What is House Flipping?
In the current times, many people are looking forward to the business of flipping houses. Before getting further, one needs to understand the meaning of the term’ house flipping’. This is a way of leveraging real estate as an investment. It takes a real estate investor to buy a property, usually on auction, holds onto it as they do renovation, and finally sells the property at a profit. House flipping requires risking money to make more money. In this case, one should exercise wisdom and extra caution. They should understand how the process works and the actions needed to ensure that the whole process is a success.
There are several factors to be considered and understood before getting into the business of house flipping.
How to Flip Homes
After understanding what house flipping is all about, one should follow the critical steps of how to flip homes. The steps include the following;
Step one: Find out and know the range of real estate markets
Not all markets are favorable for house flipping; understand the market. Most house flippers get excited about their next project and tend to ignore the market research of the business. For instance, a budget of $15,000 cant flip a house in a market where homes sell at $800,000. The less the amount of money to work with, the lower the home price one may afford to invest in.
Neighborhoods are ranked according to classes; class A, B, C, and D. Class A neighborhoods are the housing markets that are the most wealthy and are occupied by top-income earners. Class B neighborhoods are the middle class. Class C neighborhood is blue-collar and working-class. Class D neighborhoods are at the bottom, which is the low-income earners. Flipping a house in class D may be easy but comes with additional risks. Moreover, the insurance premiums may be higher than the purchase price. For this case, an investor may likely flip a house to a fellow investor instead of a homeowner. For the first deal, investors should consider targeting class B and C property.
If one doesn’t have an understanding of the real estate market, they are likely to run into the following difficulties:
- One may not know if they are getting into a good deal from the house they are buying. The sales price should be such that, after renovation, the resale price can be profitable.
- One may not identify the real potential value of a home at a specific location. The neighborhood residents should afford the created new house.
- One may miscalculate the accurate price of the house.
If one desires to make proper market research, they should work with an experienced real estate agent.
Step two: Budget and make a business plan
House flipping is a business venture that requires a good business plan. A good plan must include factors such as budget, project scope, and a timeline. A budget should be readily available before purchasing an investment property. How much money is available for investment, and how much should remain untouched for reserve? Know the cost of the house, cost of repairs and renovations before sealing the deal. The scope of work should be comfortable with the investor. For the first house flip, it is recommendable that one should start with cosmetic updates such. These may include new paint, new flooring, bathroom updates, and new fixtures. At first, anyone that is willing to try his hand on house flipping should try to avoid structural and mechanical problems because they involve permits.
Step three: Line up the finances
One may do all that it may takes to get started. However, they don’t know how to raise the money for investment. If they can’t finance themselves, they should have a lender who can fund the deal. When comparing the pricing for loans, one should pay close attention to the fees than interest rates. In most cases, one makes a handful of payments Consequently, the interest rates have less impact on the total house flipping cost than fees do.
The best way to line up finances for investment is by use of cash money. Some of the benefits of flipping a house using cash include;
- There are no interest fees
- There is no rush in selling the house
- There are no debts to hold one back
Step four: Network with reputable contractors
An important part of flipping a house is by building relationships and networking with contractors. They include general contractors, painters, plumbers, roofers, and electricians. Unless one has the skills to make repairs and renovations, they should hire experienced professionals to do the work on their behalf. Contractors will get proper quotation once the house is under contract. Reputable contractors have renewed licenses and good references. They should as well be available within the timeline and give a quote that fits the investor’s budget.
Step five: Find a house to flip
An important part of house flipping is finding a good deal. Not all properties for sale make a good house flip. It doesn’t only entail buying a property that is below market value but also one with a wide margin that can cover all the expenses of flipping. Getting into a good deal requires patience and one could work with realtors to find on- market deals or wholesalers to find off-market deals. Successful investors are very careful about what house they choose to invest in. Factors to be considered when finding a house include; a great location, below market value, and a sound condition.
Step six: Buy the house
For more experienced home flippers, they buy houses that require complete repair and renovations. As discussed earlier, beginners should consider starting with cosmetic updates and repairs. The mechanical systems should be working properly and structurally sound such that a beginner will not pay for licenses. As soon as a property is confirmed, they should get several quotes from different contractors. Several quotes will enable one to see the different approaches by the contractors. Then, the house flipper should choose a contractor who should be scheduled to start working immediately.
