About the author: G. Brian Davis is a real estate investor and co-founder of SparkRental.com, where he provides free passive income training videos for new investors, a service to deduct rent from the tenant’s paycheck, and a landlord app. He’s owned dozens of investment properties over the last 15 years, and today enjoys teaching others about how to invest in real estate and build passive income.
Ever watch house flipping shows, and fantasize about making $50,000 in two weeks?
The term “reality TV” only partially applies here.
Yes, real estate investors who flip homes, or house flippers, can earn a hefty return over a relatively short time frame. But house flipping involves a lot of work – far more than what reality TV stars make it look like.
Which says nothing of risk. Yes, you can earn $50,000 by flipping a house. You can also lose money, if you don’t grasp how to flip a house first and leap before looking.
Here are eight steps to make sure you understand how to flip houses before investing tens of thousands of dollars and succeed in your business.
First of all, what is house flipping? Is it for me?
Flipping houses involves buying a property, renovating it, and selling it for a profit.
House flippers take homes that most homebuyers aren’t able or willing to renovate, and improve them to the point where they meet buyer demand. Keep in mind that the average homebuyer wants a home that’s move-in ready.
For a more detailed explanation on the basics of flipping houses versus other types of real estate investing, see our piece on What Is House Flipping.
Once you fully understand what house flipping is, figure out if it’s for you and if you’re ready to dive in.
Confident that you’re ready to learn how to start flipping houses? Read on.
Step 1: Research a range of real estate markets
Not every market is a good fit for flipping houses. If you have $15,000 to work with, you probably don’t want to begin your house flipping career in markets where homes start at $800,000.
Even investment property loans and financing won’t bridge that gap!
The less cash you have to work with, the lower the pricing of homes you’re likely to be able to afford to invest in. Investment property financing can cover the majority of your purchase, but there’s still a huge difference between a 20% down payment on a $50,000 property and 20% down payment on an $500,000 property.
How much cash will you have to work with? What markets can you afford to flip your first home in?
Many real estate investors refer to neighborhoods according to a “class” ranking, from A to D. Class A neighborhoods are the wealthiest housing markets, populated by higher-income professionals. One step down are Class B neighborhoods, which are solid middle-class.
Class C neighborhoods have a definite blue-collar, working-class feel. At the bottom of the ladder are Class D neighborhoods, which cater to the lowest-income earners.
While some investors specialize in flipping houses in Class D neighborhoods, they come with additional risks, too. (I’ve had properties broken into, and more than once.) Insurance premiums will be higher in some low-income neighborhoods, relative to the purchase price. And in many low-income neighborhoods, you will likely be flipping to a fellow investor (a landlord), rather than a homeowner.
Flipping to another real estate investor often means lower margins, but potentially a smoother sales process. Investors can settle quickly, know what they’re looking for, and know how to purchase with no muss and no fuss.
Consider targeting a Class B or Class C property for your first deal – solid middle class or stable working class neighborhoods, respectively. (Take it from someone who’s lost plenty of money in low-end, Class D neighborhoods.)
As a final note, if your hometown is outrageously expensive, consider investing in areas 45 minutes to an hour away.
Step 2: Set a budget and business plan
Real estate investors are entrepreneurs – they’re in business and they need a business plan.
It doesn’t have to be fancy, overflowing with obnoxious corporate-speak lingo. But it has to include a budget, a timeline, and project scope.
How much do you have to invest? How much do you want to hold in reserve? Do you have enough to cover renovation draws until you’re reimbursed by your lender?
What kind of scope are you comfortable with? We usually recommend starting with cosmetic updates for the first house flip or two: kitchen and bathroom updates, new flooring, new paint, and new fixtures.
Avoid structural problems like the plague. Avoid mechanical problems – they involve pulling permits, which you don’t want to hassle with on your first house flipping deal.
Yes, your margins will be narrower. But the project will move much faster, be lower risk, and cost less.
Here’s a more detailed look on how to create a house flipping business plan, to help you flesh it out.
Step 3: Line up your financing BEFORE you need it!
The last place you want to be is “Great, my offer was approved… but how do I actually come up with the money?!”
Before you ever make an offer, make sure you have a lender who can fund your deal. Which is a good moment to mention that LendingHome funds up to 90% of the purchase price for investors flipping houses and 100% of the renovation costs.
