When it comes to the house flipping process, an ounce of preparation for your flip can save you thousands of dollars in the future. From hiring reliable contractors to running financial estimates, you can eliminate most of the risk from your first fix and flip with just a little reading and effort. That effort begins here with our guide on how to get started flipping houses.
Don’t worry! — It’s easy, and it’s free. We don’t want you to waste your reserve funds paying for house flipping classes or courses when we’ve laid out all the information you need to be successful right here in Flipping Houses 101. This guide goes through all the steps of how to get started flipping houses and includes tips and tricks from flippers with several hundred successful houses flips under their belts. You can do this!
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What Is House Flipping?
Flipping is a quick-profit strategy where an investor buys real estate at a discounted price and then improves the property to offload it at a better price. Rather than buying a property to live in, you are purchasing a home as a real estate investment. It is worth mentioning that the main goal of flipping is to purchase low and sell high.
Flipping houses can be an extremely lucrative strategy, especially if the real estate market is performing well. Note that foreclosures and old homes are popular properties to use in house flipping. This is because most real estate investors can buy these properties fairly cheaply, improving their potential profit.
Can real estate investors flip houses without any money down? The answer is yes. If you want to flip a property but don’t have enough money for a down payment, don’t worry. There are options that will allow you to enter the house-flipping market easily.
House flipping is when a real estate investor buys houses and then sells them for a profit. In order for a house to be considered a flip, it must be bought with the intention of quickly reselling. The time between the purchase and the sale often ranges from a couple of months up to a year.
There are two different types of house flipping:
- An investor buys a property that has the potential to increase in value with the right repairs and updates. After completing the work, they make money from selling the home for a much higher price than what they purchased it for.
- An investor buys a property in a market with rapidly rising home values. They make no updates, and after holding the property for a few months, they resell at a higher price and make a profit.
We’re mainly focusing on the first definition of house flipping and providing you with tips to help you choose a property, make renovations, and sell the smart way.
Risk vs. Reward
Imagine buying a house for $150,000, investing another $25,000 in renovations, and then…nothing. No one wants to buy it. You now have to pay for your rent or mortgage, plus the mortgage for your flip property, as well as utilities, home insurance, and property taxes. You might also have to pay for home staging and realtor fees when the house finally sells. All of this cuts into your potential profit.
According to CNBC, house flipping is the most popular it’s been in a decade, yet the average return for flippers is lower than in previous years. Thanks to a hot housing market that’s rising prices, low inventory, and soaring rents (which drive even more people into home buying), it’s getting harder to make huge profits.
The average gross profit on a house flip during the third quarter of 2017 was $66,448, according to ATTOM Data Solutions. That’s more than many people make in a year, and it lures plenty of newcomers who dream of quitting their day jobs and becoming full-time investors. However, the investors making this much money know what they’re doing — and even they still go bust sometimes.
RealtyTrac found that in 2016, 12% of flipped homes sold for break-even or at a loss before all expenses. In 28% of flips, the gross profit was less than 20% of the purchase price. According to RealtyTrac senior vice president Daren Blomquist, 20% is the minimum profit you need to at least account for remodelling and other carrying costs.
Is Flipping a House a Good Investment?
Flipping houses may sound simple, but it’s not as easy as it looks. Let’s be real: A house flip can either be a dream or a disaster.
Done the right way, a house flip can be a great investment. In a short amount of time, you can make smart renovations and sell the house for much more than you paid for it.
Done the right way, a house flip can be a great investment. But it can just as easily cost you thousands if it’s done the wrong way.
But a house flip can just as easily go the opposite direction if it’s done the wrong way. We’ve all heard house-flipping horror stories—the ones where what seemed like a good deal turned into a house with a shaky foundation and a leaking roof. A house flip may not make you money. It actually could cost you thousands.
If you decide to flip a house, you certainly don’t want to lose money. You want to make a wise investment and reap the rewards.
Finding A House To Flip
Look on foreclosure sites.
If you are wondering how to find houses to flip, as well as how to find cheap houses to flip, one of the best starting points is to look on foreclosure listing sites, such as Foreclosures.com. Many banks and lenders also provide their real estate owned listings. It should be noted that some of these listing sites require paid memberships.
A great place to look for properties being sold at deep discounts is at probate and foreclosure auctions. However, be ready for bidding wars, where offering all-cash might be the most compelling bid. Check your local county’s website for scheduled property auctions.