Step seven: Renovate the house
As soon as all other things are settled, its time to work on the house. The house renovation should be smart. During the repair, one may be incurring additional costs such as taxes, insurances, and utilities; therefore, they should be efficient in taking action, and the faster they get their payback. Gleaming and fabulous repairs can get off-budget and can make the renovation get out of hand. Small maintenance and updates should not be underestimated because they have a huge impact. Get a suitable contractor who gives a proper quote is the most important thing at this stage.
step eight: Sell the house
Selling the house is the simplest step in house flipping. Hiring an expert realtor would put the house on the market. A real house agent would also be of help in pricing the house and marketing it to the right buyers. However, one should learn the fundamentals of real estate pricing before buying the first investment property.
Can You Really Make Money Flipping Homes With No Money?
One may ask, can you really flip properties with no cash? Flipping houses without your own money is possible. There are investors able and ready to lend out money that one may need for the deal. However, before they lend out money, one must show that they deserve it. There are several funding options available for house flippers, and non of them requires one to use their own capital.
Methods of flipping houses with no Funds
- Private lenders
Often, private lenders are the most significant source of funds. These includes banks without the infinite hoops to that one needs to jump for most of the conventional money lenders that have become synonymous with. A private lender is anyone with extra capital and has a desire to invest the money. Since they do not have any associated with a financial institution or government-backed agency, they institute their own regulations and rules. Knowing that they can be able to set their own governing rules, they usually settle at a very steep interest fee. The rate of private lenders is slightly higher than the traditional lenders. However, they hand in the money to the borrower very fast. Efficiency is the advantage of working with private credit issuers. The slightly higher interest fee is proportional to the admission cost if it means the house flipper can efficiently secure the funding. For investors, speed is more important than interest rates. To dispatch the funds, private money lenders require security or insurance policy. This could be a trust deed or a promissory note on the subject property or a mortgage. Borrowers can as well guarantee the loan with assets. However, everything is acceptable.
- Hard money lenders
These are companies that offer short term real estate loans. Unlike private lenders, they are affiliated with a firm that has specialized in giving credit. Not to confuse with traditional money lenders, hard money lenders offer shorter loan terms. Even though they are affiliated with a specific company, they work like private money lenders. Their lending rules are a little bit looser than traditional money lenders. However, the rates are slightly higher. They ask for about 11%-15% and additional upfront charges based on the amount of credit given. However, there are no universal guidelines for hard money lenders. Each will come with its own set of rules and regulations. Mostly, they will not fund the whole project. Consequently, they may finance the borrower with 70% of the purchase price.
Wholesaling is one of the options that can make a house flipper to generate a significant income in a short time. It involves locating and selecting properties that are for sale, persuading them to sign contract while also giving the contract papers to a new real estate investor or buyer. Based on the percentage of the final deal (generally between 5% to 10%), the wholesaler makes money. The wholesale process is an opportunity of getting into real estate without financing. Though this is a great opportunity, house flippers must be active for them to be successful. It takes one to have a close check on the market, good networks with the buyers, and negotiation skills of the contracts. Connection and skills go hand in hand with progress as far as house flipping is concerned.
- Partnering with other house flipping investors
Getting money from money lending institutions are not the only way of flipping houses without money. Partnering with house flipping investors is an additional way of venturing into house flipping without using a single coin from one’s pocket. Those already in the business have no reason for denying anyone who is interested in funding. This is with the condition that the desired alliances are forged. It is possible in the event when one brings value to the deal. In most cases, if the investor doesn’t bring money in the partnership, then they have to show value elsewhere for the deal. Whatever it may take, as a partner, one is required to carry their own weight. Therefore, partnering with house flippers who possess the cash is an ideal way to get started.
