Got bit by the house flipping bug? Consider your work cut out for you over the next 180 days at least (the average time it takes to complete a single flip!)
During that time, you’ll be operating with very little room for error—average flipping returns dropped to a seven-year low of $65,000 in the last quarter of 2018, according to Attom Data Solutions. And that doesn’t account for the cost of repairs.
“House flipping is trendy, but dangerous,” says Robert McFadden, a Washington state-based agent who regularly works with and advises several house flippers.
“I’ve had to bail clients out of bad situations because they got into flipping thinking they could make quick, easy money, but the work was more than they expected.”
Rather than jump into the business casually, fueled by nothing but the passion of your last HGTV binge, follow this guide for how to flip a house for the first time so you come out on the other side with more money than you started. The alternative? Ending up like McFadden’s clients:
Stuck with a halfway-done house you’re about to lose to the bank.
Step 1: Hone your own home improvement skills
The pros on those TV shows make remodeling look easy, don’t they? In one scene they’re stripping a room bare, then one commercial break later and they’ve got the walls painted and the new flooring in.
But exactly how did they get those clean paint lines around the windows? And how long did it take for the flooring install after they found mold growth underneath?
This is the kind of unglamorous, behind-the-scenes knowledge that a successful house flipper needs to know—and that’s just for starters.
If you’ve never painted a wall or installed a faucet before, it’ll take you twice as long and look 10 times worse than the results achieved by those TV show pros.
“There are a lot of unknowns when you’re doing a house flip, so you need to have a very good understanding of the mechanics of a home, such as the plumbing, structural, electrical, and roofing,” says McFadden.
“The more work that you can do yourself, the more money you’ll make. However, if you’re not well-versed in any of those things, you’re going to have to hire professionals to do them—which will cost you.”
So, how exactly can you hone your skills? Sure, you can read DIY blogs and watch online tutorials, but the only way to really know what you’re capable of is to actually dig in and do it.
The easiest place to start is by DIYing repairs and improvements to your own house—though you do risk damaging your own home’s resale value if you fail spectacularly.
If you’re at the “my tools are still trapped in their packaging” skill level, you’re better off getting a little expert training first.
Many home improvement and hardware stores have classes that provide hands-on training led by experts, like the free workshops offered by Home Depot. You can even hone your construction skills while volunteering to help your community, too.
The well-respected home building charity Habitat for Humanity will have a hammer in your hand in no time. And there are dozens of government organizations that offer skill-honing community service opportunities, too.
Don’t feel like you need to learn it all, though. If there are repair projects you’re simply not skilled at (or aren’t interested in learning), then it may make sense to hire a professional—if you can find a good pro.
Step 2: Develop a network of experts
If you know that you can’t complete a home repair project with pro-level quality, then it’s actually more cost effective to hire an expert to get the job done.
“Home repair projects have to be done correctly, because your buyer is going to bring in an inspector to review your work,” advises McFadden. “And it’s just going to cost you more money to fix any work that’s not done right.”
The trouble is, finding great home improvement pros is harder than it sounds. If you just hire the first pro you find, you might learn too late that they overcharge, miss deadlines, or worse yet—take your money and run.
Start with these mini steps:
Ask for recommendations.
Put your relationships to work and ask family, friends, neighbors even random acquaintances who’ve recently had work done on their homes. The people you meet while honing your own skills will likely know quality pros, too.
Research potential contractors.
One person’s fabulous contractor is another person’s nightmare, so you can’t just take someone’s recommendation at face value—no matter how close you are. Instead, research their suggested contractors online, checking reviews on sites like Angie’s List and Yelp. You should also invest some effort in interviewing your pros, too.
Ask specific questions and request an onsite estimate.
Generic, “Are you any good?” questions won’t get you the answers you’re looking for, you need to ask specific questions as to how they’d handle the type of work you need. You should also arrange an onsite estimate so they can evaluate potential repair jobs in your own home, and you can evaluate your rapport. Then check those quotes on sites like Thumbtack, Fixr, and Home Advisor to see how they stack up against their projected estimates for your area.
Develop a database of top contractors.
As you’re info-gathering on all these experts, keep in mind that you’re not looking for a single go-to contractor that you can call on every time. You’re building a database of contractors, plumbers, electricians, roofers, H-VAC installers, and construction workers, so that you have options whenever you need.
The best pros book up months in advance. Without a large network to call on, you’ll discover that the one pro you were counting on is unavailable when you need help—which results in an expensive—and needless—delay.
Step 3: Enlist the assistance of a real estate agent who’s got experience working with investors
Need an agent with investing experience for your first flip?
Find a top agent who specializes in investment properties.
