House Flipping: 4 Steps to Profit
Learn the 4 Steps to Begin Flipping Houses for Profit
We all love a good before + after home transformation.
If you are handy or willing to learn and are comfortable getting your hands (literally) dirty, then flipping might be a good fit to make a (relatively) quick profit from real estate investing.
What Is Flipping?
Put simply, it is buying a run-down property that is undervalued by the general market. These homes need improvements or renovations. You create value by making those improvements and selling the renovated home for a profit.
Here are the 4 Steps to Flipping for Profit:
1. Find Your Flip:
Generally there are three types of properties we explore for buyers who are hoping to flip.
Older, dated, and distressed homes
Homes that never got repaired or maintained, downtrodden rentals, sellers relocating, downsizing or aging out of their homes. Always conduct due diligence on the home’s major systems (roof, plumbing/well, electrical, septic/sewer, heating and cooling) - this affects your repair costs. Always pay attention to location - it affects your resale value.
Short Sales
Pre-foreclosure because the owner has missed several mortgage payments, and may be willing to sell for under market value in order to pay off their debt and avoid foreclosure.
Real Estate Owned (REO)
Bank owned foreclosures. Banks aren’t in the real estate business and are often motivated to sell the homes under market value.
It’s not easy to find these properties. You’re looking for the right location, right condition, and homes that are going to be easiest to resell.
Those with broadest appeal are single-family detached homes, minimum 3 bedrooms, 2 baths, and 1,100 SF or larger. Consider your future buyer and that will help you determine what to buy and how to dial in your fix up.
2. Analyze Your Flip:
The easiest flips are light cosmetic upgrades. Think: paint, lights, fresh flooring, new cabinet pulls - the finishing touches.
The hardest flips are those that need structural repairs and major renovations. These costs are hard to estimate and usually require specialized contractors and permitting.
Calculate the estimated cost of repairs. Then add a 20% buffer to that amount to ensure you have enough. If you don’t know where to start, ask your realtor or look online for a budget template.
Start looking for comparable home sales based on the finished condition. You can also ask your real estate agent to find comps.
Then calculate your after repair value (ARV). This is the price you plan to sell the home for once it’s finished.
Once you have the repair estimate and ARV, you can determine your maximum offer price for the property using the 70% rule.
70% of ARV – Repair Cost = Maximum Purchase Price
3. Finance Your Flip:
CASH IS KING
Cash comes in many forms. It might be money from your own bank account, a HELOC, a hard money lender or private financing. In nearly all cases, a cash offer gives you more leverage to be competitive, negotiate price, and close quickly.
Conventional Financing
If it’s a light cosmetic fixer, conventional financing usually works. Investment properties usually require 20%+ down, unless you are doing a live-in flip and can treat it as your primary residence during the renovation process.
Seller Financing
If it’s a fixer and the seller owns it outright, seller financing could be an option. Financing investment properties is a topic we go into depth on in another video and blog.
4. Renovate + Sell Your Flip:
Build Your Team
You need a team in place to be successful. Don’t go it alone.
Before you embark on your first flip, have your team lined up and ready to go. This includes your realtor, lender, contractor or subs, and a trusted escrow agent. All you really need to get started is your realtor since they can connect you to others who can round out your team.
You have your experienced investment real estate professionals with Suzanne + Sarah in Central Oregon, or they can help connect you with your area’s investment industry leaders in your area of interest.
Decide who does the work.
Are you the general contractor on your own job and plan to do all the work yourself? Do you plan to do some of the work and hire some out? Or will you just be the project supervisor? This is a part of the plan that you need to decide up front and budget accordingly.
Budget + Timeline
Even if you are hiring out the work, make sure you have a clear budget and timeline for your flip. Ask your realtor when the market peaks tend to be so you can time your purchase, renovation, and sale accordingly. Get familiar with how much things cost so you can become an expert.
Focus on Impact Spaces
Focus on fixing the things that will get you the highest return when you sell.
Kitchen - Generally the most important part of the house to a potential buyer and the most expensive. Make business decisions, not emotional ones.
Baths - The 2nd most important feature of a home and a space that needs to shine.
Roof - Not sexy but also not something you want to find out the hard way needs to be fixed.
HVAC - New furnace, AC, or heat pumps can be more efficient and a strong selling point.
Additional living space - Reserve some of your hard-earned cash for renovations and permits! People want guest quarters, offices, and bonus rooms.
BONUS STEP: Rookie Mistakes to Avoid:
Make sure you have enough credit or cash on hand to do the repairs.
Overestimate the cost of repairs so you don’t find yourself running out of money before the project is over.
Be generous with your timeline. Everything always takes longer than you think, especially if you are doing it yourself.
Don’t skip the finish work. If you are trying to get top dollar for your property, every detail counts. Make sure the house is clean and staged to sell.
Let the numbers decide. You may be excited to get into your first flip, and these deals don’t come along often. There are lots of people looking for the same thing. Be prepared and ready to act fast once you find a property that meets your analysis criteria
Have a Plan B
Do your legwork up front. Hire the right team to guide and help you market, do your inspections and know what you are getting into, be conservative and know your market, don’t get stuck underwater in a down market.
Living in your flip while you renovate is one option for reducing your upfront costs, avoid paying two mortgages at once, and be most efficient with your time and inputs.
If you get stuck with a house that is finished but doesn’t sell in your allotted time frame, consider renting it out. Know what market rents are and have this exit strategy outlined at the outset so you're prepared for anything.
As with any new venture, don’t go it alone. Make sure you have your team in place to put the odds of success in your favor.
Building your team of investment realtors means you’ll have help with both sides of your flip - buying and, most importantly, selling for a PROFIT.
If you’re in the Central Oregon area, we are your go-to experts to help you you price and market your flip at the right time to maximize your return. Give us a call to chat and start house flipping for profit!