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Real estate is a proven path for building wealth, and one of the ways to invest in real estate is through house flipping.
With plenty of research, a good base level of knowledge, skill in budgeting, and knowledge of the property market, it’s possible to earn a substantial amount of money through buying and selling houses. Lots of people begin investing in property as a side hustle as it provides a great opportunity to boost your overall income and can be an extremely fun and rewarding experience. If it’s done well it can often lead to the investor being able to quit their regular job and make property flipping their primary source of income.
Buying and selling houses is by no means an easy or risk-free endeavor. It’s likely to involve initial costs and is extremely time-consuming and can be very stressful. It’s for this reason that prospective property flippers need to carry out lots of preliminary research to ensure they’re well informed and prepared for the task at hand.
Below we have detailed everything you need to know about how to make money flipping houses. Let’s start by looking at exactly what we mean when we refer to flipping houses…
What is Property or House Flipping?
Property flipping or house flipping is essentially the process of buying, renovating, and selling houses for a profit. It’s about buying a property that might be a little run-down or outdated that has the potential to increase in value with some renovations and improvements.
Houses increase and decrease in value for a number of reasons and there are multiple things to consider when it comes to flipping houses. Firstly, the current property market and local trends within the economy will definitely impact any home’s value.
The location of the house will also impact its value, and it’s unlikely that you alone can change this fact, so this is definitely something to be aware of when purchasing a property to flip.
Finally, the condition of the house and its amenities can significantly increase or decrease the value of a house. This is where you’re likely to be focusing your energies when carrying out a flip. By renovating the home and adding in additional bedrooms, bathrooms, or just updating the current décor or improving the overall layout, you could dramatically improve the home’s desirability and value price.
This might sound like a great, exciting opportunity to earn some extra cash and undertake a new challenging project, and it is! But, there are so many things to consider when it comes to flipping houses and without carrying out adequate research and approaching the process sensibly and pragmatically, you could end up making some big mistakes.
Related: The Best Books on Flipping Houses
The Process of Flipping Houses
There are a number of main stages you’ll go through when embarking on a house flip; from planning and budgeting to managing or overseeing the project and finally selling the property.
It’s important that you’re aware of the process and what is required of you so you don’t run into any surprises or issues along the way.
Setting Your Budget
Your first step in any major investment or project is to set a realistic and comprehensive budget.
It’s vital that you have a solid understanding of what you can afford to spend, and how this money will be divided up throughout the project.
First and foremost, you’ll need to decide exactly how much you’re able to spend on buying the property. Most flippers will use a mortgage or other loan to fund their project, in which case you’ll typically need a down payment as well as enough to cover any closing costs, and you’ll need to be able to prove you can afford to make any repayments.
Alternately, there are some options that make it possible to flip houses without investing your own money, but that’s a larger topic than we can cover in this article.
By setting a strict budget, you’ll be able to narrow down your options and this should give you a better idea of what kind of property to look out for and the sort of locations to consider.
Beyond buying the property, you’ll need to budget for all of the renovations. It’s likely that you’ll devise a more detailed budget for this once you’ve seen the property and have a clear idea of what sort of work needs to be done. But it’s important that you have one ball-park figure in mind when looking for potential houses so you know what kind of project you can afford to undertake.
Attempting to flip a house without setting out a detailed budget is almost guaranteed to end in unnecessary spending and losses. If you’re looking to embark on a project that gives you maximum profits, you must budget effectively!
There are numerous budgeting tools to be found online specifically for this purpose. Be strict with your spending, but don’t be afraid to go back and review your budget regularly as unexpected costs are a normal part of any large project.
Do Lots of Research
Much like budgeting, researching is a vital part of any big investment.
When flipping houses, you’ll want to research the area you are looking to buy in. This could have a huge impact on the profitability of your project and might also limit what you’re allowed to do with the property. Look into local planning laws and any new developments or building works that are scheduled to take place in the future as these could also affect your profits.
Research local contractors and tradespersons; you’re likely to require their services at one stage or another, so it’s helpful to have a good idea of what’s out there and the services that are available within the vicinity.
You should also look into the current housing market and trends to gain an idea of the type of properties that appear to be selling well at the minute and how much similar houses within the area are selling for.
The last thing you want after spending huge amounts of time and money renovating a home is to find that the property market in the local area is suffering drastically and you’re unable to find a seller. Flipping houses should be as time and cost-effective as possible, so you’re looking for a quick sale at a good price. When it comes to achieving this, carrying out lots of ongoing research is your best course of action.