“A good agent will help you find the best properties to flip,” says McFadden. “When you’re buying with a plan to flip, you not only have to do the financial analysis on the home purchase, but you need someone who can estimate the cost of necessary repairs and predict the potential sale price you can get for the home in that neighborhood once it’s fixed up.”
These numbers and predictions need to be as accurate as possible in order to budget and project your potential profits. You don’t want to be forced to reduce the price after investing money in the home purchase and repairs—or you’ll wind up breaking even or even selling for less than you spent.
Of course, you can’t hire just any agent—even if they’ve been working in real estate for years. You need one who has experience with house flipping.
“When you’re flipping a house, you need an experienced agent that really understands the costs of construction,” advises McFadden.
Profit margins are slim to begin with for house flippers, if you partner with an inexperienced agent who miscalculates the costs of construction or the projected resale price—your margins may just vanish entirely.
“Agents with that kind of experience will recognize the warning signs in homes that may need costly repairs,” says McFadden.
Step 4: Line up your flipping finances
Once you’ve brushed up on your own skills and established relationships with affordable, trustworthy pros—especially a top real estate agent—it’s time to figure out how you’ll finance the flip.
“Typically cash transactions are best. So, you’re going to need cash available, or work with an investor who can cover the cash purchase of a property,” says McFadden.
“You can also try getting a rehab-type loan, but it’s more difficult to roll the cost of your repairs into the actual loan itself that way. Most likely, you won’t have the margins to make a profit if you finance your flip with a rehab loan.”
Making an all-cash deal may be the best way to go, but funding your house flip with a loan isn’t impossible. In 2018, the total volume for financed home flip purchases reached 19.9 billion, an 8% increase from 2017.
Both loan types come with their own pros and cons, however the main difference is that the 203(k) loan caps the home repair expenses at $35,000—while the HomeStyle loan allows you to borrow up to $50,000 or 50% of the “completed” appraised value.
These loans may also come with other conditions that you should review with your lender before taking out the loan, as they could hamper your flipping plans.
For example, while HUD doesn’t forbid flipping with FHA loans, you may not qualify for one if you’re within 90 days of purchasing the house.
You’re also required to hire a licensed contractor to make the repairs with a 203(k) loan (so no money-saving DIY), and you may encounter lengthy closing times. The extra time and expertise required by your loan can shatter your finances if you don’t budget properly.
Step 5: Budget for the worst-case scenario
It might seem counterintuitive to budget before you’ve found a property, but the last thing you want is to fall in love with a home’s potential, only to find that you really can’t afford to fix it up.
While you will need to refine your budget once you’ve picked a property, you need to know the basic budget so you’re only shopping for homes that you can afford with your financial plan.
Of course, budgeting to flip a house is a lot more complex than simply buying one you intend to live in.
When you were shopping for your primary residence, you focused on finding a home you could finance on your salary and the features you personally preferred. If any remodeling needed to be done, you knew you could put it off until you could afford it—and you probably never even thought about how much you could sell for in the future.
When you’re financing a flip, planning how much you can afford to buy a home is just the beginning. You’ll also need to evaluate the expense of remodeling the property immediately, project how much you’ll be able to resell for once it’s fixed up—then do the math to estimate your chances of turning a profit.
Unfortunately, budgeting for the remodel is a lot harder when you’re flipping. You can’t spend money on just anything to make it look better—you need to research which projects offer the best return on investment (ROI), and what updates buyers in your area are paying more for.
And then there are all the unexpected expenses that inevitably arise when you’re remodeling a house.
“There’s a lot that can come up during the remodel that you might not have been expecting, such as termite-damaged support beams, or foundation issues,” says McFadden.
“When you’re budgeting to flip a house, you need to expect that it’ll need more work, cost more money, and take a longer period of time to fix up than you’re anticipating. So, I would certainly budget an additional 15% to 20% above what I was planning to spend on repairs.”
Your financial plan also needs to account for other outgoing expenses that come with flipping. For starters, you’ll need to pay monthly housing costs on things like utilities, HOA fees, property insurance, and your mortgage payment (if you get one).
You’ll need to budget for the bite the government will take out of your profits, too. Since this house was never your primary residence, you’ll need to pay capital gains tax on the proceeds, as well as property taxes for the time period you own the home.
On the plus side, there are a number of tax breaks for real estate investors—which is why you’ll need to pay a qualified financial planner to help you budget.
Although, there’s one thing a financial planner can’t help you budget for: time.
It may only take 30 minutes or an hour to see a home go from shabby to chic on TV, but you know it’ll take longer than a TV show to refurb a home. In reality, it could take weeks or months.
