When the real estate market was at its peak earlier this century, flipping houses became all the rage. Enticed by the potential lucrative profits, people from all walks of life decided that they wanted to try flipping houses as a source of income.
For a few years, that trend continued, as people were able to buy homes, fix them up and sell them for large profits, sometimes in a matter of months. That all seemed to come to a crashing halt when the housing bubble burst in 2007 and the global economic slowdown followed.
After a few years of disaster in the real estate market, flipping properties began gaining popularity again. There is even a cable TV show on the DIY Network called “First Time Flippers” that profiles everyday people who try their hand at flipping for the first time.
In 2018, the total number of all single-family home and condo sales were flipped homes, according to ATTOM Data Solutions. In all, 207,957 homes were flipped in 2018, which marked a half-percent increase from sales for 2008.
While the percentage of flipped homes dropped 4 percent from 2017 to 2018, it is still an income stream that could prove beneficial to those interested in investing in the real estate market. According to the ATTOM Data Solutions report, the average gross profit of flipped homes in 2018 was $65,000.
But what does it take to flip a house for profit? And is house flipping for you?
Follow these six tips to understand what you need to flip a house and whether it’s a project you can handle.
1. Understand the Market
The first step to successfully flipping a property is thoroughly understanding the current market, with the key word being “current.” While you may want to attempt to project the next hot neighborhood in your market, the most successful flips are those that happen quickly. That is, the most profitable flips are those with the shortest amount of time between when you buy the property and when you sell it.
Under these terms, only the current market matters. As such, it’s important for you to understand where the demand is in your market. What types of homes are people looking for? Where are these homes located?
The most important step in your journey for a successful flip is to identify the right neighborhoods in the right markets. Once you do that, then you can move on to the far sexier step, which is …
2. Identify the Values and the Opportunities
This is the part of house flipping that most people think of, and it’s because that’s what TV shows and other media have trained us to do. We are so focused on what something could be with a little sweat equity.
In a sense, every person who purchases a home is attempting to identify a value in the market – whether they are flipping or not. The goal of any buyer is to purchase a house for the lowest possible dollar relative to the market. (This is something to keep in mind for later)
When you’re flipping a property, though, you must not only identify a property that’s currently a value but one that also provides opportunity for profit, too. The best way to do this is to follow the tried-and-true 70 percent rule.
Most successful flippers will say you shouldn’t purchase a home for more than 70 percent of the after repair value of that home, minus the total cost of the repairs you intend to make. It’s an exercise that you will conduct by looking at the final potential sales price of your flip to determine whether its current list price would provide you with a potential profit.
Once you have set your total budget for the investment, you can figure out whether a property would be a good investment by doing this calculation:
After repair value X .70 (70%) – cost of repairs
As an example, if a home’s after repair value would be $250,000, and it the cost of repairs would total $45,000, then the maximum you should pay for the home is $130,000.
$250,000 X .70 = $175,000
$175,000 – $45,000 = $130,000
This is a great guideline you can use to determine whether a particular property would make a good investment as a flip.
3. Plan for Financing Your Investment
The ideal way to finance a property flip is to purchase a home with cash. Paying for the home in cash allows you to allows you to avoid paying monthly interest on a mortgage. And if you’re able to finance your investment with cash, you’re also more likely to have the stomach to wait out the market if you’re not receiving the offers on your home that you want.
Funding a house flip with cash might not be something you can do, though. You may opt to fund the purchase through a traditional mortgage or a home equity line of credit from your primary residence. If you do, just know that you must factor the interest you pay into your overall costs.
If you paid $5,000 in interest because you were forced to pay a mortgage for eight months, that’s $5,000 you’ll need to deduct from your profit.
4. Learn to Estimate the Cost of Certain Projects
While it’s easy to identify the projects that would add value to a home, it’s not easy to be able to quickly determine how much these projects might cost. Most people could easily identify replacing old dirty carpet as a way to increase the value of a home, for instance, but how many would know how much it would cost to lay new carpet, or replace carpet with hardwood floors?
This is where a lot of house flips go wrong: The people running the projects significantly underestimate the cost of doing them. What you need to do is get a general sense of what it costs to complete common projects throughout the home. For example, get an idea of how much it would cost to:
- Replace carpet in a 700 square-foot portion of the home
- Completely gut and re-design a 300 square-foot bathroom
- Paint all the ways in a 1,500 square-foot home
- Gut and replace a kitchen that has the same layout as the old kitchen
By having a general idea of the cost of these common projects (and more), it’ll be easy for you to determine what your total repair costs would be in a particular home.
5. Figure Out Which Projects Would Bring the Highest Return
The next key to flipping houses is figuring out which projects you should complete in your home before putting it back on the market. The trick here, though, is to balance what projects will bring the most added value to your home while also keeping in mind you’ll want a positive return for each project.
For example, a kitchen remodel is often the one project that will bring the most added value to a home. In fact, HGTV says a kitchen remodel will bring back 60 percent to 120 percent of your investment in resale value. While those are strong numbers, anything below 100 percent will not be a smart investment for you as a flipper.
What projects make sense to a flipper are different than what projects make sense for a homeowner who intends to remain in their home. That’s why it’s important for you to tackle smart renovations and not just renovations you might take on as a homeowner. It’s not that you shouldn’t renovate the kitchen; it’s that you should do it in a smart way.
The 2017 Cost vs. Value report says the average investment on a remodeled kitchen was $62,158 that year, while the average amount recouped in that investment was $40,560. No flipper wants to tackle a project that nets an average return of a loss of more than $20,000. That’s just not smart business.
If you’re going to renovate the kitchen, opt for a more affordable version, then. If the project resale value of your home is $200,000, you certainly don’t want to put in a kitchen that will cost $60,000. It’s important to understand the final estimated value of your home before you decide which renovations to complete. Sometimes, small updates to the home such as replacing carpet or even painting will bring the highest return.
6. Partner with a Local Real Estate Agent to Sell Your Home Quickly
Once the renovations are completed, the idea is to sell your home as quickly as possible. The quicker your home sells, the more money you stand to make. This is due to two reasons:
The quicker it sells, the more likely you are to net a sales price close (or above) your asking price.
The quicker it sells, the less money you will spend in carrying costs such as your mortgage, taxes and insurance.
The best way to sell your house quickly is to partner with a local real estate agent who specializes in marketing flips and selling homes fast. These real estate agents will know how to accentuate the renovations you did to your home and the added value they will bring to the next owners. They will also understand the urgency you have to sell the home quickly and will price your home accordingly, balancing your desire to sell fast with the desire to sell for the most money.
Partner with HomeUnion® to Make a Smart Investment
One of the biggest obstacles to investing in the real estate market is location restriction. Individuals are often limited in where they can invest based on where they live. This may not be the smartest region to invest in, though, as you may not live in a hot real estate market.
That’s how partnering with HomeUnion® can help. HomeUnion® allows individuals to invest in real estate markets around the country with their innovative investment tools. In addition to an extensive array of research tools available, the company has a database of thousands of homes in which you can invest.
This makes investing in property flips more realistic for more people, as the barrier of location is removed. To find out more information, visit our website or call us at (866) 250-5610.