If you turn on HGTV you’ll see show after show of seemingly average people flipping houses and making huge profits.
Home flipping is on the rise, currently 6% of all homes sold are fix and flip properties.
If you’re looking to get into real estate investing but don’t know where to start, keep on reading..
This house flipping guide will help you understand the process and start making money.
What is House Flipping?
Flipping a house means buying a property at below market value and turning around and selling it for a profit, or renting it out.
Sounds easy right?
Well it’s not that simple…
You may have seen shows on TV or heard from friends about a home flip turned nightmare.
When you flip a house you are usually buying a property that needs several repairs. The more repairs needed, the cheaper the home will be.
Ideally, you should aim to spend no more than 70% of the market value after repairs are made.
As an example let’s say you buy a home in need of repair for $200,000.
The after repaired value (ARV) is $300,000. This means you have $40,000 to spend on repairs and upgrades leaving you with $60,000 in profit before closing costs and agent fees.
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Financing a Flip
When it comes to financing a house to flip there are really only two options. Since most conventional mortgage programs such as FHA loans and conventional loans are usually only for owner-occupant borrowers. You can get a rehab loan (hard money loan) or pay cash.
If you’re a first-time house flipper I would strongly suggest waiting until you can pay cash for the whole project. However, if you have the help of an experienced investor then getting a rehab loan is a viable option.
Hard Money Loans
A hard money lender will lend you the funds to purchase a distressed property and additional money for repairs, usually up to 70% of the after repaired value. Hard money loans, also called rehab loans, are interest only loans that have high interest rates.
When using a loan to buy a house to rehab and flip you will put yourself under immense pressure to sell the home quickly. And the last thing you want to do on your very first home flipping project is to rush it.
If you are experienced in flipping properties and are low on cash then a hard money loan is a good option to start building your bank account again.
Cash is king. And if you’re a first time house flipper there is no other way to get started. When you’re using cash you will be under less pressure to rush the project. You can afford to take your time to make sure everything is done right.
The 70 Percent Rule
The 70% rule is a term used by real estate investors that means you should pay 70% of the after repaired value of a property. The ARV is the market value of a house after all repairs have been made.
For example if you purchase a rehab property for $100,000 that needs $40,000 in repairs.
The home will sell for $200,000 after repairs are made which means the investor has spent 70% of the market value to rehab the home and stands to make a profit of $60,000 before closing costs and realtor commissions.
How Much Profit Can I Make Flipping a House?
Using the 70 percent rule, if you are buying a house with an ARV of $200,000 that needs $40,000 in repairs, you need to buy the property for $100,000.
This does not mean your total profit will be 30%. There are closing costs, fees, and realtor commissions you need to factor in. Below is an example of the total profits you can expect from a flip.
|Purchase Closing Costs (5% of purchase amount)||$5,000|
|Holding Costs (90-120 days)||$3,000|
|Real Estate Commission (6%)||$12,000|
|Closing Costs (3% of purchase amount)||$6,000|
|Net Sales Price||$182,000|
Finding Homes to Buy
Foreclosures – Foreclosed homes are properties that the owner defaulted on the payments and are now owned by the bank. Foreclosures are an ideal buy for most real estate investors because banks want to unload the properties quickly and are often willing to take a loss.
Pre-Foreclosures – A pre-foreclosure is the time period after a notice of default if issued to a homeowner. The borrower facing foreclosure has an option of selling the home before the final stages of the process.
The foreclosure process takes between 3-10 months to complete. Finding pre-foreclosures is often quite difficult because these homes are usually not listed on the market but if you’re able to get one you’ll usually get a great deal.
Short Sales – A short sale is a home that is for sale by the owner but owned by the bank. A pre-foreclosure that is listed for sale is a short sale, but not all short sales are pre-foreclosures.
The problem with buying a short sale is the time it takes between the time you make and offer and the bank approves the sale. Oftentimes this process can last months, which does scare off some buyers.
Cash Homes – We have all seen those we buy houses fast advertisements around. Those are real estate investors looking to buy a home in need of repair from the home owner before it goes on the open market. These properties are sold well below market value, usually because they are in need of major repairs.
Property Auctions – Home auctions are a great way to find local properties you can flip for a profit. However, by the time a home makes it to an auction there are few deals to be found. Many investors are able to get the good deals well in advance of an auction.
Auction.com – Auction.com has many homes listed on their site which includes actions from third parties.
Hubzu – Hubzu has not only properties for sale by auction but also conventional home sales.
Hudson and Marshall – An agent friendly online auction website with nationwide home auction websites.
Find the Right Real Estate Partners
When flipping properties you will want to work with the same real estate professional that do a great job and give you a discount for the repeat business.
- Attorney:A real estate attorney will help you with contracts, disputes, and legal actions.
- Tax accountant: You may want to incorporate or form an LLC to reduce your personal liability. You will also need someone to help you with taxes being self employed makes taxes much more complicated.
- Real Estate Agent: A trusted experienced real estate agent can make all the difference when it comes to investing in real estate. They can help you find the best deals in your market, run comparables, and negotiate on your behalf.
- General contractor: Unless you’re an experienced general contractor you will need a GC to help oversea the repairs and updates to be done on your properties. Hiring a professional is the best way to ensure everything runs smoothly and on time.
- Landscaper: Distressed properties usually have terrible curb appeal and are in dire need of landscaping. Having a good landscaper on call is important to maximizing your ROI.
- Painter: Most of these properties will need a fresh paint job. There is no quicker way to making a home look great again than a good paint job.
- Architect: In some cases you may need to take on larger projects that involve removing walls or adding a room. An architect can help you redesign the layout and provide blueprints for construction.
- Handyman: There are usually many odds and ends that need repairs and unless you want to spend your time replacing cabinet hardware, fans, lights, door knobs, etc. then a handyman can be a cost effective option that will save you a ton of time.
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