Thinking of Flipping Houses? Consider This First
You’ve got a knack for things involving hammers and nails, or you know the people who do. You’re also looking to turn a profit outside of your day job. One day, you may even ditch the day job altogether and make it on your house flipping income alone.
House flipping is romantic: you buy an old or neglected house at a deliciously low price, spend a few weeks or months priming it with a little TLC, and sell it to an enchanted home buyer at a 10-20% profit for you. Everyone walks away happy.
If you’re seriously considering house flipping for the first time, you probably have some experience in real estate. Most of the successful flippers you see in your neighborhood or on TV are real estate agents, investors, or DIY gurus with umpteen connections with contractors and construction experts. But a background in real estate isn’t always enough to prepare you for the realities of house flipping --, especially in the current real estate market.
Not to Burst Your Bubble, But...
A recent NPR article on house flipping reveals the role that flippers played in the 2008 housing market crash, and it’s a serious warning to those who are getting started in the renovation-for-profit industry.
Here’s what happened. During the housing bubble about a decade ago, the majority of residential investment properties were financed with loans. Often, these were unconventional loan products like ARMs, making them far riskier to the borrower. And while one ARM is risky enough, many of these investors were responsible for several loans at once.
When the market crashed, it was these investors who were defaulting at sky-high rates. It didn’t matter that many of these investors had stellar credit; when they couldn’t sell their investment properties, their businesses went under.
And since there’s been some speculation that we’re heading toward another crash, you don’t want to wind up empty-handed at the start of your fix-and-flip venture.
Tips for Starting a Successful House Flipping Business
Here are some Home.Loans tips to set yourself up for success in the flipping business:
Don’t take out more loans (or loan amounts) than you can afford to pay in the event of a personal emergency or market crash. With house flipping, the cost of repairs isn’t your only risk -- you’re also gambling against time. With each month between your purchase and the moment you sell the house, you’re paying a mortgage, which can become very costly if too many months pass.
Use Cash When You can
As a new house flipper, you probably don’t have thousands of dollars in cash to buy a house outright. But if you can pay cash for your home improvement materials, contractors, and other help, you’ll be in a stronger position financially than most other flippers.
Don’t Fall in Love -- Focus on the Purchase Price
It’s common for a new flipper to walk into a home and fall in love with the potential of a place (as we said before, it’s romantic!) But your eye should be fixed on the price you can get, relative to the work to be done. Here are some helpful tips when it comes to striking this balance:
Use the 70% rule. The 70% rule helps an investor determine how much profit they can make on a house after they fix the home and sell the property. First, determine the after-repair value (ARV). Then, determine the cost of repairs. Subtract the cost of repairs from the ARV, and this will tell you the maximum price you should pay upfront for the home.
Study the neighborhood. Just as you would if you were purchasing a primary residence, study the neighborhood for housing trends. What’s selling, and how long do houses take to sell? What does future development look like in the area? Which amenities (walking distance to shopping and restaurants, for example) can you tout when it comes time to sell?
Get an inspector involved. You’ll need an accurate picture of the cost of your repairs, and which ones to prioritize. And even if you’re handy, there are things an experienced home inspector can see that you’ll likely miss.
Prioritize the right repairs. Sure, you may be able to sell your flipped house faster by only giving it a face lift -- but consider the potential for even greater profit if there are deep-seated issues like the need for a bathroom addition, energy-efficient windows, or new landscaping. As always, use the surrounding houses as a guide to determine the value of more in-depth fixes.
Research your state
Every state and city has different licensing requirements. In addition, some states are inherently better for house flipping than others. For example, a CNBC article on home flipping reports that the east coast has a higher turnover rate for home purchases, making states like Maryland and Pennsylvania ideal for house flipping. In these states, investors can expect an ROI of up to 162% -- with profits in the six-figure range.
Some of the worst states for house flipping, according to the 2018 article, include Hawaii, Montana, Wyoming, South Dakota, and Mississippi. These are largely due to properties staying on the market longer, which racks up holding costs for investors (unless they opt to rent the house out while waiting for a sale).
Talk to different lenders
The location where you do your personal banking may not always be the best place to secure a loan for flipping houses. As with any financial product, you should shop around for the lowest rates and best possible terms to get your flipping venture off on the right foot.