How to Flip a House for Maximum Profit
You Will Need Cash. You will need money for a down payment and other fees associated with buying your new investment property. You will also need the money or credit to pay for renovations, decorating and carrying costs (mortgage payments, utility payments, insurance, etc.).
You Need Good Credit. You will need to be approved for the initial mortgage but also for credit if required to pay for expenses along the way. Loan approvals have become more difficult to secure and lenders are becoming increasingly wary of giving money to clients who are looking to flip houses. The best way to increase your changes of getting your loans approved is to demonstrate your responsibility with money. A high credit score is the best way to do that.
Do Your Homework. In order to know property prices in your area, you must do your homework and get familiar to what sells before contemplating a flip. If you know what the average three-bed, two-bath house sells for in your area, you will find it easier to spot a bargain house when it’s under your nose. Sometimes even within a community there are 4 or 5 separate areas that have differing lot and home values that you will need to know about. Make sure you look at numerous properties before you even think of buying. Find out the selling price before you make an offer and ensure that you realistically achieve a profit.
Allow for time and cost contingencies. You may be aiming to complete your renovation project in four weeks, but flip timelines are notorious for going wrong. Your plumber may be irregular or may be too sloppy. You need to be prepared for the worst-case scenarios.
It’s not just the building costs that you need to account for. Your budget should also cover real estate closing fees, bank loan fees and potential extra mortgage payments if your renovations take longer than expected or the house fails to sell quickly.
When flipping houses, it is important to be conservative with your rehab budget, especially when you are a beginner investor,” said Ryan Substad, owner of Northwest Property Solutions, who sold a flipped property earlier this year and has two more in the works. “Always leave a little buffer in your budget for unexpected things that might come up. When you start opening up walls or doing demo to the property, there are bound to be extra things that need to be fixed as well as the little things you originally forgot to put in your budget. Also, the thing many people forget to set some money aside for are the items that come up on the buyer’s inspection report that they want fixed before closing. If you make sure you have some buffer room in your budget and are conservative with your numbers, you’ll be well on your way to making a nice profit.
Know your knowledge and skills. To be successful as a flipper, you need to be able to pick the right property, in the right location, at the right price and at the right time. Even if you get a deal of a lifetime, you need to know which renovations to make and which to skip.
Professionals take their time and wait for the right property. Novices rush out and hire the first contractor that makes a bid to address the work they can’t do themselves. Professionals either do the work themselves, or rely on a network of pre-arranged, reliable contractors or real estate agents. They understand that buying and selling houses takes time and that the profit margins are sometimes slim.
Before you get involved in flipping houses, do your research thoroughly. Like any other business, flipping requires time, money, patience, skill and knowledge to study the market and the flipping business as a whole. It certainly is not as easy as it sounds, because flipping means careful planning, doing your homework and expecting the unexpected.
If you’re handy with a hammer, enjoy laying a carpet, can hang a drywall, roof a house and install a kitchen sink, you’ve got additional skills to flip a house. Professional builders or skilled professionals, such as contractors, carpenters and plumbers will do very well to flip houses. Their knowledge, experience and skills help them find and fix a house. They usually flip houses as a sideline business to their regular jobs. On the other hand, if you’ve got to pay a professional to do all this work, the profits on your investment reduce. Make sure you know what you know, know what you don’t know, and know the costs to get a professional to come in and do the job right.
Never, Ever Overpay. “Paying too much for a fix and flip property is one of the most damaging mistakes that real estate investors can make,” said Kuba Fietkiewicz, fix and flip investor and founder of REIkit, house-flipping software. “If you get your value right, then you can get a whole lot of other things wrong and still make money. However, the reverse is rarely true. If you get the value wrong, it doesn’t matter what you do, you’re likely going to lose money. Although doing due diligence on a property is not as fun as swinging a hammer, analyzing the numbers for each deal carefully is a crucial first step that should not be rushed. This starts with calculating an accurate ‘after repair value,’ or the price you could sell the house for after you are done fixing it up. The difference between the deal price and the ARV must be large enough to cover expenses and also make a profit. Once you find a property worth pursuing, you can confidently put in an offer and start making your house flipping dreams a reality.”
Choose the Right Neighbourhood. When searching for a house to flip, buy an old house in a highly respected or up-and-coming neighborhood,” said Tonya Bruin, CEO of To Do-Done, a handyman service company that specializes in home renovations and fixer-uppers. “You can figure out the lay of the market by talking to a real estate professional or completing your own research. The homes in these neighborhoods will already price above typical selling value, so when you completely renovate them with new appliances and structural repairs, they will sell for even more.
Know Your Prices. “Overpaying for contractors/work as well as material is another one that can quickly turn a flip to a flop, so make sure you know your prices for materials as well as what a job costs both on the total project budget perspective as well as on an individual trade-by-trade basis,” said Lukasz Kukwa, real estate advisor with Coldwell Banker Residential Brokerage. “Make sure you do not over develop or renovate for the area in which you are selling as well as the buyer pool you will be selling to, many times beginner investors invest funds into the wrong places such as on higher-end materials or products that will not yield them a return as their buyer pool in that price point will not pay more for those choices and/or the comps in the area you are renovating in won’t cover the extra money you put out for these items and work.”
Have an exit strategy. “Always have at least two exit strategies and don’t dawdle choosing which one to execute,” said Robert Taylor, of The Real Estate Solutions Guy, who has rehabbed houses for nearly 15 years. “If you buy a house and find yourself significantly in over your head, resell it and move on quickly — even if it means selling at a loss. Every experienced investor has had to do this. Holding on to a bad deal just costs you more money. The longer you hold on to a skunk, the more you’re going to smell like him. We’ve bought houses that after I purchased them, I realized that the numbers were just too thin. We turned around and resold the property as-is for more than we would have made if we had spent the money to fix it up and flip it.”
Flipping houses has its challenges, from getting a fix and flip loan to finding the right property. But if you can make it from start to finish, the process can be incredibly rewarding — both personally and financially. That said, it’s important to remember that you don’t need to reinvent the wheel. Just because you’re flipping your first house doesn’t mean it hasn’t been done before, so use the resources available to you to learn from other peoples’ mistakes. Read books, check out blogs, talk to experienced flippers — no matter how you get your information, researching the topic can save you a headache and potentially even thousands of dollars.