There are a lot of ways to invest in real estate, but few methods are as popular or mainstream as flipping houses. This longstanding method of buying and improving a property to earn a profit can be a worthwhile venture, but as the real estate market heats up, some investors are left to wonder: Is house flipping profitable? I've found the answer regardless of market conditions is yes -- as long as you follow a clear set of rules. If you want to start a house-flipping business, follow these 10 rules to help you maximize your profit margin and minimize your risk.
10. Prepare for surprises
If there's one thing I've learned as a real estate investor over the years, it's that unexpected and sometimes challenging surprises will occur. While every deal may not have a "fun" surprise to problem-solve your way out of, most will. Being flexible and a quick problem solver is crucial. If a contractor discovers an issue that needs further attention before completing the original contracted job, make sure to investigate it yourself and seek the advice of others to ensure the added work, and cost, is warranted.
9. Have a solid contract
Contracts are the backbone of fix-and-flip deals. Making sure you have a sound purchasing contract and contractor agreement is key to a successful deal. It's a good idea to speak with your accountant and attorney to ensure your contract properly assigns roles and responsibilities to the subcontractor to reduce tax liability and has the important and necessary legal clauses to reduce liability in the event of injury or dispute. Be clear with timelines, jobs/tasks, design elements, and pay. There should be absolutely no question as to whether or not a party upheld their part of the contract at the end of the day.
8. List for less
Listing for less may seem counterintuitive, since after all the goal is to earn the highest possible gross profit, but listing for less can actually result in netting more because it draws more eyes and interest to the property. Listing slightly below market value could result in a bidding war. Most of the time when I employ this technique, the home is under contract and always above asking price within the first 15 days of listing.
7. Design for the market
It's somewhat common for newer fix-and flip investors to renovate the property for themselves, not necessarily for the market. While you may love a certain design element, landscaping feature, or upgrade, it doesn't mean others will. Following popular design trends is helpful in appealing to the market, but it's also important to remain neutral in order to appeal to the most potential buyers. Finding a balance between the two is challenging but important. It's also critical you don't over-improve the property. Determine what the neighborhood demands in terms of renovated homes and meet the market demand. Going above and beyond doesn't necessarily mean you'll make more, it may just mean you spend more.
6. Minimize your timeline
Keeping your timeline as short as possible boosts returns and allows you to move on to other projects. Most professional flippers aim to buy, renovate, and list the property in around three months or less for a basic flip. More extensive renovations may require longer time periods, but flips should be completed in five months maximum. Having your contractors lined up and purchasing important items like appliances, tile, or decor at the start of the project will reduce wait time in the event of delays or backorder on products. It may help to use a calendar to book appointments and make sure projects are accounted for.
5. Estimate a slightly lower ARV
The after-repair value (ARV) is everything when it comes to flipping. If the goal of the investment property is to buy at a discount and improve value through renovations in order to sell at a higher price, then the price you can sell at largely determines the discount you purchase at. Most investors use a variety of valuation techniques to determine a property's ARV, but I suggest being the one to comp the property and always assume a sales price slightly below the going rate. Adding a 5% decrease of the estimated ARV leaves additional wiggle room in the event there's a shift in the market or unexpected surprises add to your total renovation costs.
Just as you need to prepare mentally for surprises, you also need to budget for surprises. Adding an extra 10% to 20% buffer to your total renovation costs will help cover unexpected expenses that arise -- and trust me they will arise.
3. Master renovation estimates
If you're just getting started and aren't familiar with renovation costs or experienced in home repairs, it may feel intimidating to estimate a renovation budget without help. Ideally, you'd bring your contractor along to each project to help you come up with the most accurate estimate possible, in turn helping you make a solid offer, but that's not always realistic.
Hiring an inspector is another option, but this too can be costly, and inspectors may miss things, leaving you with hidden costs. The best option is to become a master at estimating renovation costs. The goal is to be able to walk into a property and quickly know what needs to be done and how much it will cost. There are several guides that can help you get a range of costs as you learn and gain experience, but the best way to become a master is to put it into practice. Walk through properties, run estimates, and get quotes to check your numbers as much as possible.
2. Manage your contractors well
The hope is that any hired contractor will complete the job on time and to the best of their ability, but unfortunately not every contractor is created equal. Having well-written contracts as well as quality and progress check-ins will keep the contractor on their toes. But make sure you aren't micromanaging.
Some fix-and-flippers deduct pay from the contractor if they exceed the contract timeline as a way to motivate them to complete it within the desired time. But another option is to incentivize them to finish it faster by offering a $100 - $500 bonus for any jobs completed before the contracted timeline. Make sure you calculate a breakeven point at which the extra bonus would not be feasible and add that into the contract.
It's extremely helpful to have qualified and vetted contractors in a range of fields. Establishing an ongoing relationship will mean less ongoing management and far less headaches during a project. Ask for referrals from other active real estate investors, but as you try out new contractors, manage them like a professional.
1. Stick to a formula
Most fix-and-flippers use the 70% rule, which means your purchase price at maximum should be 70% of the ARV minus renovation costs. While this is a good rule of thumb, there are a number of markets where sticking hard and fast at 70% will leave you waiting in the dust while other more aggressive flippers close deals. In a hot and competitive market, 80% may be a more realistic number. Just as it's important to know the neighborhood and the general market, it's also important to know the necessary number to buy in your market. However, I suggest not exceeding 80% of ARV. Going beyond this number results in lowered returns and the possibility of incurring a loss if other aspects of the list are missed.
As you estimate repair costs, remember to include holding cost, such as water, electricity, or other utility services, financing costs, and selling costs. Whether you list the property with a real estate agent or if you have a real estate license yourself will determine how much to budget. Similarly, how you finance the property -- such as with a hard-money lender, private money, or on your own -- will affect how much to include here.
Always start lower than your max offer and move up from there. And never, ever exceed your formula's max offer. Let your numbers guide you. Even in a competitive market, don't overpay for a property.
There are always unknown and outlying causes that could positively or negatively impact a house flip. An unexpected downturn in the real estate market or economy could make it challenging to sell the property when the project is complete. Conversely, if the housing market improves during your ownership, your profits could increase without output for additional improvements. Delays in materials or labor due to high demand or a shortage of supplies can also impact timelines. It's important to use these rules to guide your investment, but also understand that some elements are out of your control. Make sure you're aware of current news that could impact your potential profit, and attempt to prepare for these market changes as best as possible. Overall, adhering to a strict set of rules will undoubtedly help improve your odds of success as a flipper.