Find Your Property and Assess Its Profitability
Once you have a clear budget and you’ve researched locations and property markets, now is the time to begin looking at properties. It’s often best to begin looking online; regularly checking sites like Zillow or Realtor.com. You might want to work with one specific realtor, or you might decide to search independently.
If working with a realtor, you’ll meet with them and give them an idea of exactly what you’re looking for. They’ll then come back to you with some potential properties. You’ll be able to view the properties and can then decide if any of them seem like a good fit.
When choosing a property, you should always calculate your ARV, or After Repair Value. The ARV looks at the cost of the property and the renovations to determine your overall projected profits. It’s calculated by looking at stats from homes sold recently in the area which are similar in size and style to the property you’ll have after renovations.
The ARV is based on the 70% rule, meaning that the investor should take 70% of the properties ARV, minus the amount needed for renovations to calculate their maximum purchase price. There are a number of online calculators to help you work out your ideal purchase price and your properties ARV.
Get a Professional to Inspect the Property
Once you have a property in mind, it’s a good idea to get some professional advice before going ahead with the purchase.
A professional inspector will be able to identify any major problems with the property such as infrastructural damage or cracks, faulty wiring, unstable or deteriorating foundations, and much more. Of course, when you’re purchasing a home with the intent of repairing it and flipping it, you know there will be some issues. The purpose of the inspection is to be sure you’re not overlooking issues that are more significant than you’re anticipating.
If you already have a chosen contractor or you’re working with a project manager, it’s also a good idea to have them look around the property. They should be able to give you an idea of the costs of each of the repairs and renovations.
Financing the House Flip
Once you’ve chosen a house that seems like a good fit for you, you’ll need to get your funds in order and place an offer. As we said before, most people fund their projects with a mortgage or specific fix-and-flip loans.
These work in similar ways, you’ll borrow X amount from your chosen lender at an agreed interest rate and will pay this back over an agreed amount of time.
The difference between these kinds of loans and regular mortgages is that these loans allow for extra money to be borrowed to cover the additional costs for renovations. The amount you can borrow will depend on a number of factors. Firstly, your personal affordability that is based on your income, your assets, and the down payment you have available. Secondly, the lender will look at the property and will either decide how much they can offer based on its current value or its projected value after renovations.
Each lender operates slightly differently and will offer different things. It’s a great idea to work alongside a financial advisor or a mortgage advisor when going through this process as they will be able to advise you on the best deals and interest rates.
Renovating Your Property
Renovating any property is a huge task and can be extremely taxing, particularly when you have profits in mind and are trying to do everything in the most cost-effective way possible.
Here are some of the most common ways to add value to a property:
- Adding Bathrooms or Bedrooms is a surefire way of increasing a house’s value, as long as this is done in a way that doesn’t restrict the space or negatively impact the overall layout of the property.
- Opening up the space is also a popular method. Having open-concept living spaces tends to increase a house’s value.
- Carrying out straight-forward updates and redecorating is also a great and fairly easy way of adding value. A fresh coat of paint and new floors can dramatically increase a home’s desirability. Be careful with the decisions you make. Certain colors tend to be more effective than others (see this list of the best paint colors for selling a house).
- Rectifying any structural damage is vital.
- Maintenance or upgrades on any outdoor spaces and gardens is a great way of adding value.
If you’re carrying out large-scale renovations, it’s probably a good idea to hire contractors to help with this for safety and quality assurance. If the renovations are as simple as redecorating and adding some new amenities and décor, you might be able to carry out a lot of this yourself and save on some costs. It really all comes down to personal preference and circumstances.
Selling for a Profit
Once your property is fully renovated, it’s time to get it back on the market.
Start by staging the property effectively to show off its best features, and then work independently or with a realtor to hold open-houses and advertise the property online.
Related: How to Become a Home Stager
The house should sell for close to your asking price and hopefully, you’ve made a nice profit on your first house flip project!
Is House Flipping a Good Investment Choice For You?
Without a doubt, investing in property and flipping houses can be extremely stressful and financially taxing. But, if it’s done well and you carry out all of the necessary planning and budgeting, it can also be extremely fun, rewarding, and profitable.
By following the advice laid out here and having a good awareness of each individual step when flipping a property, you should be able to carry out a cost and time-effective project that leaves you with a nice sum of money at the end.