Maybe someone has told you that they're flipping houses and making a lot of money doing so, and that is why you're currently reading this article. It could also be that you saw one of the many shows where pros go in and buy cheap real estate, fix it up and then sell it at a profit. Yes, money can be made, and it's an exciting project, but you can also end up losing a lot of money if you don't know what you are doing. Some people make millions doing it, but it's definitely not everyone, and as soon as a project is over its estimated budget, it eats out of your projected profit too. We have covered a lot of the different things you need if you want to get started.
Is Flipping Houses Profitable?Most people will not tell you how you can lose a ton of money if you're trying to flip real estate. That side of the story is simply less interesting, and it's more entertaining to focus on the people making it big. Before you start with any of these projects, you should make sure you have enough knowledge about the local real estate market, how much it costs to remodel, budgeting techniques, and you have connections with a good contractor who can help you. If you don't know how much money real estate sells for in your market, you're setting yourself up for failure. When you buy a cheap property, it might be because there's just so much work in it, but not a lot of upside, and that it will never end up being a profitable project. Some of the people flipping homes even choose to get a real estate license, which will give you access to a lot of data that is otherwise not easy to access, such as MLS. While a good flipping property comes at a deep discount, it should still be profitable once you put the necessary repairs into it to make it worth the investment and time you put into it. If you can't increase the selling price by a lot, it might just become a money pit. In this whole process, you need to make sure that your choices are based in finance, and not emotions. In addition, it's a project that requires a lot of cash. Either you need to have the cash available, or you will need to borrow it from somewhere. Home flipping sounds nice, but it's a lot of work, and if done incorrectly can just be more of a headache than anything else.
Buying and Selling Houses for ProfitThere are a lot of risks associated with doing this work, that you need to be aware of. Armed with the right knowledge and skills, you just might make it though. Instead of thoroughly going through the process of buying a house as well as a thorough guide on selling the house, we have done it in their respective and elaborate guides. Take the time to read those two article also to better understand every single step involved in flipping houses. You need to ensure that you have the finances available and under control for such a project. You need to know that it could take 6 months longer than you anticipated, and you will need to have money stored away for this. If you're financing this with a loan, you need to make sure you have a good credit score, or take serious action to improve your credit score before you start. Rather than jumping out in the decision of buying a property where you're not sure if you can make the numbers work, wait a little longer and get a property that you're sure of. Unfortunately it will cost you money to price yourself out of the market, so you will want to make sure that you can sell the home when the time comes around.
What You Need to Know Before Flipping HousesThere are many things you need to know before you start venturing down this route believing you will end up making great money flipping homes. People make too many mistakes, meaning they don't end up seeing any of that ROI that they were hoping for. Be sure you know how to calculate ROI on a house flip before you start. This project is not one that is for everyone, and it is not nearly as easy at it may sound. You will likely also get better the more houses you end up doing, since you learn the mistakes to avoid, and where you often end up throwing money away. You need to know that even if you can make a lot of money, there are a lot of costs involved too, and it is not before you actually sell the house, that you know how much money you made on the deal. Focus more on the price that you initially purchase the property at rather than how much you hope to sell it for. It is often easier to shave $5,000 of when you originally purchase a property rather than increasing it by $5,000 when you sell it. Since it comes down to being a good negotiator, we put together an article that you may like. You can get this deal financed using lenders, but they will usually charge a higher rate and fees than you would be paying on a mortgage. Think about this as an investment, and don't fall into the trap of considering this your primary residence. This means you should only do upgrades that add more value to the home than they cost to implement, and preferably ones that do not keep you remodeling forever. Every month that you have to hold on to the house is a month that you're paying holding costs for it. You also need to make sure that the upgrades you make are ones that will be enjoyed by a broader mass, not simply your own personal taste. Take into account comps when you're determining what you think you'll be able to sell the home for. If you're in an area where no home has ever sold for more than $200,000, it is not realistic that you can sell it for $400,000 irregardless of the upgrades you put into it.
