These days, more and more people are looking into getting into the business of flipping homes. If you're one of them, you're in luck. Below is a step-by-step guide for how to flip a house. We'll explore what house flipping is, how the process works, and what you can do to ensure that your venture into flipping ends up being a success. This post will take you through the entire process from start to finish.
What is house flipping?
Before getting into the nitty-gritty of how to flip a house, it's important to be clear on what the term "house flipping" really means. At its core, flipping a house is a way to leverage real estate as an investment. In this case, instead of buying a home to live in, the investor buys a property, holds onto it for a short period of time, usually while making renovations, and then tries to sell it for a profit.
Flipping an investment property is all about spending your money wisely. To start, the goal is to find a property that is undervalued for the area, typically because it needs a decent amount of work. Then, it's important to select the right renovations, ones that will catch buyers' attention and add value to the property. Finally, once the renovations are done, it's crucial to invest in marketing strategies that will garner a profit.
Smart topics to research before getting started
Particularly if you've never invested in real estate before, you'll want to be sure to do your research before going all-in on a flip. In this instance, knowledge is the key to success. With that in mind, below are three topics that you need to familiarize yourself with before getting started.
How to financially prepare to buy an investment property
While established investors often pay cash for the properties that they buy, that often isn't possible for those who are just starting out. Fortunately, it is possible to get a mortgage on an investment property. However, as an investor, you will be held to stricter qualifying standards than if you were buying a primary residence.
Here is an overview of the financial requirements you can expect to encounter. If can't meet them currently, take some time to get your finances in order before you begin searching for a property:
- 620+ credit score: Since government-backed loans, like FHA and VA, aren't available for investment properties, you'll need to have a credit score of at least 620 to qualify for a conventional loan.
- 20%+ down payment: Since mortgage insurance also isn't available for loans on investment properties, you should be prepared to make at least a 20% down payment.
- Six months of reserves: The term "reserves" refers to the money you have left in your bank account after paying your down payment and closing costs. As an investor, Fannie Mae requires that you have enough funds to make at least six months worth of mortgage payments.
- Two years of W-2s: You also need to be able to show that you have a strong work history. Typically, lenders prefer to see that you've worked at the same job for at least two years.
How to find and purchase a house to flip
Once your finances are in order, the next step is to think about how to find and purchase a house to flip. To do this, rather than diving in on your own, it's better to get connected with an established real estate agent, particularly one with experience working with investors who flip houses.
Again, finding the right professional is all about doing your research. If you know anyone in the flipping business, now is the time to ask them for recommendations. If not, reading online reviews can go a long way toward giving you a sense of an agent's background and experience level.
After you find an agent who's the right fit, he or she will meet with you to get a sense of what you're looking for in a property and put you on a multiple listing service (MLS) search that includes your criteria. From there, it's just a matter of waiting for properties that match your criteria to come on the market and going to see them.
How to decide whether to do the renovation yourself or hire contractors
The next piece of the puzzle is deciding whether to do the renovations yourself or hire contractors. Often, investors strive to do the renovations on their own because they've heard that embracing sweat equity is the key to generating bigger profits in the end.
While that may be true in some instances, if you're not very handy, trying to go it on your own can do more harm than good. Put simply, this is one situation where it's easy to get in over your head. In light of that, ask yourself these questions before making your decision (and be honest about your answers):
- What's the scope of the work? If you're looking for a property that needs mostly cosmetic work, you can probably tackle that on your own. If you're looking at properties that need major structural work, especially work that deals with gas, plumbing, or electric, you'll probably want to hire someone who has the necessary credentials.
- Have you gone DIY before? If you have, you might have the experience you need to handle doing renovations on your own. If not, it's probably better to leave the work to the pros.
- Do you have the time? It almost goes without saying that house flipping takes a tremendous amount of time, but that's especially true when you're doing the work on your own. If you know that you don't have enough time to really commit to this project, it's probably best to outsource the work.
- Do you enjoy being handy? If you don't enjoy it, don't do it. Flipping a house is too big of a commitment of time and money for you to be miserable.
The 7 essential steps for flipping a house
Now that you have a better idea of what you need to know before you get started flipping, it's time to actually learn how to flip a house. Below are seven steps for flipping a house. Read them over to get a better sense of how the process works from start to finish:
1. Assemble a team of experts
Flipping a house is not an activity you can undertake alone. Rather, you're going to need to put together a team of qualified professionals, each of whom will be able to guide you through a different facet of this process.
In particular, you'll want to find:
- A lender: Getting financing is the first hurdle in flipping a home. You'll want to focus on finding a lender who is well versed in investment loans, who has an in-depth knowledge of the different loan programs in your area, and who has the capacity to do alternative types of financing like portfolio loans, if needed.
- A real estate agent: You'll also want to find a real estate agent who has plenty of experience working with investors. Ideally, you should work with someone who is familiar with the hot neighborhoods in your area and knows enough about flipping homes to be able to help you assess whether each potential property is a good fit for you.
- A general contractor: In the event that you've decided not to DIY your renovations, you'll need a steller general contractor. Focus on finding someone who's happy to provide you with estimates when needed and who already has a team in place to help with the work.
