House flipping is a type of real estate investing that many people find rewarding. Today’s television shows and the popularity of HGTV make house flipping look relatively simple, but there’s a lot of behind-the-scenes work that never makes it on the air. The reality is not everyone finds success fixing and flipping houses.
You can have a positive experience if you are well prepared and understand the risks involved with fix-and-flip investing. Preparation is key for finding success with the first flip project.
If you’re interested in flipping houses for profit, work through these ten steps and call CapSource today!
#1- Get Educated
Every investor approaches this kind of real estate investing with different goals and objectives.
Brand new real estate investors considering buying distressed properties, renovating, and selling for profit, need to start by learning about real estate investing and building a knowledge base of how the process works. Even experienced investors making their first foray into the fix-and-flip market benefit from educating themselves on how to work a flip.
Network with investors who have flipped houses before. Ask lots of questions and learn from their experiences. Find out how they evaluate if a property is a good deal or not.
Learn about home repairs and renovations. Talk to general contractors about the process and their usual timelines for different kinds of work. This will also be an opportunity to find the contractors that you may use down the road.
CapSource also offers investor coaching and education for all experience levels. We want your fix-and-flip to be a successful project so we all win. Part of what we do is educate about funding options, teach how to use data to evaluate properties, help with running comps, and consult with the rehabilitation.
#2- Decide if House Flipping is Right for You
Most home buyers want a “move-in ready” home, but these aren’t the homes that have the most potential from an investor’s perspective. Flipping houses means buying properties most buyers aren’t interested in or willing to renovate. By being willing to do those renovations, the fix-and-flip investor is hoping for a profit.
It’s an active form of real estate investing and one with a higher risk. You will have to be involved in every stage, from purchasing to managing the renovations to the home sale. Depending on your time and how involved you want to be, you may even choose to renovate yourself. Of course, that will involve even more time and effort on your end.
The beauty of real estate investing is it has many different forms. Fix-and-flip properties are just one investment vehicle. Investors have other options for producing income and growing wealth through real estate that do not involve buying and fixing distressed real estate for sale. The risk and time involved are not something everyone is willing to take.
If you’re still interested in house flipping but are uncertain about moving forward with your first project, a good place to start is by working with an experienced partner. CapSource is more than just a source for funding. We are here to partner with new investors, so you can learn about every step in the process. We’ve executed numerous deals in various states; put our knowledge to work for you.
#3- Research the Market
The key to successfully running a house flipping business is to know the local markets. To make the most profit, you need a good deal in an up-and-coming neighborhood. That property also needs to fit inside your budget. Most house flippers aren’t starting by buying investment properties priced at $500K.
Research neighborhoods near you to learn which are the best candidates to find a fix-and-flip property. Not only do fix-and-flip investors primarily need to find distressed real estate, but you need to consider buyer desirability or rental prospects in case you can’t sell.
Real estate investors often assign rankings to neighborhoods, referred to as Class A to D. A “Class A” neighborhood represents the wealthiest housing markets that high-income professionals occupy. The next step down would be “Class B,” which is solidly middle class. “Class D” represents the lowest rung, which would be a distressed community often with low-income housing. While you can flip houses inside all these neighborhoods, your prime targets lie in the class B & C neighborhoods.
#4- Learn About Lending
Look into how financing works for investment and renovation properties. You have some creative ways to raise funds to flip a house. Use your research time to build relationships with potential lenders.
Not every real estate investor has cash ready to outright buy and pay for the renovations. Plus, allocating all your funds into a fix-and-flip isn’t necessarily the wisest move. That’s why having a lender at the ready is helpful. You can leverage your cash with the various financing options available to help provide the money you need when you find a deal.
The best lenders are ones that see your relationship as a long-term partnership. Some firms just lend the funds; others, like CapSource, have a network of resources you can use to successfully complete the project. In fact, we offer financing options specific for fix-and-flip projects.
You can pool your money with friends and family, but collaborating with family for high-stakes investing risks putting a strain on your relationships. Make sure you spell out the agreement in writing.
For homeowners, a home equity line of credit (HELOC) can open up to access cash. You’d use the equity in your existing property as collateral, get the cash you need to buy a property, and pay it back once you sell the fix-and-flip.
Suppose you have significant equity and appreciation gains in a current home. In that case, a cash-out refinance could give access to equity in your existing home while providing you a better mortgage rate.
Another option is a hard money loan. These are short-term loans from a private lender that are as good as cash. They do usually have higher interest rates, but the terms are more negotiable than other lending options. The better relationship you have with the lender, the more flexible they can be on your terms. Ask the CapSource team how we use financing to collaborate with investors to achieve their goals.
#5- Build a Fix and Flip Team
House flippers don’t tackle a project alone. It takes a team of people to execute a house flip from start to finish. In the beginning, a real estate agent is keeping an eye on market conditions and exactly where their investor clients are looking for deals. A good real estate agent alerts their investor contacts when a potential property that fits their house flipping criteria comes on the market, getting them in the door quickly.
