A Guide To Flipping Properties
Most of us are familiar with the term “flipping properties.”
A lot of us know that it can be a great way to generate revenue. But a lot of us aren’t as familiar with the process and the basics of flipping properties.
If you’re someone who’s in this camp, this article is for you. We’ll discuss the entire flipping process, from acquiring a property to budgeting and financing it with a hard money loan to making repairs and eventually selling your investment property for a profit.
How Flipping Properties Works
Flipping properties is a real estate investment strategy that begins with an investor buying a property to fix it up and sell it for a profit.
It all starts with a budget. If you’re looking for a house or properties to flip, you need to ensure you have the finances for the project. The national average cost is $47,903.
Flipping houses, in most cases, requires a lot of cash. The national average cost is $47,903. Accurately estimating the costs is a vital part of turning a profit. Let’s look at the main factors to take into consideration.
Acquisition, Insurance, and Ownership
A property is more than just its asking price. If you’re going to flip a property, you need to account for taxes, insurance, title fees, financing fees, and additional acquisition expenses as well. For instance, on average, an insurance policy for a vacant or unoccupied house is $1,842.
Many flippers follow the “70% rule.” This rule dictates that flippers avoid buying properties that cost over 70% of the after-repair value (ARV), which is the estimated value of a property after a complete flip minus repair expenses.
What does this rule look like in practical terms? Let’s say you find a home listed for $245,000. You conduct research and believe you could sell the place for $320,000 once you take care of certain repairs. Next, you go to a general contractor for an estimate on the cost of repairs. They estimate $40,000. If you use the 70% rule, you’re looking at:
(320,000 x .7) – 40,000 = $184,000
Since the asking price is $245,000, unless you could get the seller to come down to $184,000, you probably shouldn’t move forward.
Note: Here is a link to a 70 rule calculator if you want to try out your own figures.
Budget
Obviously, setting a budget is a critical initial step. Other than moving efficiently, this is probably the most important thing you can do when flipping property. Staying on budget ensures you turn a profit and stay away from savings or personal funds.
Most sellers aim to make a 10% to 20% profit for each property. It’s always a good idea to research average prices in the area to have a solid estimate of what you can reasonably sell property for.
Another good idea is to build a full inspection into your budget. These typically cost between $500 and $600. While they’re not cheap, they’re well worth the expense. These inspections help you understand repairs and maintenance needed to flip the property. And you can still walk away right after the inspection process if it helps you realize the undertaking won’t be worth it for you.
Property Research
Next, you want to find property that only requires cosmetic updates. And not only that, but it’s also ideal if you can find affordable property in expensive areas.
A good example of a cosmetic update is new paint. A fresh coat of paint has a high return on investment (ROI). It’s one of the least expensive ways to enhance the value of a property.
When you view a property, look for things like shoddy landscaping, dirty kitchens, and poor layouts. These are high ROI improvement opportunities. This is the opposite of most relationship advice out there: Flipping property requires seeing something for its potential and acting on that.
Financing
After you figure out which property or properties you want, you’ll most likely need a loan to secure said property. This is going to be the short version of something you’ll want to research further.
Getting a loan for property you plan to sell right away is different than getting a loan for somewhere you want to live. Purchasing property to flip it is considered an investment, which alters your eligibility for a mortgage loan. You likely won’t be able to secure a traditional loan from a bank, even if you meet the requirements for minimum credit score, down payment, credit history, etc.
Hard Money Loans
A hard money loan through a private lender is your best option for flipping property. Hard money loans are loans secured by real property as collateral. Unlike traditional mortgages, hard money loans typically occur with individual or company-based hard money lenders who supply the money loan to an investor. Hard money loans help flippers raise money faster than traditional loans but at a higher cost to real estate investors since they are risker than traditional loans. Traditional lenders like banks do not offer hard money loans for this reason.
These kinds of loans cover the cost of the property and repairs. One key advantage of these loans is efficiency of the process compared to mortgage loans. And we know how important moving quickly is when it comes to flipping property.
One disadvantage of hard money loans is that hard money lenders tend to charge higher interest rates than mortgage lenders. That said, a traditional 15 or 30-year loan isn’t ideal for this situation anyways, so trying to pay off a hard money loan quickly before the interest causes issues is your best bet.
Repairs
Once you secure the financing and pay for the property, it’s time to repair and renovate. Hiring a contractor is necessary unless you’re a contractor. Contractors have knowledge, connections, and expertise that will help immensely throughout the renovation process.
Any structural or foundational issues must be top priority. For instance, problems like plumbing leaks and electrical issues must be addressed before anything else.
Once you have these crucial repairs completed, you can focus on the cosmetic elements that may add value. Curb appeal is key to selling property, so figure out how you can make your home’s exterior attractive to potential buyers.
Throughout this process, it’s important to DIY when possible and outsource economically. Saving money is great, but it shouldn’t come at the expense of reliable reapairs.
Staging and Selling
Lastly, you need to sell the property. Marketing and staging are key parts of this last leg. Here are some marketing tips to keep top of mind:
- Use social media to broaden your reach and spread the word
- Take appealing pictures with excellent natural lighting
- Offer virtual tours
- Use listing syndication
- Be honest about any lingering issues
The final step isn’t the time to rest on your laurels. According to data from the National Association of Realtors, 77% of buyers felt they were better able to see themselves moving into a staged home.
Thus, make a concerted effort to decorate the dwelling and give people an idea of the property’s potential.
The Profit Potential
Everyone considering flipping property wants to know the potential profit. In 2022, per Attom, the average ROI for house flipping was 26.9% (gross profit was $67,900).
That said, house flipping isn’t as profitable as it used to be. In 2017, the average ROI was 51.4%.
Conclusion
From the planning and personal finance perspective to the contractor component and finally the staging and marketing phase, hose flipping is no simple job. Although there are disadvantages of flipping like any other investment strategy (including higher interest rates, lack of cash flow, and more upfront fees and costs), the ability to sell a home quickly for profit can drastically improve your investing approach if done right. Hopefully this article has given you a general idea of both the challenges and benefits of the flipping process.
