How To Start Flipping Houses
To successfully flip a house, you need to take a few steps outside of the normal procedure of buying and selling a house.
1. Research The Market
The first step toward serious house flipping is knowing the housing market. You aren’t going to know a good deal in an up-and-coming neighborhood without having a thorough understanding of the area first.
Begin by researching the real estate market. Learn where people want to live and determine any popular housing trends. You should partner up with a real estate agent or REALTOR® to do this – they’ll help you understand market conditions, determine all necessary repairs and help time the sale.
In fact, many professional home flippers are licensed real estate agents. This shouldn’t come as a surprise – if you’re interested in house flipping full-time, you need to know the ins and outs of real estate. You should be comfortable with the process of buying and selling a home, and the juggling it requires.
2. Understand Neighborhood Rankings
It’s also important to become familiar with the class ranking system that real estate investors use for neighborhoods, from Class A to Class D:
- Class A neighborhoods: Top of the market, with the highest real estate prices.
- Class B and Class C neighborhoods: Middle-class and working-class neighborhoods.
- Class D neighborhoods: Areas with the lowest-income housing.
For your first flip, choose Class B and Class C neighborhoods. They’re more affordable and move faster than the high-end homes in Class A, and they typically don’t require as much renovation as homes in Class D.
When you’re working with a real estate agent who knows the area, you can pinpoint neighborhoods that have potential for your investment strategy. Maybe a Class C neighborhood is about to get a big investment from the city, or a major employer or a university is growing nearby. Knowing about these outside factors ahead of time can create an opportunity for you to profit.
3. Secure Your Finances
Before you even consider a purchase, you’ll want to know how much money you need to flip a house. If possible, purchase the property in cash. This will save you from accruing debt and paying interest on the house before it sells.
If you don’t have the cash laying around to outright buy a house, you could consider pooling money with friends and family to buy it. There are also some crowdfunding sites, like FundThatFlip.com, that offer ways for you to get your flip funded by investors.
There are other ways to finance your flip as well. Keep in mind that most mortgage products aren’t offered for house flipping. Banks typically aren’t interested in getting into the risky business of house flipping. You’re going to have to finance your flip another way.
How much to flip a home varies depending on the type of financing you secure, but here are a few ways to finance your purchase:
- Cash-out refinance: A cash-out refinance could be an option if your primary home has increased in value. With a cash-out refinance, you’ll take out the equity in your current mortgage and refinance to what you still owe.
- Home equity line of credit (HELOC): A HELOC is a loan that uses the equity in your home as collateral.
- Hard money loan: A hard money loan is a short-term loan issued by a private lender. Hard money lenders offer loans that range from 6 months to 1 year, have high interest rates and can require down payments up to 40%.
Along with the finances for the purchase of the home, you’re going to need to pay for repairs and renovation. Make sure to budget for these expenses, as they can be the area that either tanks your flip or makes it profitable.
4. Get Expert Counsel
Before buying a house to flip, you need to know what you’re getting into. Just like it helps to have knowledge in real estate markets, knowing what repairs are necessary on a house and how much they cost will help you make a smart investment. After all, houses you purchase to flip are investment properties.
It’s a good idea to network with other real estate investors and talk shop. Consult your real estate agent on connections to experienced contractors and reliable inspectors. If you’re handy, find out what upgrades you can take on yourself – but be aware enough of when you’d be in over your head.
Along with budgeting money for repairs, you’ll need to budget time. This is especially the case if you’re taking out a loan to buy the home. Every day that you don’t sell the home, you’re having to pay more money in interest, insurance and taxes.
You should be prepared in case something goes wrong or takes longer than planned. Not only do repairs take time, but your schedule and those of your contractor or home inspector may not align perfectly. Delays like failed home inspections can cost you serious money.
5. Find And Buy A House
After you’ve researched the market, secured the financing and are confident you’re going to make a smart investment, it’s time to find and make an offer on a house. Have your numbers worked out ahead of time with some wiggle room for the purchase price.
Once you find the right property at the right price, you need to pounce. Put your money down on a place you believe in. You can’t start working on it until you close on it, and you can’t close on it until your offer has been accepted.
Depending on who you’re buying from, closing can happen fast – or it can take months. If you’re buying from a bank, it’s likely ready to close as soon as possible. But if you’re buying from a resident, closing may be contingent on them finding a new home.
It’s best to have contractors at the ready to start renovations as soon as the house closes. The quicker you get the work done, the quicker you can put the house back on the market.
6. Sell For A Profit
This is why you wanted to flip in the first place: you saw an opportunity to profit. Once the repairs and remodeling are done, it’s time to sell the house and reap the paycheck for all your hard work.
- Give your house a competitive sale price for potential buyers.
- Hire a real estate agent who knows the market and how to sell your home.
- Make note of comparable house sales in the area, and what makes your house different.
- Be aware of how long similar houses tend to stay on the market before sale.
Selling the house you’re flipping is what makes the whole process worth it. It’s what you’ve sunk all the time and money into. Forecasting the timing and cost of the flip is what’s going to determine your profit.
