The foundations of becoming a house flipper
One of the more exciting ways to approach making money is to become a house flipper. On paper, it’s a no-brainer; buy a property as cheaply as you can, typically from auctions or tax sales, invest some sweat equity into increasing the market value, and sell it for a net profit. It’s a very popular option, and the numbers show it. In 2016, house flipping accounted for over six percent of total home sales.
But there’s a big difference between wanting to flip a house and knowing how to flip a house.
If you jump into flipping houses without taking the time to really do your homework, it will be easy to get in over your head and lose your shirt in the process.
To help you determine if the glorious life of a house flipper is right for you, we asked one of our home improvement Experts to offer some advice for people just getting started.
Meet the Expert
David Bowden has spent over 30 years in the house flipping business, working as an investor, contractor and realtor. He has been using his knowledge of the pros and cons of the business to help customers on JustAnswer since June 2017.
Earning the skills
Of course, property flipping is much more than buy low and sell high. There are a lot of skills to be developed, and they'll help you to recognize the difference between a diamond in the rough and a money pit.
The most important skills to develop according to David:
Understanding the market and what the property needs in order to be habitable. You cannot look at price alone. Most of the properties that come available have problems, either structurally or legally. You can not invest in something that is going to be a major headache or expense that ties up the flip or makes the investment cost more than it will sell for.David Bowden
- Protecting your credit score: In order to get the loans you'll need, you'll have to have a solid credit rating. This will can also save you money on interest rates, too.
- Taking out a HELOC: A home equity line of credit can be a fast way to come up with the cash for your renovations and roll them into the final sales costs.
- Finding ways to save money: There are many ways to reduce the expenses associated with buying and selling property, such as making your down payment with cash to avoid mortgage insurance.
- Networking: House flippers have to build relationships with contractors, lenders and buyers. Be ready to shake a lot of hands and give away a lot of business cards!
- Racing the clock: Every month that you spend renovating is another month you're paying on your loans. This adds a sense of urgency to the process, and you'll need to deal with the constant pressure.
What this means is that you'll need to develop strong nerves to deal with the inevitable ups and downs, with large amounts of money on the line. You'll have to stay clear headed and stay focused on thinking strategically about the property.
Finding the right property
Identifying the right kind of property to flip in the first place takes a lot of research and understanding. According to David:
Not being emotionally attached to the property is important. This is a business and not a home you will live in. Having a solid plan of action and sticking with products that will add value for the time and money to install them is what counts. Also, being able to see beyond the obvious or inside the walls without them being open.David Bowden
Some of the things to consider when looking at a property include:
- Location: This will have a huge impact on the final sale price of the property. You should pay attention to the neighborhood, with attention to real estate trends in the area and resources like job opportunities and the quality of the schools.
- Condition: This should be obvious, but you need to learn to recognize the repairs that will be required, and the renovations that will increase the value. Combined with the likely selling value, this will become the basis for your budget. Be ready to estimate the costs of this work, and the time they'll take, and add 20 percent for cost overruns and unexpected repairs.
- Distance: You are going to have to visit the property daily during the renovations, so a three-hour commute may not be the best idea! Be sure that your property is close enough that you'll be comfortable travelling back and forth regularly.
- The kitchen: Pay the most attention to the kitchen, as it can have a huge impact on the value of the property. Is it already pretty well set up, or does it need to be torn out and modernized? While a kitchen renovation shouldn’t automatically disqualify a property, it should be something that makes you think hard.
After you have taken these factors into consideration, you will start to have a sense of just how much of a value the property actually is. Just because you are getting it for less than the normal sale price in the neighborhood doesn’t mean you’re getting a bargain!
Calculating your budget
Before you start flipping homes, you'll need to know how to determine your budget. This is a crucial balancing act, and you have to keep in mind that you won’t even know the full extent of the repair work until you get started. This is where your dreams of being a house flipper will start to turn into a nightmare. According to David:
The big-ticket expenses are easy to calculate, however the smaller ones add up significantly and usually 10-20% more than you budgeted for. Example is interior/exterior painting, carpeting, and a new roof. These are all big expenses that are easily added up, however the smaller expenses, like asbestos or current code requirements, are not so obvious nor small expenses. A good rule to follow and trust is; "if something isn't working, there is a valid and usually expensive reason.David Bowden
Before you make an offer on a property, you should know:
- Your maximum offer: You'll need to know the highest price you can pay and still expect to turn a profit. A mortgage calculator can be a helpful tool for this process.
- Hidden expenses: This includes things like closing costs, unexpected repairs, taxes, an advertising budget for the final sale, permit fees, and a myriad of tiny bites that will threaten to consume all of your funds.
- The timeframe: This one is huge. Every month spent on renovations or waiting to close the sale when they're done means another mortgage payment. If the process tips past a year, you have to add capital gains taxes to your expenses, which can be a budget buster if you aren’t ready for it. As a house flipper, you'll quickly find out again that time is money.
When you have your budget calculated, and left room for the unexpected expenses you're sure to encounter, you'll be ready to make your offer. Once that offer is accepted, congratulations, you’re officially a house flipper. Let the race begin!
Learning the ropes
David has this final advice for anyone getting started in the field:
Do your own homework and do not rely completely on other professionals.David Bowden
This is possibly the biggest factor in becoming a house flipper. While it’s easy to begin with big dreams and stars in your eyes, the grim reality is that the self-correcting nature of the market means that it will be difficult to turn a profit. In order to have a successful career as a house flipper, you'll need to learn to save time and money by doing things yourself. This means fulfilling many of the roles yourself: You’ll need to be ready to be your own contractor, financial advisor and real estate agent simultaneously. The more work you can do yourself, the less money you have to spend.
House flipping is a careful balancing act, requiring the nerves to stay calm in difficult situations and the confidence to take a risk. If you have what it takes, it can be a great way to turn a profit for yourself. But it’s never as easy as it seems, and you'll have to learn to overcome adversity or you’ll just end up with regrets.
Whenever you start a large project like becoming a house flipper, you're going to run into new concepts that you'll need to understand. If your progress has ground to a halt, the qualified Experts on JustAnswer can answer your real estate law questions and home improvement questions, give you the insight that you need, and get you moving in the right direction.