If you’re someone who enjoys watching home renovation and house makeover shows, you may have been wowed by the amount of profit that house flipping can generate. In 2019, the average house flip made a profit of almost $65,000!
But before you rush out to buy the first house you can find, make sure you have a firm foundation. Knowing how to get into the fix and flip business, and planning for all contingencies, will help you to be successful in the long run.
If you’re interested to learn more, keep reading! We explain everything you need to know about running a successful house-flipping business.
How House Flipping Works
Simply put, a fix and flip business will buy a home in need of repairs and updates. With some good planning and management, the owner will fix up the house, then turn around and sell it for more money. The premise is straightforward: buy, fix, sell.
Flippers make money when they can buy a run-down home and make significant improvements to make it more desirable. They also can look for homes to buy in high-demand neighborhoods where buyers are willing to pay more.
It’s important to try and turn over properties quickly to reduce your carrying costs, or the amount of money it costs you while owning that home. In real estate, that will be items such as insurance, taxes, or even mortgage payments.
When you’re ready to get started flipping houses, start by making a business plan. This is vital to help you identify your specific goals, estimated timeline, and projected return on investment (ROI). You should also specify if you’ll be hiring professionals or doing the work yourself, and where you plan to work.
You’ll also need to think about how to set up your business. Will it be a limited liability corporation (LLC)? You will need to establish your banking and accounting, as well.
Think about who you will need to hire as part of your team. Real estate agents, lawyers, general contractors, and even an architect are important roles that you will need to fill at some point.
Items to Consider
There are many factors to keep in mind when getting into buying fix and flip houses. As you’re considering if this business is for you, keep the following information in mind:
Real Estate Funding
You need to figure out whether you want to borrow money for your business (more on this below). You also need to think about a line of credit so that you can pay for supplies and materials. Once you have your business set up, licensed, and registered, you can begin to talk to a bank about a business credit card.
Which Property do You Buy?
Finding the right houses can be trickier than you might think. Be sure you don’t buy an overpriced house! Once you renovate, you might not be able to sell it at a high enough price to cover your costs. It can take a while to find the right place.
You can also rely on social media, fliers, or yard signs to advertise and get the word out. If done well, customers will end up coming to you.
Real Estate Trends
A good real estate agent will be able to help you study various neighborhoods, understand trends, and give you an inside scoop on good properties. They can also help you with actually buying or selling a home.
An agent can also help you by helping you to analyze how much to sell the home for based on other prices in the area and the upgrades you put into the house.
Do-It-Yourself or Hire a Construction Business?
If you’re pretty hand with tools and understand some basics of home repair, you might want to attempt the flip by yourself. This will save you money, but also take up a lot more time. Especially if you have a full-time job, flipping houses as a side gig can end up taking way longer than you estimated.
If you decide to go with a general contractor, interview a few before deciding who would be a good fit. They’ll be overseeing a lot of the work when you’re unable to be there, so make sure you trust them. See what skills and experience they have and what they might have to hire out to a subcontractor
A construction business will also help you get a flip done faster. That means you’ll be faster to sell the property, pay back any loans, and move onto another project.
It’s a great idea to spruce up the landscape to give your home great curb appeal. After all, if you’re investing time and money on the inside, you want the outside to reflect that!
A good landscaper can help you plant new grass, establish garden beds, and even repair or build outdoor seating areas. All which appeals to buyers.
One Fix and Flip or Many?
When you’re starting out in the fix and flip business, there can be a steep learning curve. But, once you’re more established, you may want to have several projects going at once. While this adds to your workload and responsibilities, you can also make a lot more money.
After all, the more houses your flip and sell in a year, the more profit you could make!
Fix and Flip Risks
Like any business, there are some real risks that come with setting up your own fix and flip business. Any entrepreneur will tell you that there can be some significant consequences when a business fails. And unfortunately, the ROI on flipping houses can be inconsistent. Some other risks are:
Running Out of Money
Be sure to nail down your financing before you begin your project. You also need to have a firm idea of the costs of the repairs so that you can stay within budget. This is where you need a trustworthy contractor and accurate inspection!
A rookie mistake is to over-renovate a property and spend too much money. If you’re not able to sell it at a high enough price point, you waste money. Look at the After Repair Value (ARP), as well as comparable homes nearby, and use that to guide your budget.
And as anyone who has watched HGTV can tell you, there are also unforeseen costs from damage or repairs that pop up when least expected. Plan and budget for this possibility.
Not Knowing What You’re Doing
While starting a fix and flip business doesn’t take a degree, think about getting training or taking a course to help you understand what you’re getting yourself into. Fluctuations in the real estate market or permit lapses can mean a great house gets sold for less than its ARP. Having a good knowledge base can help you avoid that.
You should also know some basic repair and maintenance skills as part of your business. That way, you can help with some smaller fixes around the property. You can also have a better grasp of what work is being done (and how time and money are being spent).
Running Out of Time
Real estate doesn’t always move fast. If you’re funding through a fix and flip loan, approval and closing procedures can take weeks. If you’re working on a fixer-upper as a side hustle, your timeline will increase.
It also takes time to get permits and inspections, show the house, and even close a sale. You’ll need a lot of patience to see it through.
But, the longer it takes you to flip a home, the more your profit decreases. Aim for 90 days a flip.
How to Fund Fix and Flip Investments
When it comes to buying homes, you’ll also need to decide how to pay for these houses. You have two choices: pay cash or get a fix and flip loan.
Both have their pros and cons. For example, paying cash for a property can help reduce your carrying costs. But it can also limit the number of properties you can work on at the same time, which ends up reducing your profit.
If you choose to pursue real estate funding, you’re able to work on multiple flips at the same time. This means you can make more profit, but also means that the carrying costs go up.
Many flippers end up going with a hard money lender. These are usually private individuals or companies who give short-term loans at higher rates.
By choosing this route, a fix and flip business will have quicker and easier access to capital to use for their business. Since they plan on paying off the loan quickly, the higher rates are worth it. You’re then able to move on to your next flip more quickly.
Ready to Jump In?
Make no mistake, a fix and flip business requires hard work. Not only are there numerous items to keep in mind, but you also have to remember that there are going to be failures along the way.
However, there is also the possibility of great success and profit. If you plan well and make wise choices, there will be great rewards in it for you!