protection. That’s why it’s a good idea to get business insurance that offers coverage against accident claims, lawsuits, and so on.
Insurance will give you the confidence to cross off every item on your house flipping checklist and start flipping houses. For example, when unexpected mishaps occur, you can expect to be reimbursed for any expenses you incur addressing them. Another is if anyone you hire sustains an injury on the job, worker’s compensation can handle the medical bills.
If you have the money to spare, consider getting a builder’s risk policy to hedge against renovation-related damages. You could also get vacant home insurance to insure the property against damage while it’s on the market.
Step 7: Assemble Your Team
Before conducting your first flip, make sure to assemble a team of competent professionals. These people can make the buying process smoother and ensure that the selling process is hitch-free.
Even if you plan to DIY some aspects of the property, you’ll still need to hire competent contractors who can transform a fixer-upper into a marketable house. Aim to work with professionals you know or who’ve been referred to you and who have a decent track record.
Working with this type of contractor is key because they’re excellent at what they do and trustworthy. Also, they can help you set realistic expectations with regard to your budget, renovation costs, and timelines.
Aside from contractors, you’ll also need to include a lawyer, accountant, and real estate agent or realtor on your team.
Your lawyer will be an invaluable team member to have when you need to do due diligence or draw up or review contracts; your accountant can help you stay within budget during a house flip; and your real estate agent or realtor can help you find purchasing and sale opportunities.
Step 8: Buy, Fix Up, and Flip Your First Property
Up until this step, you’ve been laying the groundwork for your house flipping business. Now it’s time to start your first project.
Here’s one of many house flipping tips worth considering: don’t take on too much too soon. Make sure the house you choose to flip isn’t too expensive or requires extensive repairs. You can be more ambitious later when you have a flipped house or two under your belt.
Also, when looking for houses, don’t limit yourself to what the local real estate agent knows. Check with wholesalers, look for pre-foreclosed properties, and attend city government auctions.
During the renovation phase, let the materials you see used in similar recently-sold properties guide you. Matching these properties will help you stay competitive and bring your flipping process a step closer to success.
Finally, expect the unexpected. There are no guarantees when flipping houses, and whatever can go wrong will. For example, during renovations, your contractors may discover hidden damages that you didn’t budget for. Or, an uncontrollable event may lead to postponements and missed deadlines.
Once renovations are complete, work with your team to sell the property. When you get a buyer, don’t forget to service your debt or pay taxes.
Step 9: Keep Networking and Do It All Over Again
Having flipped your first house, you can add “house flipper” to your list of titles. Unless you intend for your foray into this real estate business to end with one property, there’s more work to be done.
Aside from the steps involving company formation and team assembly, you’ll want to repeat the above steps when moving on to your next project. While doing so, don’t forget to maintain the relationships you built during your first stab at real estate investing.
Not only will the people in your network prove useful when it’s time to flip a new house, but they can also connect you to professionals who are equally as skilled and trustworthy. As your network grows, you can take on more complex but profitable projects and carve out your space in the industry.
Essential House Flipping Tools
As a beginner, it’s possible that you may not have the funds to hire all the outside help required to make your business a success. The tools discussed below will help you perform many of the tasks involved in running a house flipping business:
- Website: Hiring a web developer to design and build your website can be expensive. Luckily, content management systems like WordPress make publishing a website straightforward. You don’t need coding knowledge to use them, and you can purchase an affordable theme that’ll make your website presentable to the general public.
- Accounting Software: If you can’t afford an accountant, you’ll find accounting software like QuickBooks and Xero handy. That said, we recommend getting a professional to look over your accounting computations when filing tax-related documents, as making errors can be costly and may attract legal consequences.
- Social Media Apps: When you’re ready to market a renovated property, social media apps like Instagram and Facebook will prove beneficial. You can run targeted advertisements that pinpoint niche customer segments and generate leads.
- Industry-Specific Software: You can use software tools like Propstream for all your property-related tasks. These can help you perform research, generate leads, and market to potential customers.
Although some of the above tools may seem like additional expenses, they can help you wear multiple hats when starting your real estate flipping journey. And when you can afford to hire additional hands, these professionals will likely use some of the above tools when working for your business.
Frequently Asked Questions
Can I Start a House Flipping Business With No Money?
Yes. Some of the ways you can finance your real estate investments without money include crowdfunding, partnerships, private lenders, and wholesaling. You’ll find the last option of appealing if you have bad credit because you don’t need to worry about raising capital for renovating the house.
Is House Flipping a Risky Business?
It can be if you don’t plan well. If you take on debt to raise capital, you’ll have to contend with interest payments eating into your profits if the house takes too long to sell. Also, a lot can go wrong during the renovation phase, and there’s no guarantee that you’ll sell on time or at a profit. But if you play your cards right, it’ll be worth the risk.
What’s the Hardest Part of Flipping Houses?
The most challenging aspect of flipping a house is the search phase. The property you choose can affect everything from how long renovations take to your profit margin and will determine whether you succeed. Making this high-stakes decision may cause some first-timers to experience “analysis paralysis.”
Is It Cheaper to Build or Flip?
It’s definitely cheaper to flip a house than it is to build one from scratch. Building a house is more expensive because it requires more manpower and materials. But with house flipping, you’re working with a place that’s already been built. Other than the down payment, repair costs, and fees, you’re essentially good to go.
Flipping a house can be a challenging process, but with these nine steps, you’ll have a guide on how to proceed.
You’ll need to begin by doing your research and crunching the numbers. Then, you’ll create a plan and register your business. Once you’re incorporated, you can start sourcing for funds, assembling a team, and getting insured.
After finding a decent property during the house hunting step, you can renovate, market, and hopefully, sell for profit. And when you succeed in your first flip, you can do it all over again.
Hope this article can help in your house flipping journey. Let us know in the comments as to what you’ve done so far. And if you have friends looking to start a house flipping business as well, don’t hesitate to share this with them.