- Home equity
The property equity generated from one house can purchase another one and the chain continues. Property owners that have value in their homes can use several options to get cash. The investor can do this through a refinance made through cash. It involves redoing the current mortgage and taking the difference between the loans as profit. Since the homeowners are not restricted to how they use the funds, they can use the capital in house flipping. Another way is through the use of the home equity line of credit (HELOC) to buy a rehab home. HELOC operates similarly to a credit card by giving investors the chance to borrow against their equity and making monthly payments. This borrowings can offer investors and property owners with a lump sum that is a good beginning in house flipping. The benefit of this option is that the interests of HELOC are tax-deductible. The more the equity, the higher the chances of getting approved.
- Option to buy
The option to purchase is a process of leasing and then buying. Investors reach a consensus to buy a home after leasing it. Renters lease space and finally purchase it after the lease agreement lapses. At the time when the original contract gets signed, it’s the moment the purchase price is determined. Mostly, the rent repayments, which are regarded as credits towards the last rate. This is one of the ways one can flip houses without money since it doesn’t require any upfront repayments. Even though it may be easy, one is required to negotiate significant repairs and renovations when the contract is being signed. It is important to carefully review the contarct since the terms vary depending on the circumstances. This is a viable way of flipping houses; however, it requires attention to details and preparation.
VII. Seller financing
One can look for homes that advertise the financing of the seller or get the idea to sellers who may develop interest after they find a property to flip. This option allows investors to work with former property owners. The benefit is that one is more flexible when negotiating terms of the loan. It needs smaller down payments, a doable payment schedule, and simpler terms of approval. When securing a property by seller financing requires the investor to know what is expected. They should be transparent about their property goals and give information that shows why the deal should be financed. Querries about employment, income, and credit history may be asked. However, this option allows one to explain the particular situation. Due diligence is essential since not any property is qualified for seller financing is the right match for a rehab property.
How to Find Houses to Flip
Finding a house to flip is very difficult, but it doesn’t mean that one should miss the opportunity they come across. A house flipper needs to know how to choose the right house or property. There are several factors one should consider when choosing a house to flip.
Step one: Location of the house
The value of the house flip is determined by where it is located. While flipping houses in the real estate market, the exact location of the house can make the flip or break the deal. Proximity factors such as public transport and stores may increase the value while highways and airports will decrease the value. One needs to understand where the house sits and who is expected to purchase the house.
A city and neighborhood are the main factors of a location when considering a house flip.
The city one chooses to invest in matters a lot when finding a house to flip. One can opt to choose a city they reside in, a nearby city, or a city on the outskirts. Whichever city one chooses to invest in, it should be a profitable city as far as real estate is concerned. A city with more housing inventory where one can get a discounted house and a good Return On Investment (ROI) is highly recommended. Rate of house flipping should be on the lower side such that competition is not too much. Places of investment in the city are changing due to the adoption of new laws, new construction plans, or economic change.
The choice of neighborhood is equally important as the city when choosing a house to flip. A good neighborhood should have the following characteristics
- Have good value for real estate indicators
In house flipping, real estate appreciation, property value, and prices, rental comps, and days on the market are the indicators.
- Be in a competitive market
If one wants to sell a flip house, they have to check on markets where there is high competition such that there is a guarantee of sales. The competitive nature means that the house doesn’t stay in the market for a long time. This should be considered when finding a home to flip. Competitive neighborhoods are the ones connected to transportation, learning institutions, shopping malls, health institutions and are safe.
Generally, the purpose of surveying the neighborhood is to know if the specific area you are looking into is suitable for investment.
Step two: Financial consideration
When choosing a house to flip, one has to consider the financial implications of the housing choice. House flipping is an investment whose goal is to gain profits, which has a high-risk factor. To fetch good profits, one usually has to find a house that is below the market value, renovate and resell it. However, houses below the market value may require more renovation and repair such that they may end up costing more. House flipping process may incur a high cost, so one has to account for all costs involved. The house chosen should be inspected thoroughly such that it is easier to estimate all costs. Profits can be pocketed if the resale price of the house is higher than the cost involved in renovation and fixing.
Step three: Forced appreciation
Appreciation is the increase in the value of a house over some time. Appreciation happens if the interest rates, demand for property, and inflation change. Now forced appreciation is the increase in the value of the house caused by the action of an investor. The value of the house is determined by dividing the Net Operating income (NOI) with the cap rate. Therefore, the value can be increased by increasing NOI. NOI can be increased by running renovations, making repairs and updates that can increase the quality of the house. However, it is crucial to consider the range of house prices within the neighborhood to avoid inappropriate market values. Therefore, if one is chosing a house to flip, they should know whether there will be any appreciation of the property with time.