- A plumber and an electrician: Just like some doctors have a speciality, some home renovation work needs to be done by a certified professional. Plumbing and electric are two of those tasks.
2. Figure out your financing
Once your team is in place, the next step is to work with your lender to get preapproved for a loan. If you meet the financial requirements listed earlier, you'll most likely qualify for a conventional loan. However, if not, be sure to ask your lender about these alternatives:
Shortly after they're funded, most loans are sold to an agency like Fannie Mae or Freddie Mac. Occasionally, though, lenders will keep some debt in-house as part of their portfolio. Since these loans aren't getting sold, the lender is free to set their own qualifying standards.
If you've owned your home for a while, you may be able to borrow against your built-up equity to finance your investment property. Typically, these loans come with good interest rates, but they can also be risky because your home serves as collateral.
You can read more about financing your flip here.
3. Create your budget and business plan
While buying a primary residence is an emotional process, buying a house to flip is all about the numbers. It doesn't have to be fancy, but you should take the time to work up a budget and business plan. In this case, you should try to answer the following:
- Budget: How much money do you have to spend in total? How much do you want to spend on the home versus the renovations? How much are you leaving as a cushion for unanticipated costs?
- Scope: What scope of renovations are you comfortable handling? As someone new to flipping, it may be best to stick to cosmetic updates and steer clear of homes with larger, structure-related issues.
- Timeline: How long can you afford to carry the home before you need to sell? You'll also want to get estimates from your contractor on how long various projects should take.
4. Find the right house
Now that you have a game plan in place, it's time for the fun part: shopping for your property. Here, you'll work with your real estate agent to tour homes that meet your price point and search criteria. However, when you see a home that you think might fit the bill, it's a good idea to bring your general contractor in to give an estimate on the work needed.
Once you find a property that meets your bottom line and looks as though it needs an acceptable amount of work, go ahead and make an offer.
5. Buy the property
In many respects the process of buying a house to flip is the same as it would be for any other property. However, in this case, you should be extra sure to do any relevant inspections, especially a home inspection.
After all, you want to be well aware of any potentially costly problems with the property before you're obligated to pay for the fixes out of your own budget. If the scope of the work is too expensive for you overall, you'll also want to ensure that you have the option of walking away from the deal and finding another property that better suits your needs.
6. Do your renovations
Next up, it's time to tackle your renovations. This is the area where you really want to make sure to stick to your budget and timeline. For example, during renovations, it can be all too easy to get caught up in creating your dream chef's kitchen or a spa-like bathroom. However, doing so is a surefire way to overspend.
Instead, focus on sticking to your estimates whenever possible, even if it means refinishing existing cabinets instead of replacing them or choosing a less expensive tile for the shower. That said, the one area where it is okay to spend is on safety issues. As the soon-to-be seller, it's your responsibility to make sure that all the property's essential components are in safe, working order.
7. Sell the home for a profit
When the renovations are complete, it's time to have your real estate agent put your home back on the market. In this case, selling is all about meeting your bottom line. Ideally, you'll be able to add up the total amount you've spent on buying, carrying, and renovating the property to come up with a reasonable list price.
Once the home is on the market, your goal is to make a profit. Be sure to entertain any offers that come in at or above the total amount you've spent.
Common house-flipping mistakes to avoid
Now that you know how to flip a house, it's important to point out a few common house-hunting mistakes to avoid. They're listed below. Read them over so you'll know what to watch out for as you flip your first property. Armed with this knowledge, you should be able to avoid some of the common pitfalls that trip up most first-time flippers.
Buying a money pit
Every house has problems, but if you can, you want to avoid taking on problems that are too big for you to handle. For your first flip, stick to looking at properties that need mainly cosmetic fixes, and be sure to do a home inspection, which will alert you to most big-ticket fixes before you buy the home.
Overestimating your skill set
While it's tempting to think that you can maximize your profits through sweat equity, it's really important to be honest about how much of the renovation you can do on your own. The last thing you want is to realize in the middle of a project that you are in way, way over your head.
Believe it or not, making a profit on a flip while working with contractors can be done. You just have to be careful about budgeting and sticking to your estimates.
Overimproving the property
Overspending on renovations is probably the quickest way to lose money on a flip. While you'll want the work that's done to be solid, unless you're in a luxury market, this is the time to forgo high-end, custom finishes in favor of middle-of-the-road choices that hold mass appeal.
However, once again, it's worth noting that fixing any safety issues is worth the additional spend. It's not worth taking on the liability of having someone get hurt because the work you did wasn't up to code.
Forgetting to add a cushion to your budget
Lastly, even the most carefully planned flip will hold some surprises. Plan for the unexpected by remembering to add a cushion to your budget. Typically, investors plan to spend an additional 10% over the total estimated renovation cost on contingency charges.
The bottom line
There's no denying that flipping a house is a huge undertaking. However, with the right planning and preparation, it can also be an incredibly rewarding way to make a profit. If you're at the beginning of your house-flipping journey, use this post as a comprehensive guide on how to flip a house. With the help of these tips, you should be able to ensure that your first attempt at flipping a property ends up being a success.