With so many home renovation shows out there, you've probably heard the term house flipping used once or twice. Real estate flipping is the process of purchasing a property, making repairs or upgrades, and selling it for a profit. In its simplest form, house flippers seek to buy low and sell high in order to make money.
When you flip houses, you are not usually intending to live in the house; rather the strategy is to sell the property as fast as you can so as to avoid paying taxes and other expenses on the property. While there will obviously be initial costs that you will need to budget for, house flipping can be done with few resources and little experience.
Are you ready to start flipping houses on your own but not sure where to start? Here's your guide to becoming a house flipper with little to no experience!
One of the first things you need to start with in your house-flipping business is money. House flips aren't cheap and you need to set a budget before spending a dime on a property you are hoping to flip.
The 70% rule is the most popular and most commonly used by experienced real estate investors and house flippers. The rule states that you should only pay 70% of the after-repair value (ARV) of an investment property minus the cost of any necessary repairs. The ARV is what the home is worth after it has been fully renovated. This rule is used to balance the financial risk and avoid overspending on one property that could actually lose you money. The calculation for this rule looks like this:
ARV ✕ .70 − Estimated repair costs = Maximum buying price.
You will also need to find funding for your real estate investment. You may have some of your own money saved, but you also might try meeting with private lenders, banks, or hard money lenders.
For properties that you are going to buy and sell quite quickly without many renovations, you should work with hard money lenders as hard money loans are meant to be used on investment properties that will be bought and sold within a short amount of time. A hard money lender bases their loan on the home's ARV and usually comes with a high-interest rate.
On the other hand, conventional loans from most traditional lenders or private money lenders are different from hard money loans as they can be used to cover the cost of repairs of the flipped house. A traditional lender can help you with a home equity loan or a home equity line of credit. If you already have an existing mortgage, you may be able to talk to your financial institution about reworking the interest rates and putting money towards the flip.
While a private lender could perhaps provide competitive interest rates and loan terms with their private loan, conventional banks may have the resources that you need to fund the project.
If you do decide to use cash and more of your own money, you can avoid paying interest, but you will be missing out on the potential tax deductible that comes with borrowing. Regardless of the finding you use, you will likely need a credit history and a credit report completed before signing the contract or paying the down payment.
Once you have your funding and budget set up, you can start hunting for the right property. Before getting started, you will need to spend some time researching the local real estate market of wherever you want to purchase your property. Market research is essential for understanding market value, curb appeal, potential rent payments, and other insight into a specific property. You should also look at the purchase price of a comparable property. Usually, you can work with real estate agents and look at houses for sale or off-market properties.
There are a few factors to think about when you begin house hunting. First, when you flip a house, you want it to sell for a profit. Think about whether adding repairs to the property will interest potential buyers, or whether it is a money pit. You'll also want to consider the asking price and how it fits into your budget. Additionally, consider the current market you are in. If it's a seller's market, you will likely pay more for the right house than in a buyer's market.
Once you find a home you’re interested in purchasing, it’s a good idea to bring in a general contractor or to assess the property before moving forward with purchasing. A contractor can talk to you about the time spent on renovations, the potential cost of repairs, and the general rehab process needed. You should do your due diligence with any property you want to purchase, including your primary residence.
Another main component of being a real estate investor is assessing your own skill set. Many investors know the industry and economics of the market, but may not actually have the home renovation skills that you will need to flip a house.
Part of your business plan will be evaluating what you can add to the mix yourself. Flipping a house often involves sweat equity - putting your own work into the renovation process to save some money. If you are good with a hammer and have time to put into this project, you will likely see an increase in your gross profit. Time investment is an integral part of house flipping. If your skills don't lie with a hammer and nail, you will need to pay someone else for this skill, especially if you want to get the job done right.
After assessing your own skill set, you will need to build a team of other professionals who can help you with the other areas of flipping. You will want to work with professionals who have experience flipping a house, other investors, and legal professionals.
An ideal investing team will include:
These people will be able to help you find the right place for the right price and work alongside you to complete the project.
Real estate investing doesn't have to be a hard and inaccessible business venture. With the right financial decisions, through market knowledge, help from professionals, and your own hard work, you can become a house flipper!
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If you’re a newer house flipper, you have probably heard about the 70 percent rule. Here’s your guide to the investing rule that can prevent you from spending too much money on an investment.
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