An orthodox method of finding your first fix and flip investment property is to hop in the car and drive around your target neighbourhood. Look for signs of properties in distress, such as boarding up windows, overgrown yards, or piles of mail and newspapers. If you spot a property, write down the address and do some online research to find the owner or seller so that you can make an offer.
Join your local REI group
Joining your local real estate investment club or association is a great idea regardless of your investing niche. Networking with other real estate professionals could connect you with potential deals and partnerships. LinkedIn.com, online forums and local meet-ups are also great ways to connect with others.
Network with wholesalers
Wholesalers need house flippers like you in order for their business to be successful. Their sole focus is in finding undervalued properties and reselling it to a third party. House flippers can get a great wholesale price and resell the property for a retail price.
Work with an agent
You may want to consider adding a real estate agent to your team, especially if you lack experience or are unfamiliar with the real estate market. In addition, licensed real estate agents have access to the MLS (multiple listing service) which will allow you to locate undervalued properties more effectively.
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How to Flip a House in 5 Steps
- Finance the House Flip With Cash
Flipping houses can be a risky business, and it’s easy to see why adding debt into the mix only makes it more dangerous. Here’s why we always recommend you flip a house with cash:
- No interest fees. House flippers who borrow money may pay interest for months, which only increases the amount they have to sell the house for to break even.
- No rush to sell. Using debt to finance a flip can cause you to act out of desperation. If you can’t get the house sold, you’re likely to lower your price and cut your profit. Cash-only house flippers can wait out a slow market because they don’t have interest payments piling up against them each day it doesn’t sell.
- No debt to hold you back. Most importantly, making any “investment” with debt is a dumb plan. Period. Trying to sell a flipped house for more money than you invested in it is already a risk—even with cash. Using debt in the process skyrockets your chance of losing money if there’s a hiccup in your plans.
Let’s look at an example to see why using debt to flip a house isn’t worth it: You take out a loan to purchase a house to flip for $130,000. You finance an additional $30,000 for renovations and hope to sell the house for $200,000 to keep a nice profit. Sounds like a great plan, right?
All seems to be going great until an unexpected repair costs an extra $2,000. And then renovations take six months instead of four, costing you an extra $3,000. When you list the home, it sits on the market for a month before you’re forced to drop the price and sell it for $185,000.
A month later you close and get your payout. But a huge chunk of your payout goes toward paying back the money you borrowed plus eight months of interest! And that’s on top of the usual selling costs like agent commissions, taxes and title fees.
- Know the Market
A lot of house flippers get excited about their next project and can ignore this less glamorous side of the business. But if you don’t have a good understanding of the market and real estate trends in your area, you could run into the following issues:
- You don’t know if you’re getting a good deal on the house you’re buying. The sale price needs to be low enough so you can do the renovations and still come out ahead when the house is priced at market value.
- You can’t accurately identify the home’s potential value. Your vision for the home must fit the reality of the neighbourhood and the ability of the neighbourhood’s residents to afford the home you create.
- You don’t know how to price the house. If you’ve bought a house in a neighbourhood of mostly $130–150K homes, you’ll want to price your flip at the lower end of that range when it’s time to sell.
So how do you get a deep understanding of the market that makes for a successful flip? Find a real estate agent with years of experience in your area. Your agent can help you target your home search to the right neighbourhoods based on your price point, budget for renovations, and desired profit.
- Make a Budget for Your House Flip
Don’t wait until after you purchase an investment property to make a budget. Know your price range for purchasing a home, making any repairs, completing renovation projects, and paying selling costs before you seal the deal.
Know your price range for purchasing a home, making any repairs, completing renovation projects, and paying selling costs before you seal the deal.
Make a list of any cosmetic projects as well as any expensive overhauls like plumbing or electrical problems. If you don’t have a background in construction, a contractor can tell you what needs fixing and how much it will cost. Surprise repairs can make or break a flip, so be sure to do your homework here.
When you’re under contract, get a home inspection and any other specific inspections you may need. It’s always better to spot problems on the front end than be surprised down the road.
- Invest in Smart Renovations
Dreams of gleaming hardwood floors, on-trend light fixtures and fabulous kitchens with professional-grade stoves can quickly cause your renovations to get out of hand. That’s why it’s important to know your budget upfront and then make sure your updates stay on track and boost the value of the home.
