Flipping houses is a great way to make a lot of money in short order – but it does have risks and drawbacks, especially if you’re not quite sure what you’re doing. Let’s take a look at what you need to know about flipping houses for profit.
What Does Flipping A House Involve?
Humorous imagery aside, flipping a house involves buying a property, then trying to resell that property for a better price. There are two techniques used to increase the price.
First, when the market is hot, the price of a house may go up all on its own. In this case, you might sit on the house for a few weeks while selling prices around it go up, then try to get rid of it.
Alternatively, you can renovate the house. This could be as simple as cleaning up after the last owner and putting a new coat of paint on things, or it could involve changing the appliances, adding an expansion, or otherwise turning it from a “fixer-upper” to a “fixed”. A clean home with new appliances will sell for much more than a dirty place with used equipment.
Either way, the primary goal is to resell the home as quickly as possible. Every day you own the home is an expense, so the faster it’s sold, the better off you’re going to be. The profits from each sale (minus your cost of living) are invested in the next home. If you can make enough of a profit, you can eventually start to buy more homes and begin flipping those as well.
As part of this, you’ll need to buy low. You won’t profit by flipping a home that’s selling for anywhere near the normal neighborhood price.
The Pricing Safeguard
One thing many people don’t realize about flipping homes is that you don’t have to stay in the same price range all the time. Also, it’s possible to recover from a bad flip by investing in a cheaper house next time. In fact, some of the best profits can come from low-value homes that are brought up to average prices.
The key here is that each region has a set of average home prices. If you’re selling in the range of most buyers, it’s a lot easier to find someone willing to pay your asking price. Speed is more important than getting the best value from each house. Your real income comes from the number of sales you make, not their prices.
To put it another way, it doesn’t matter to you if a house is selling for $150k or $550k – what matters is the cut you can take as personal profit.
Common Mistakes In Flipping Houses
Before we get to some tricks for doing it right, let’s take a look at some of the most common problems people face when they’re house flipping.
#1: Not Having Enough Money
Ideally, you’ll be able to finance the purchase yourself. If you have a loan, you’ll need to pay interest on that. You’ll also have to deal with capital gains taxes on certain properties. Even if you pay cash, you’ll have to deal with expenses like utilities and taxes, and that’s not getting into whatever you’ll have to invest to raise the price of the house.
In short: If you don’t have enough money, to begin with, it may be hard to break even, much less get a significant personal profit out of the deal. Flipping a home isn’t something to go halfway on.
#2: Not Having Enough Time
Flipping a house takes more time than most people realize. You may spend months looking for the perfect house to flip. You’ll also have to spend the time to fix it, inspect it, and sell it. That’s time you won’t be spending at a stable, full-time job. Ultimately, you need to be in a place where you can afford to spend the time it takes to flip a house. Otherwise, chances are it won’t be worth it.
#3: Not Having Construction Skills
House flipping tends to be at its most profitable when you do most of the work yourself. That can range from swinging a hammer to installing sinks, redoing the roof, or putting in a new carpet. Paying a professional for each job drastically reduces your chances of successfully profiting from the venture.
If you prefer to use your mind instead of your hands, house flipping may not be for you.
#4: Not Having Enough Information
Part of house flipping involves a keen understanding of the local market. Most homes in a given neighborhood tend to sell for similar prices. It’s extremely difficult to find a house that sells for far lower than most and can be easily fixed to sell well over the average.
It helps to keep an eye on other options – like foreclosures – but ultimately, you’ll have to work in a market that’s big enough to support regular flips. If you don’t, it’s just not going to work out.
#5: Trying To Sell Too Fast
Flipping houses is a business and should be treated as one. It’s not a quick-money scheme – if it were, everyone would be doing it. Instead, you’ll need to be patient most of the time and look for the property that fits every need. You shouldn’t rush to buy the first low-priced property that you find, nor should you expect to only do minimal work before selling for a big profit.
If you plan to rush everything, you’ll fail.
How To Be A Successful House Flipper
Now that you know some of the most common problems associated with flipping houses let’s take a look at the traits of success. These don’t guarantee massive profits, but they will help you do the things that are known to work.
#1: You Have A Lot Of Cash
Most sellers will want at least 25% down – and the more you can offer up-front, the better. Remember, chances are the seller is trying to move to a new home of their own, and they need money for that. If you can’t offer enough cash, someone else may dart in to seize the offer.
#2: You Know How To Make Accurate Cost Estimates
The buying price is only one of the factors you’ll need to consider. You also need to understand how much it will cost to make any repairs, to advertise the home, and to hold onto it while you’re waiting for a seller. You need to know the value of labor (yours and others) and the price of taxes and commissions.
All of these are details that will help you figure out if a home is going to be profitable enough to sell. In general, if the buying price plus the costs are significantly above the average sale price in the area, it’s not going to be profitable.
#3: You Can Buy In Good Neighborhoods
Good neighborhoods have rising property values, attributes that attract buyers, and low crime rates. These are the places most people look at when they’re deciding whether or not to buy a property. You can’t improve the neighborhood around the house, so it’s important to buy in areas that are already nice.
In other words, a property isn’t a good candidate for flipping just because it’s priced below average for its neighborhood.
#4: You Know When To Stop
A house that sells quickly is a house that’s pretty average for the area. That means having similar (but generally newer) furnishings, similar counters, and so forth. If you try to improve too much, it’s not going to sell in a timely way.
It’s fine to be a little over the average, but you shouldn’t blow the curve apart. Similarly, remember that each increment of $50,000 tends to be high or low in somebody’s budget, so you don’t want to price exactly on those numbers. Selling for $235k may attract far more buyers than trying to sell for $250k.
#5: You Know What Low-Cost Improvements You Can Make
A low-cost improvement is something that looks good but doesn’t cost that much. For example, many types of crown molding can make rooms look significantly better, and they cost almost nothing to buy and install (unless you’re getting the really costly stuff). Low-cost improvements can get your home to the value you want without actually requiring too much of your own money.
#6: You Know How To Get Good Contractors
Chances are you won’t be able to do everything yourself (although it’s good if you can). For times when you do need a hand, you’ll want to find a talented, independent contractor who can work on tight deadlines to get the job done.
That said, great contractors are hard to find. You may need to hire different contractors over several years before you find one you’re truly happy with. Until then, keep shopping around and looking for the best balance of speed, quality, and pricing. Don’t pay more than you have to, but don’t hesitate to hire someone if it’s needed to get the best price as soon as you can.