Remember, you’re footing the bill the entire time your flip house is under construction, which means you’ll need enough cash to cover time-related expenses. So, you’ll need to create a timeline as to how long you anticipate remodel will take—then tack on 15% to 20% onto the schedule.
Step 6: Research a variety of real estate markets (and current market conditions)
When you’re just starting out as a flipper, you need to break out your school-time homework habits—because success requires a whole lot of research.
Before you narrow in on a specific property, you’ll first need to study up on how well homes are selling in various neighborhoods (by price and days on market).
“Technically, flipping can be done in any neighborhood. But in reality, it’s best to buy the least-attractive house in a relatively stable neighborhood, so that it has the potential to sell at a better price than you could sell at in a not-so-great neighborhood,” says McFadden.
You also need to educate yourself on your area’s real estate market conditions.
In a perfect world, you’d be able to buy a house to flip in a buyer’s market, when inventory is high, buyers are scarce, and prices are low. You’ll get the property on the cheap, but you won’t be able to sell for as high a price as you might like.
Then when you’re ready to sell, the market would magically transform into a seller’s market—with low inventory, and plenty of buyers vying to buy your house to drive up the price. You’ll pay more for the house, which means you’ll have less to spend on repairs (and unpleasant surprises), but you’ll sell at a top-of-the-market price.
Unfortunately, real estate is no fairytale. If you’re lucky, you’ll be flipping in a market where there’s a balanced number of homes for sale and buyers available, although there will be plateauing home prices. You’ll pay a little more for the house than you would in a buyer’s market—but not as much as you’d pay in a seller’s market. When your flip is ready to list, you’ll sell for less than you could in a seller’s market—but more than you could in a buyer’s market.
“Flipping is tricky because you’re essentially putting yourself on both ends of the home sale,” says McFadden. “A balanced market may be the best market condition for house flippers. You can still get a house for a decent price, do a few repairs, and still expect to sell in a reasonable timeframe without it sitting on the market.”
If you had to pick between buyer’s or sellers, you should know that it’s probably easier to flip in a seller’s market—because homes sell faster.
In a buyer’s market, you risk getting into a situation where you can’t sell it, which means you’re carrying that debt and paying expenses for that house indefinitely.
There is hope if you do get stuck with a house you can’t sell in a buyer’s market. You can rent the property until the market turns around.
Step 7: Find a house to flip
Once you’ve settled on a neighborhood and evaluated how the current market conditions will impact your bottom line, you still have a lot of work to do to find the right property.
“When you’re shopping for a house to flip, you can’t just look at how much it costs now, you have to be looking at the potential resale value of that property once it’s fixed up,” advises McFadden.
“So you need to work with an experienced agent who can do a proper market analysis for the final product, too. That way you’ll truly understand whether or not the purchase price plus repair costs will yield you enough of a profit to make it worthwhile.”
An agent is well-equipped to provide a ballpark estimate of what visible repairs and upgrades might cost. However, the best way to avoid those expensive, unpleasant surprises is to hire a qualified home inspector to do a detailed analysis of all necessary repairs.
If he finds major issues that require big bucks to fix, walk away.
“I would be most cautious about trying to flip a house if your inspector says it needs extensive structural, foundational, or major infrastructure repairs to plumbing or electrical systems,” advises McFadden.
For example, simple repairs like replacing a faucet or light fixture won’t require a whole lot of money or technical expertise to fix. But if the home winds up needing a brand new plumbing or electrical system, that gets pricey.
That doesn’t mean you should only opt for homes that need simple cosmetic fixes—as the profit margins are pretty slim when there’s relatively little that needs work.
“If the house you’re considering flipping has a relatively decent electrical and plumbing system, it’s in decent shape structurally, and the roof isn’t bad—that home has real potential to turn a profit,” advises McFadden.
“Even if the roof is bad and needs replacing, you can add that expense into your budget. Of course, if the roof has been leaking and causing other damage inside the home, you need to be aware of it.”
Step 8: Buy—Renovate—Sell
By now you’re probably thinking that this sounds like a lot of work before you even dive into flipping—and you’re right. However all this pre-purchase legwork is the best way to make sure that your house flip is a success.
If you’ve followed all these steps, you can buy with confidence, knowing that you’re purchasing the right property in the best neighborhood—and that you’ve budgeted enough money to cover the remodel, unexpected repairs, and any delays.
You’ll save money by tackling some of the remodel work yourself, and trust that you’re hiring the best pros to complete any jobs that you can’t handle.
With the help of a financial planner, you’ll learn all the financial tricks a flipper needs to know—like taking advantage of real estate investor tax breaks.
Header Image Source: (Grant Durr/ Unsplash)