Don’t forget that big renovations—like kitchens and bathrooms—can easily make or break your flip. Take the kitchen, for example. According to the 2020 Cost vs. Value report, the average amount spent on a major kitchen remodel is almost $68,500. The average amount regained from that cost is only around $40,000.2 That’s not the kind of ROI you want to see when you’re flipping a house.
If you’re renovating a house that you hope to sell for $220,000, don’t put $60,000 into custom cabinet installations, high-end finishes and that dream kitchen island! Instead, consider a smarter renovation that focuses on refinishing the existing cabinets, adding granite counters and replacing appliances. You’ll spend less and have a much higher likelihood of earning back your costs when you resell the house.
While you might invest in a couple of big updates on a flip, don’t underestimate the power of small tweaks. Things like a fresh coat of paint, updated hardware and new landscaping can make a huge impact!
- Get Guidance From a Local Real Estate Expert
Can you make money from house flipping? When it’s done the right way, you definitely can! In 2019, flipped homes sold for a median price of nearly $218,000 with a gross profit of almost $63,000.3
Keep in mind that the gross profit doesn’t include the amount spent on repairs and renovations. But if you’re able to flip with cash and stay in your budget for renovations, it’s completely possible to make a great return on your investment.
The key to flipping a house successfully is to do it with cash, make a smart investment in the type of house you purchase, choose renovations in your budget, and sell it quickly. Having a real estate agent on your team helps make all of that happen!
Whether you’re buying a house to live in for years or to flip in six months, a quality real estate agent can provide the market knowledge and practical guidance you need to make a smart investment.
Here are three great options to help you flip homes with no money.
Hard Money Lenders
If you are not content with parting with a significant amount of money upfront to buy real estate, then a hard money loan can be the answer. Hard money lenders are people who lend money to others at a high-interest rate and often charge points on top of that. Hard money lenders will usually let you borrow comparatively more than conventional banks and other financial institutions.
A hard money loan is one of the best options for individuals who are experienced investors and have one or multiple existing properties. They are also ideal for owner-occupants with substantial equity in their homes and a great credit score.
Another great thing is that you can finance all the property repairs with some hard money lenders. Unlike conventional bank loans, your ability to get hard money financing is not determined by your creditworthiness. However, the fees and rates are often higher with hard money loans. Note that the interest rates may range from 8-15%, and the points range from one to five.
You should also keep in mind that a majority of hard money lenders will typically only loan you a certain percentage of the purchase price — usually around 70%. When evaluating various hard money lenders, you should pay close attention to interest rates, fees and loan terms.
Private Money Lenders
If you have all the technical skills and experience to flip houses, but not the funds, then this option is best for you. Private money lenders are individuals who have the funds and would like to invest in real estate. However, they do not have the expertise and time, or would rather be on the golf course or beach than swinging mallets. Private lenders have liquid money to spare and are willing to lend you at a predetermined interest rate. Perhaps the most suitable source of finance for no money deals is a private money lender.
The money partner or lender can sit back, relax and pay the money. In contrast, the other partner will manage the logistics of the real estate project and ensure they complete the house flip quickly and professionally. You can borrow the whole purchase amount and repairs plus some other costs if you manage to find the right private lender.
It is worth noting that the amount of money the lender will provide you will depend on the comfort level between you and the private investors, the experience and the real estate deal.
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Another great option to flip real estate with no money is using real estate wholesaling. Wholesaling home is an excellent idea for investors who already have a viable flip business. Keep in mind that for property wholesaling to work in your favour, you’ve got to have an existing and reliable network of real estate investors looking for a few fix-and-flip deals. So, you cannot simply purchase a house and hope for the best. It is vital to have a plan to succeed. Wholesalers often make money based on a specific percentage of the final sale price, which is typically between 5% and 10%.
When wholesaling fix-and-flip properties, you are selling the opportunity to buy a house without ever assuming the title. You will make an assignment fee as you are acting as an intermediary.
Flipping homes with no money down often entails being creative, working with other investors and thinking outside the traditional loan box. Your best chances of obtaining funding are private money lenders, real estate wholesaling and hard money lenders.
There’s no doubt that flipping houses are a risky business. If you make smart decisions, you can make a lot of money flipping. But you can also lose everything if you make a bad investment.