Step four: House flipping
When choosing a house to flip, you have to ensure that the process is profitable. The analysis must be done on how much it will cost, flipping the house, and how much the house will be sold at. Those new into the investment should work with experienced real estate agency to avoid any losses at the end. Also, finding good contractors will help in giving the right quotes.
Other ways of how to find houses to flip include;
Searching the multiple listing service (MLS)
MLS is a database brought together by real estate brokers with a list of all properties for sale. The listing contains details on the geographic area, characteristics, and statistics of the properties. The MLS is available to the realtors only. If one is not a realtor, they should partner with one if they would want to access the MLS. When choosing the house to flip, the MLS will assist in making the right house purchase.
Joining a real estate investment group
Real estate investment groups are common, and they are worth checking out on them. They contain helpful information and opportunities for houses to flip.
Looking for auctions
Estate auctions are good opportunities for discount purchases. This is a good option for those with the cash to pay for the house purchase.
How to Get Into Flipping Houses
One may be interested, but they may not know how to get into flipping houses. When getting into house flipping business, a lot has to be done. Like any other business, the venture needs resources, planning and efforts as well as skills.
The following are steps of getting into house flipping business.
Step one: Writing a business plan
Before taking any action, making a plan of the business is the first step in house flipping. The plan will get the business on track, assisting in estimating profits, and getting finances. The plan should be done in-depth, and a lot of information should be included. The business plan will lay out the purpose of the business, how much it may cost, and the profits expected.
Step two: Growing networks
House flipping is tough and requires resources to complete each project. One should identify the available resources while taking advantage of one’s full strengths. An experienced real estate agent is an asset. Speaking out can help one find reputable realtors, wholesalers, and contractors who can help complete projects within the budget. Reaching out to professional and personal networks is essential for mentoring and advice.
Step three: Choosing a business entity
Operating legally in a house flipping business requires one to choose a business entity as they register in the state they wish to operate. There are many business entities to choose from. However, one would go for the one with limited liability protection. Since there are risks in house flipping, liability protection is important. This ensures that incase of any legal problems, the personal assets are protected.
Step four: Obtaining insurance, EIN, permits, and licenses
Before one is allowed to start working as a house flipper, they should first register for Employer Identification Number (EIN). This should be considered as a social security number that can be used for tax purposes, applying loans, and opening bank accounts.
One is also required to consider business insurance options. Employees that will be hired should be covered for compensation, unemployment, and disability. Commercial property insurance is necessary for the business, properties, and for yourself.
Business permits and licenses will always enable one to operate a business. Licenses and permits depend on the State and the scope of work. In the construction industry, having several permits is expected.
Step five: Finding contractors and suppliers
Once the business has been established legally, it needs suppliers and contractors to keep it going. The contractors should be experienced, with proper reference, and have done excellent work in previous projects. A right contractor may help in proper planning and budgeting, timelines, and cost estimation. Suppliers who are reliable and are able to work within the budget are the best.
Step six: Assemble a team
Whether partnering or getting a contractor, one must hire a qualified team to do house flipping successfully. There is a team that one would consider working with and they include the following;
Business partners/ investors
A partner may be a private investor or a real estate investor. A good business partner brings skills and assets to make an honest profit. The benefit of having a partner is the ability of one to approach a deal in different ways.
Realtor/ property owners
An experienced partner can help in several dynamics of house flipping.
Seeking legal advice in a financial agreement is important, especially when making investment decisions.
Step seven: Obtaining financing
After identifying a house to flip and taking all the necessary action, one may now be ready to finance the project. If one is not able to finance from their own pockets, they can obtain loans from money lending institutions. House flippers are advised to explore all possible options before settling on the loans
Step eight: Source the deal
Flipping houses largely depends on supply and demand in the real estate market, cost of labor, and appreciation. If one is looking for houses with less market value, wholesaler or auction are the best to consider.
An investor in house flipping is likely to succeed via the steps mentioned above. However, asome mistakes could break down the house- flipping business.