A good general contractor is a vital asset. The contractor can view the property with you. They’ll point out any hazards for concern and give a rough estimate of any necessary repairs to bring the house into livable condition or to maximize its profit in the market.
Your lending partners will help with your financing needs. CapSource understands the press for time and the need for quick access to funds to help close an investment deal. Quick closings are part of a real estate investor’s business and we are here to support that.
House flippers need an assortment of maintenance and service vendors. Investors need to carry home insurance while they own the property. Find an insurer to build a relationship with. You may also need other vendors, like landscaping or HVAC companies. CapSource can give guidance on finding contractors, insurance agents, and other essential vendors.
The real estate agent comes back into the picture once the property is ready to sell. They will help estimate a list price and create a marketing strategy to attract as many buyers as possible to gain you the most profit. They’ll assist with the contract negotiations and get the property to the closing table, so you exit the deal with cash in your pocket.
#6- Make a Business Plan
House flipping is a business, and you need to treat it that way. Create a plan for your house flipping project. It doesn’t need to be elaborate, but it should have your budget, a timeline, and the scope of the renovation work you are willing to do.
In the business plan, explain how much money you will invest, how much you will reserve as a safety net, and if you have enough to cover renovations until your lender reimburses you.
Consider how much renovation work you are willing to take on with your house flip. For brand new fix-and-flip investors, it’s probably best to avoid properties with significant defects. Start learning about the industry by focusing on fixer-uppers with more cosmetic problems than structural issues.
If you plan to take on houses with more risk, explain how much risk you are willing to tackle.
CapSource provides a free consultation on creating a real estate investing strategy to help grow and scale your company. All you need to do is contact us to schedule a call.
#7- Set Your Purchasing Parameters
Before buying a property for renovation and selling, have guidelines to ensure you don’t go overboard with the investment and risk not making any profit.
A common rule for house flippers is the 70% rule. This rule says that you estimate the house’s After Repair Value (ARV) and the cost of all necessary repairs. Calculate 70% of the ARV and subtract the anticipated cost of repairs. The resulting number is the maximum amount you should pay for the property.
Let’s say you have an estimated $200K in ARV and $50K in estimated repairs. That’s $140,000 (70% of $200K) subtracted by $50K for a maximum purchase price of $90K.
Another factor is time. Remember, if you’re using financing, you pay for the interest, insurance, and taxes every day you own the home. Have an estimate for how long you think repairs will take and how much money you’ll be paying out of pocket to own the house.
#8- Go House Hunting
Until this point, everything has been about education and preparation. Once you have a business plan, purchasing parameters, and a team ready to go, start house hunting. Have the numbers you want worked out ahead of time and include some wiggle room.
Understands that the house-hunting process could take some time. Some real estate investors find the right opportunity within a few weeks, but others wait for months for the right deal. Don’t let a lengthy house hunting process cause you to get anxious and buy the wrong property. Stick to your rules. Patience pays off.
Once the right property does become available, you’ll want to move fast. Make sure you believe in the place that you are purchasing. Put your offer in and go through the negotiation process. As a real estate investor, you must be willing to walk away if the homeowner isn’t ready to let the property go for a price that fits inside your purchasing guidelines.
#9- Start work Immediately
As soon as you close on the property, get to work! Have all your contractors lined up, ready to start renovations the moment the house closes. The quicker the work is done, the quicker you can list the property on the market and make your profit. Don’t wait until the closing day to start booking your contractors. Start as soon as you have a signed purchase agreement.
Having a basic understanding of construction, design, and real estate is helpful at this point in the process. So is having the right team working for you to get those renovations done in a timely and reasonable manner.
Any cosmetic upgrades you do should align with contemporary trends to appeal to as many home buyers as possible.
Be smart with the timeline and how you schedule the contractors. For instance, you need the drywall finished before the painters work and the painters finished before the new flooring installation. Remember, any required permits add a few days to the contracted work.
#10- Sell the Property
Once you complete all the repairs and remodeling, get that house listed on the market!
Your real estate agent should know the market and how to sell your home. Be aware that the longer it takes to complete the renovations, the more the market could have fluctuated. The real estate agent will pull the comparable sales, factor in the upgrades you’ve done, and give you an updated estimated purchase price.
Price the property competitively. The longer your house sits on the market, the more money you’ll be paying to maintain the home. A competitive price attracts buyers and goes under contract quickly.
Setting a House Flipping Business Up for success
It’s the home sale that makes fix-and-flip investing worth it. This is the moment your hard work is realized, and you (hopefully) generate a profit. Once you have flipped one house, repeat the process to do it all over again. Keep the basics in mind, learn from every fix-and-flip, and you’ll be on your way to a solid career as a house flipping investor. Contact CapSource today to get started with your first Fix and Flip project and take the first step toward financial independence!