Fixing and flipping houses can lead to serious profits, but it’s not for the faint-hearted. Unlike rental property investing, flipping houses is much more of a hands-on job and the risk is considerably higher. With that in mind, there are a few important rules for flipping houses you should know before you get started.
1. Know the 70% rule
One of the most important and time-tested concepts house flippers use is known as the 70% rule. In a nutshell, this rule tells you how much you can spend on a property in order to give yourself a high probability of earning a profit.
Here’s how it works. The 70% rule says that your all-in costs of a flip, including the acquisition of the property itself, repair costs, and any carrying costs, should never be more than 70% of the estimated after repair value, or ARV.
For example, let’s say that you estimate that a home would be worth $300,000 after you renovate it. Multiply this by 0.7 to show that your overall costs of the project should be $210,000 or less. If you estimate that you’ll spend $10,000 on mortgage payments, taxes, and insurance while you own the property and another $40,000 on repairs, this rule says that you should pay no more than $160,000 to buy the property.
2. Over-prepare yourself for the costs involved
The idea of the 70% rule is that by limiting your total project costs to 70% of ARV, you’re leaving yourself a ton of cushion in case something goes wrong. If you have to hang onto the property for a few months longer than anticipated or if there’s an unexpected repair you have to make, complying with the 70% rule should ensure that you still make money -- or at the very least don’t lose anything.
Another key point is that flips rarely go exactly according to plan, even for experienced investors. Over time, you’ll likely get better at estimating repair costs and selling prices, but there’s simply too much that’s outside of your control. You might find an expensive surprise when trying to complete a renovation, for example, or the local housing market could cool off while the property is undergoing construction. You should still estimate costs to the best of your ability, but expect the unexpected -- that’s why you’re using the 70% rule in the first place.
3. Be realistic when it comes time to sell
One common rookie mistake is pricing your property too high. Sure, you want to get as much as possible for a house, but you also don’t want it sitting on the market for months longer than it has to.
When your repairs are done, check out the recent comps, order an appraisal, and/or have a serious conversation with your real estate agent about how much you can realistically expect to get for the home if you want it to sell quickly. And when you get an idea of what it will sell for, price it accordingly.
4. Have your team in place before you buy
I mentioned carrying costs earlier, so it should make sense to say that you want to own the property for as little time as possible. Shaving a few months off your fix-and-flip time frame can literally add thousands of dollars to your bottom line.
To that end, one of the best time-saving strategies that is often overlooked by first-timers is to have your team in place and ready to go before you buy the property. This might include, but is not necessarily limited to:
- Lender -- If you plan to finance the project, have a preapproval in hand before you start looking, and provide details about the property to the lender as soon as reasonably possible.
- Contractors -- Get the ball rolling with repair and renovation estimates before you even put an offer in. Once you have an approved contract, start finalizing and scheduling repairs to begin work immediately after closing. Time is money with fix-and-flips, so treat it as such.
- Real estate agent -- Most experienced house flippers have a go-to real estate agent (or are one themselves). If your plan is to flip a house in a timely fashion, let your real estate agent know this, and make your desired timetable very clear so they can do the necessary work on their end.
5. Be ready to walk away if you can’t get a good deal
In all areas of real estate, you’re more likely to make your money when you buy than when you sell. This is especially true when it comes to fix-and-flips. With that in mind, it’s important to have the discipline to be very selective when it comes to purchasing properties to fix up.
In simple terms: If you apply the 70% rule with a realistic ARV, and you can’t get the property for an all-in cost of this much or less, be ready to walk away. Especially if you’re new to fixing and flipping houses, it can be difficult to train yourself to not become emotionally attached to a property, but it’s important to learn to see potential fix-and-flips purely from a dollars and cents perspective. If the numbers don’t work -- move on to the next one.