The following are mistakes to be avoided ;
- Insufficient funds
Daggling in any real estate business is very expensive. Property acquisition cost is the first expense and without money means that you have to get facilitation from the lending institution. The money borrowed has to get back with interest on top. Every dollar spent on the interest is the money one needs to earn on the sale just to break even. Therefore, making profits maybe even tougher.
- Not enough time
House flipping is a venture that consumes time as it can take several months to find and buy the right property. After buying the property, one still requires time to fix it. Even if the investor hires someone else to to do the work, they will spend some time doing the supervision. Before selling the house, there must be inspection to make sure the house complies with the buiding codes. If the house doesn’t reach the standard, one needs more time to bring it upto standard. After all the necessary things are done, time is required to sell the house. Therefore, house flipping requires time commitments.
- Inadequate skills
Skilled builders and professionals flip houses as part-time activity besides their regular jobs. With the knowledge, skills, and experience, they will find and fix a house efficiently. If one can handle a hammer, lay carpets, hang dry walls, install a kitchen sink, and roof a home, then they got skills to flip a house. If one doesn’t have the skills, then they have to hire a professional to do the work. It goes without saying that paying the professional is taking out the profits.
- Not enough knowledge
Succeeding in house flipping must be accompanied by the know-how of picking the right house, at the right place, and the right price. Even if one gets a good deal, knowing the repairs and renovation to make or the ones to skip is very crucial. One must as well know when to get out before the project becomes useless.
Experienced and skilled house flippers take their time to wit for the right property. Unskilled house flippers rush into buying the first house and hire the first contractor without proper considerations. They as well hire realtors instead of minimizing costs to maximize profits. The unskilled also rush so that they make a fortune quickly. Professionals understand the time it takes to flip a house, and they know the profits are not the same. Some of the times, the benefits are minimal.
How to Flip Houses as a Career
How do one flip houses as a career? Some individuals have made it big, and due to this success, house flipping has gained popularity. If one is thinking to get into house-flipping as a career, then they should understand the following truths.
- Budgeting capital
Most investors don’t have sufficient capital to get into house flipping. In this case, they borrow money from credit issuers. Even before they get loan approval, they must have cash on hand. Skilled house flippers know that a budget can be broken by unexpected repairs and additional works. Therefore, one should plan accordingly.
- Scheduling issues
Often, house flippers set time in the mind of when they expect to get returns on their investment. It is essential for whoever one may be working with to hit the deadline. Scheduling may be difficult because it may be affected by factors such as material delivery, weather, several trades and a couple of other issues. Most projects are not complete at the time they were expected to be complete.
- Delayed sale
A house flipper may purchase a house at the right price, make renovations within budget, and get the house to market at a good price. One would expect the house to sell immediately. The reality of the thing is that it may take some time to get a buyer in any market. The delay is contributed by several factors, such as the location of the house and the economic impact. The best way to work on this delay is by having several houses working at the same time. This reduces the impact of the house sitting in the market.
However, house flipping is a career that can build wealth over time.
Tips on Getting Started Flipping Houses
Focusing on one type of renovation and home may make one an expert in cost and time estimation required to complete a particular project.
- Start with what you know
Start with where the market is best. By the virtual of this fact, one would have a better understanding of the type of houses that are in demand.
- Have a plan B
In case the house doesn’t sell, one should have a backup plan. One of the most common solutions is leasing the house. Other options may be occupying the house or slashing the asking price.
- Work with a realtor
A Realtor will make money during the transaction. However, they have positive impacts in other ways. When it comes to selling the house, a reputable realtor will attract a potential buyer. Realtors are also networked to people who can assist in finding a suitable house and doing the renovations.
- Begin with the end in mind
Before purchasing a house, one should estimate whether the house’s likely value after the renovation is done. With the proper estimation, one should be able to see the cost of renovation, and they can figure out the profit they would get out of the deal.
- Be modest
With honest assessment, one should figure out which projects one can handle and the ones that require help. Even if one may personally handle some projects and save on the cost, potential buyers will always compare someone’s work with that of a professional.
- Don’t quit the job
Keep the job when starting. Starting small is good for gaining experience and growing steadily.