Updated: Feb 20, 2021
So, you've watched every house flipping show on Netflix, saved up a little money and you're ready to be the next great house flipping investor... but where do you start?
The fact is, house flipping can be a money and time drain if you're not careful to avoid some of the most common house flipping mistakes.
After years of flipping and real estate investing, we've learned a few things about how to actually make money flipping houses and we're going to share some of our top tips with you.
But first, let's talk a little bit about why house flipping is such a great investment and why so many people are jumping on the house flipping train.
What is House Flipping?
House flipping is the process of buying a house for less than market value, either from the bank (such as a foreclosure) or a home that needs some upgrades, and then improving the property and selling it for a profit.
In some cases, an investor might just buy and hold the property, knowing that the market is going to pick up in that area and they'll be able to sell for a profit without having to make any upgrades at all.
Either way, you'll need to be able to identify areas of opportunity and know when a property is a good fit for house flipping.
Let's check out some expert tips we've learned over the years for how to start house flipping profitably right from the start.
1. Know Your Market:
It's easy to get sucked into the potential of a property and lose sight of the actual profit margin.
This is a mistake.
Unless you're picking up that property to restore for your own use, you want to keep your emotions out of it and make a smart financial investment.
The best way to do this is to understand the market in your area. You can do this by studying the real estate trends where you are planning to purchase. You'll want to know answers to questions like:
Ideal locations - To buy low and sell high, you need a desirable area.
Best schools - Buyers are more eager to buy in areas with great schools.
Proximity - If you'll be going to the house often, you'll want to be close enough to not spend a ton of time and money traveling back and forth.
Market Value - The numbers don't lie, know the market value.
You need to find a property that is going to leave enough room for upgrades, while still selling within the range for that neighborhood. Make sure to run the numbers on the price of the house, the cost for needed upgrades, and leave room for profit, to determine what you would need to resell the property for.
You may have heard about the 70% rule for house flipping. If you haven't, we talk a little bit about it in this post.
This is where a local real estate expert can be a huge asset. If you are looking for a real estate agent who deeply understands house flipping and the real estate trends in the Sacramento area, we're here to help. Give us a call and we'll help you find the right flips.
2. Make an Honest Budget:
It's easy to walk a potential flip and just think about the profits, but you want to get real with your budget.
If you think you've found the perfect house to flip, it's time to run the numbers. Here are a few key considerations:
Your price range
The cost of repairs
Holding costs during renovations
The last thing you want is to run into a bunch of surprise repairs that will destroy your budget and your timeline, cutting into your profits and tying you up even longer with that flip.
This is why you want to find an experienced and honest contractor that you can work with on your flips who will be able to identify needed repairs and give you an accurate quote. The more you work together, the better you'll both get at identifying the perfect investment properties to flip.
3. Choose Smart Renovations:
Renovations can really destroy your ROI, so you want to be smart with your choices. You may want to upgrade everything in a house before reselling, but you may not need to.
Be strategic about the renovations that the home will need in order to sell at a profit. Consider the neighborhood and other homes selling in the area to get ideas on the types of finishes that are popular and what potential homebuyers are looking for.
For example, you could blow your entire renovation budget on things like gorgeous custom cabinetry and a custom waterfall island, when instead you could restore existing cabinetry, replace the doors and hardware, update counters and add new lighting for a whole new, more affordable, look that buyers will still love.
Here are some of the most important areas to consider when updating a flip:
Fresh neutral paint
Affordable bathroom updates
Affordable kitchen updates
Necessary repairs (fix leaks, wiring issues, etc.)
Look into sourcing attractive, but affordable, finishes that will allow you to renovate the home quickly and sell for a profit. Over time, you'll learn what renovations will actually cost and you'll get better at eyeing a great deal.
4. Invest With Cash:
Whenever possible, purchase your flip with cash. If you're buying bank-owned properties, this is especially important. If you don't have enough cash for the entire project, you'll at least need enough cash to cover a down payment of around 25%, plus the cost of renovations, and holding costs until you're able to sell.
It's easy to only think about the giant pot of gold at the end of the flipping rainbow, but that's not a guarantee and there's a lot of steps between buying the flip and selling that you'll want cash on hand for. Here are some of the reasons why less debt is better when house flipping:
First, you don't want to be paying interest on your flip. This will just add to the amount of money you've spent on this house before selling.
Second, if you're going into debt to flip, you'll be more desperate to sell and willing to take bad offers. If the market changes while you're renovating, you want to have the option to hold on to the property until the market turns in your favor, but going deeply into debt to flip will prevent you from being able to do that.
Third, house flipping will not always go as planned. If that house you bought does have a major repair needed once your contractor starts getting to work, this will set you back even more and deeply cut into your profits.
Ideally, you'll have saved enough money to start your first flip with cash or have excellent credit to secure a loan. To look for that perfect first flip, give us a call. We'd love to help.
5. Know When To Walk Away:
House flipping is more popular than ever, with many people flipping houses as their full time job. Safe to say, when it comes time to put in offers on that flip, you'll have some competition.
Keep your budget close and stick to it. If you can't get the house for the price you need, walk away. Looking for another flip is better than going broke from a bad investment.
Before you even start making offers, know your highest price that you can pay and still make a profit. Remember to add 20% to your estimate for repairs, interest and taxes to have some room. Stare at this number when negotiating to make sure you don't get caught up in the moment and end up with a flip you regret.
Here at Enyart Homes, we're big fans of house flipping as one way to invest in real estate. If you're looking to start house flipping in the Sacramento area, reach out! Having a mentor for your first flip can make all the difference.
Good luck on your house flipping journey! With these 5 tips, we hope you'll be off to a profitable and successful start.
If you have any questions or tips you'd like too add, leave us a comment below. We'd love to hear from you!