How to Flip a House
So, you love watching shows about flipping houses, but do you have what it takes to do it yourself? How familiar are you with the real estate market? Do you understand basic real estate factors like mortgage rates, lawyer fees, and the cost of buying and selling? Before you even think about getting into this exciting market, take a look at these topics to learn about how to flip a house.
Create a Budget
First things first, you’ll need to create a budget to fund a large project like buying and flipping a house. Sit down with a mortgage broker and your bank to see what options are available to you. A good credit score and a decent down payment are two things they will want to see right away.
You will likely have to take out money without being able to pay it back until the home sells for profit. This could take months, or maybe even up to a year. Can you hold it for that long? Can you handle delays in construction (because they always happen) and will you have funds available for emergencies?
A good budget should tell you exactly how much you can afford, and what you can therefore get approved for. Getting a pre-approval done with a bank or mortgage broker is one of the best things you can do to get an idea of your financial limitations.
Setting some funds aside on top of lending amounts will provide an even bigger safety net, especially if you're going to take on major renovation projects.
Calculate ARV Potential
Once you are pre-approved for a mortgage, the “After Repair Value” or ARV can help you determine if a property is worth investing in. It’s a basic calculation strategy to help estimate the value of the house after renovations are finished.
You’ll want to start with comparable properties on the market, usually in the same area, and see what they went for, before and after repairs. Estimate what the cost of repairs will be on the property you are looking at, and of course, anything else like holding costs and legal fees.
Add the sale price plus repairs and other costs to get the total “ARV.”
Use the 70% Rule
The “70 percent rule” will give you a fairly comprehensive idea of whether the property is worth flipping. The rule means the property should be purchased for 70 percent of the ARV, minus the repairs. To get this final calculation, multiply the ARV by .70 and subtract the total repair costs. You’ll end up with your maximum purchase price. Here is an example:
The house is worth $300,000 after all of the renovations, and the repairs cost $30,000. Multiply 300,000 by 70 percent (or 0.7) which equals 210,000. Subtract the repairs (210,000 – 30,000) and you end up with 180,000. That’s how much you should buy the home for to be able to make a profit.
The default calculation is: ARV x 0.7 - repair costs = Total Purchase Price.
Is It Profitable?
Many people want to know whether house flipping is profitable or not. Unfortunately, that’s not a straightforward yes or no question. When it’s done right, flipping houses can be extremely profitable. If you do it wrong, you can lose everything.
Following the 70 percent rule and calculating ARV are just a couple of ways to confidently move forward with a project, but there are many other details that go into a smart flip. Ideally, you want to make 10-15% profit on each flip.
If you want to make flipping your full-time job, you may want to plan around five flips a year, depending on sale prices in the market you're investing in. Cheaper home prices will mean less profit, but it can be easier to get into these markets without a big down payment or as much overhead.
This is where some other factors start to come into whether or not house flipping is a good idea.
Not all markets are made the same, and your area may or may not be a good place to invest, plain and simple. Do your homework to see if there are homes available to make money on. Take a look at market trends to see if homes are going up or down in value, and get a sense of the current supply and demand.
Just because you can buy an eyesore and make it pretty again doesn’t mean you’re going to make money. The best house to buy is the worst one on the block. If the neighborhood is good (safe, close to schools, parks, etcetera) find the cheapest house that you can afford and flip it to look similar to the rest of the homes around it.
Aim to match the vibe. Don’t overdo it and build a mansion in a middle-class neighborhood.
Find a Real Estate Agent
Finding a good real estate agent that you trust and that understands what you're looking for is crucial in the house flipping game.
Even if you know a little bit about it, agents have access to key information and do a ton of work for you on the sidelines like setting up viewings and getting the appropriate legal documentation done once it’s time to make a deal.
They are essential from the beginning to the end of the process and will become a major player in your team, especially if you want to do more than one flip. They’ll be able to coach you when it’s time to make tough decisions about buying and closing terms like financing, inspections, and transfer of ownership details.
Find a Good Contractor
If you're going to do the work yourself, great. Even better if you have your own construction company, but most people don’t. While you may be able to use some of your own elbow grease, certain things can only be done by licensed electricians, plumbers, framers, roofers, etc.
A general contractor can look after the whole project for you if it’s large-scale and do the necessary hiring of the sub-trades. If you are only looking for homes that need a little “TLC”, things like painting, putting up new drywall, and minor bathroom and kitchen repairs are tasks the DIY-er can usually handle.
Just remember: time is money. Sometimes paying a professional to do the job is worth it in the end, however, “sweat equity” may be essential to get started.
