What Is House Flipping and How To Be Successful At It
- Written by Isabella Caprario
To flip a property is to buy it in order to resell it in the shortest possible time obtaining large capital gains. It is to buy at auction or a cheaper price in relation to the market, to later rehabilitate and finally obtain a great profit. Flippers can make huge profits. But, in reality, it is a risky and not easy task. You have to really know what you’re doing, be on top of market trends, foreshadow every possible event and analyze cost and revenue thoroughly.
Knowledge Is Key
If practicing house flipping was easy, everyone would do it, and everyone would be rich. To be successful in this speculative business requires deep knowledge. It is important to really study your every move, determine where people want to live, the type of home they want to buy, the kind of features they are looking for. You have to really know the local housing market, look for up and coming neighborhoods with lots of growth, investment, schools and businesses around or to come.
You need to know up front how much you can afford to spend, how much to buy, and also how much you can afford to lose, should your business fail. As we mentioned before, the flipping business is very speculative, but with high risks comes high probability. You have to learn to negotiate efficiently. The less money you invest in the house you are going to sell, the more you can make. Negotiating comes in handy when dealing with contractors, workers and real estate vendors, as they also represent a cost.
Establishing A Budget
You should prepare yourself with a budget, a timeline, the project goals and objectives, as well as the risks involved. How much do you have to invest? How much do you want to keep in reserve? Do you have enough to cover your renovation costs?
First step is buying the house, which should be bought at a lower price, and this usually happens for two general reasons. Either the property is in need of major renovations, that the current owners cannot afford. Or the current owner needs to sell quickly due to an emergency.
The home is later remodeled in the pursuit of obtaining a profit from the quick resale of the property. Homebuyers are usually not interested in buying a home that needs remodeling or repairs, they prefer a home that is ready to move in. Also, financing agents require that the home be habitable and not in need of significant repairs.
We generally recommend starting with cosmetic updates for your first flips: kitchen and bathroom updates, new flooring, new paint, and new fixtures. Avoid structural, mechanical, electrical, and plumbing issues. Your margins will probably be narrower, but the project will be less risky and cost less.
Follow The 70% Rule
Experienced flippers follow the 70% rule to calculate return on investment. This rule states that investors should not pay more than 70% of the after repair value of a property minus the cost of necessary repairs. In other words, if the local housing market indicates that the home you’re looking to repair, will sell in the area for $200,000 dollars tops. And you need $30,000 dollars in repairs. Then the house should not cost you more than $110,000. This is very important to consider, as you don’t want to overpay for a house.
For your first flip, you should surround yourself with mentors and contractors that can help you analyze the cost of every single outcome, so you can really study your numbers before making any decisions and putting any money down. It's a good idea to start building a network of quality contractors before bidding on a home. Remember, it can take a long time to find good help, and the flipping business should be as quick as possible.