How to Flip a House for the First TimeIf this is your first time doing a flip, you should familiarize yourself with the different steps. First off, you need to locate a house that is less than market value, where you believe you can add enough value to make back your money and more. To start off with, you need to find the perfect house to flip before you start remodeling or doing anything else. You need to evaluate the profit potential on different properties, and don't be afraid to pass up an opportunity if you think the margin is too small. You can also start looking at foreclosure homes. When deciding on the price you're willing to buy, it's important that you budget at least 20% profit on the deal. There are often costs that will end up being bigger than you initially anticipated. Either save up money for the deal or find other types of financing to get the project done. You want to make sure that the first project you take on is not super complicated. It should be a fast flip where minor improvements will increase the value of the property significantly, like painting it.
How Much Money Do You Need to Flip a House?The amount of money you make flipping houses should hopefully improve over time as you become more and more experienced. While you hear stories of others flipping, and making big bucks, chances are your average person starting out isn't able to achieve these levels of returns. A great way to try and finance the deal is by working with a partner who has the capital available to get the deal done. Even if you're buying a house to flip it, you will still need to come up with the down payment. The money you need will depend on the state of the place you're buying, the amount of upgrades that need to be put into it, the holding costs and a solid buffer. Always know that costs probably won't be what you expect them to be, and that they may be considerably higher.
Home Flipping CalculatorEspecially when you're just getting started, it's extra important that you know all the related numbers and that you make a strict budget. There are home flipping calculators out there that can help you in the process. This tool from Real Markits gives you an understanding of all the different terms you need to be familiar with before starting the project. This includes but is not limited to: Loan-to-value ratio, renovation costs, monthly expenses from maintenance, insurance and more, and interest rate. The two different calculators that we linked to is pretty easy, the harder part is to stick to those numbers you originally came up with. You also will need to make sure that your estimates for the upgrade costs actually hold true. The calculator can't give you the exact wisdom you're looking for as there are many variables in play, and your ability to estimate costs is what determines the success of the project.
House Flipping Financing OptionsFlipping houses requires capital and you may not have all of it yourself. You probably won't be doing the repairs yourself, and the different remodeling contractors need to be paid. There's also an agent that needs to be paid for their services, and you may therefore need financing for your flip. These are some of the different types you can look into.
- Cash Out Refinance -
- Home Equity Line of Credit
- Property Line of Credit
How to Flip Houses With No MoneyBefore you start trying to flip homes, you should find local real estate investor clubs and meetings that you can go to and meet other that do it too. There is a good directory here. And there's even an association too. It is often a place where you could find someone who might be willing to invest, but be ready to see that it may just seem like a pitch fest. Since flipping costs money, you will either need to save up, find someone to bankroll you or get a loan. If you know people that are looking for investment opportunities, however if you're approaching them, make sure that you don't make these mistakes. If you choose to approach private investors, make sure you know all your numbers and read this post to come off as being knowledgeable even if it is your first time doing a flip. When you approach wealthy individuals, there are actually possibilities for using IRAs and 401Ks for these types of investments without the individual being faced with a tax penalty.
How to Budget When Flipping a HomeIf you're flipping a home, you know that it's not a small sum of money that you're talking about, and you should know that you can lose money on this venture. You should be ready to determine the amount you can afford to lose if things don't go the way you planned. The same principles apply for budgeting as your general household budget.
Read our general post on budgetingWhen you're budgeting, you will need to get all the relevant costs in, which includes buying and selling costs. Remember that it will cost you an average of 6% when you sell the home, which is split between the two agents, which is not an insignificant amount of money. On top of that, play around with the numbers and see how much off budget you can afford to be before you start losing money. Include in your calculation what you will be paying every month just to continue with the project, which includes the interest, insurance and other related costs. When you budget, there are different parts that are included. Carrying costs, selling costs, cushion, home repairs and remodeling, and the price your buying the house for should all be budgeted accordingly. The buying costs should include inspections, down payment and everything else too.