Once you’ve got your team and budget assembled, it’s time to look for properties. The early bird gets the worm, so to speak, so plan to spend your mornings, days, and nights scouring the market. Take your time, but also trust your gut: a property that stands out to you may not to someone else, but don’t let that deter you.
Your agent and contractor should go with you to view any homes you are serious about. Foreclosures, auctions, and bank sales are great ways to find cheap properties, but they aren’t the only way to make money.
Having a keen eye for a diamond in the rough is a skill-set you’ll want to develop. Knowing what you can and can’t handle is another talent that can’t be taught.
Specific Things to Upgrade
The best rooms to upgrade are generally the bathrooms and kitchen. Not a lot of potential buyers want a dated kitchen or a leaky shower. Putting in an en-suite bathroom, or adding a powder room to the main floor are always good projects that add home value.
Bedrooms can generally be upgraded with simple décor changes or a fresh coat of paint—in fact, giving the whole house a fresh look can be a fairly cheap and easy way to clean up an older home in need of some updating.
White paint is the professional go-to as it photographs well, gives the illusion of more space, and appeals to the broadest market. Here are a few other upgrades that have the best return on investment (ROI).
Upgrade the Lighting Fixtures
Changing overhead lights and fans can make a drastic difference in a home, not only illuminating areas better, but modernizing the look. Feel free to change old outlets and electrical sockets while you’re at it.
Quick Bathroom Fixes
Spruce up an older bathroom that doesn’t require a full tear-out by replacing fixtures like showerheads and taps. These can quickly liven up the space, as can a new vanity and toilet. Older tiles that are in good shape can be cleaned, especially grout lines, which will save a ton of money.
This project will likely get your investment back after the sale, whereas a new roof or new windows generally bring lower returns. New siding instantly adds curb appeal, and can be a straightforward job to get done.
Install a New Garage and Front Door
Brand new exterior doors can get you 100 percent of your investment back, without breaking the renovation budget. Their instant curb appeal is priceless, and no homeowner wants to have to deal with doors that don’t work.
Landscaping and Gardening
Tidying up lawns and gardens is an easy task that can bring a major boost to curb appeal. While you’re at it, power wash siding and decks or add a new one: laying new patio stones or adding a deck can add significant resale value.
Rip up Old Carpets
Hardwood is expensive, whereas laminate can still look great and improve the feel of a home. Choose to do every floor over just a room or two. It will cost more, but contractors will be able to get wholesale deals on large amounts of materials.
Leave the Layout
Choose a home that already has enough living space and an open concept to save on major costs such as changing the home’s layout or building an addition. While these projects can be worth it in the end, layout changes are costly and should be left up to experienced flippers.
Microflipping is a subsection of flipping houses that doesn’t deal with any time-consuming and costly renovations. The idea is to buy properties that are below market value and then sell them to another buyer at a profit. The sales are faster than regular flips since there aren’t any repairs or renovations to factor in.
The major work is analyzing and knowing the market well enough to make money on these micro-flips. The most profit is made on the quantity of sales, so if microflipping is interesting to you, make sure you’re ready to process many deals and go through a higher volume of real estate.
Inspections are incredibly important when buying a house, especially if you're buying an as-is property, or the cheapest house on the block.
Many hot North American markets have foregone certain conditions of sale because of the competition right now, but not making a sale conditional on financing and a home inspection can set you up for some major problems. Protect yourself during bidding wars by getting a pre-approval so you know your financing will be fine.
Don’t try and buy a house out of your budget, and let your lending agent look over the details before making an offer to see if it's safe to waive a certain condition.
If you're a contractor, or you're working closely with one, have them walk through the property with you before making an offer, and then you can confidently waive the inspection condition if you already have a professional’s go-ahead.
Staging and Selling
Staging your home after it’s been renovated and ready to be put on the market is a great way to get more attention and money from potential buyers. Staging can include renting furniture and hiring “stagers” to create the perfect layout and look of the home.
Bedrooms should have high-quality bedding and furniture, bathrooms should be adorned with towels, kitchens could have flowers and bowls of fruit out on the countertops, and living rooms might be fully decorated with couches, chairs, and entertainment centers or TVs in place.
The idea is to show people how the home can look without them having to guess or think about where things would go, or how a bed should be placed in the room. Staged homes can expect to get up to 20 percent more than a home that isn’t staged, even if it’s newly renovated.
Staging often brings in multiple offers and bidding wars between buyers that are serious about your home. If you’re going to flip, you definitely want to stage.
There are a lot of nuances to flipping a house that you won’t begin to understand until you start doing it. It might be a good idea to do a small renovation on your own home to see what’s involved even if it’s only small repairs.
If the process excites you and you understand how to increase the value of your property through design and renovation, maybe you're ready to take the leap into home flipping. Just remember, it’s not for the faint of heart.