When comparing pricing on bridge loans for flipping houses, pay particularly close attention to fees. Interest rates will be high on all bridge loans, compared to long-term traditional homeowner mortgages, but they actually matter less. In most cases you’ll only be making a handful of payments, so interest rates have less impact on your total house flipping costs than fees do.
Step 4: Start networking with contractors
You also need to start building relationships with contractors before you buy your first flip. You want to start getting quotes once the property is under contract, or even before.
Part of learning how to flip a house is building a network of contractors: general contractors, electricians, roofers, plumbers, painters, HVAC experts. Get to know several lower-cost, well-rounded handymen as well.
Unless you’re doing the work yourself, half of the house flipping business is simply building a network. Contractors are an incredibly important part of that network, along with an outstanding Realtor and home inspector.
Step 5: Find a house to flip
Another crucial part of learning how to flip houses is learning how to find good deals. That means not only buying below market value, but with wide enough margins to cover your many expenses: two rounds of closing costs, carrying costs during your renovation, Realtor fees, and of course the cost of your time and work.
There are many strategies to find below-market deals on homes to flip. You could work with a Realtor to find on-market deals, work with wholesalers to find off-market deals, build a direct mail marketing campaign, and so on.
Finding good deals for flipping houses is a massive topic in itself, but start here for an introduction to how to find houses to flip.
Part of finding a good deal as a home flipper is simply patience. Finding deals is a numbers game. If your strategy for finding deals revolves around direct mail, you may need to send 500 letters, tour 50 properties, and make offers on 20 of them, before one is accepted at a price that makes sense for you.
Tempting as it may be to compromise, stand by your house flipping business plan! If the numbers don’t meet your minimum, or the project scope is larger than what you’re comfortable with, keep looking.
Step 6: Buy the house
Got a contract accepted? Great!
Typically investment property lenders move much faster than homeowner lenders, but the process still takes time. With LendingHome, for example, you can start the process by entering your details and they’ll follow up with several loan options and interest rate scenarios you can select from.
Next, consider hiring a home inspector. Home inspections take several hours and are incredibly comprehensive.
While more experienced house flippers may look for homes that need a complete renovation, in the beginning you should stick with cosmetic repairs and updates, as we discussed earlier. Make sure the property is structurally sound and that the mechanical systems are in good working order.
Once you’ve confirmed that the property doesn’t have any unpleasant surprises waiting for you, walk through with several contractors. Get multiple quotes and get a sense for the differences in approach from the different contractors who provide quotes.
Choose a contractor and schedule them to start work on the same day you settle on the property.
Step 7: Renovate
Once you’ve settled, it’s time to start work!
You’re on the clock from Day 1. Every month that goes by, you’re paying interest and other carrying costs: utilities, taxes, insurance, and any other costs of owning that particular property.
In other words, lost money! The faster you can complete the renovation project, the faster you can sell the property and pay off your loan. And the faster you get your payday.
Flipping homes successfully is in many ways an exercise in efficiency. Many contractors will tell you “Oh sure, we can wrap up this project in a week!” Then a month later, they’re still messing around with the drywall.
The same goes for project pricing. Far too many contractors try to raise the project’s price on you halfway through a house flipping renovation.
All the more reason to choose your contractors well. If you’ve never worked with a contractor before, call as many references and past clients as possible.
Step 8: Sell it!
The final step of flipping homes is usually the simplest – selling it!
This is largely handled by your Realtor, so make sure you hire an expert Realtor for your market. Not all Realtors are created equal, and many are part-timers or generalists, who aren’t experts in your specific market.
You can lean on your Realtor’s expertise for pricing. Ideally, you should already have gotten their opinion on after-repair value (ARV) before even putting a contract on the property.
But ultimately, you’re the one responsible for pricing properly; your profits depend on it. Make sure you understand the fundamentals of real estate pricing, before buying your first investment property to flip. Here are five key home pricing strategies for house flippers from a professional home flipper.
When many new investors start learning how to flip a house, they mistakenly assume they should get their Realtor’s license. And sure, it can save you 3-3.5% on a listing agent’s fee, but it costs you in other ways. It costs time and money to take the course and the licensing exam. In many cases, it costs money to join a brokerage team.
For your first few house flipping deals, start by working with an expert local Realtor. If you decide you love flipping homes, you can always invest the time and money to get your Realtor’s license.
A few final thoughts on flipping houses
Learning how to flip a house and doing your first deal can be stressful. Lean on other experts, from your lender to your contractors, to your home inspector, and your Realtor. When in doubt, get a second opinion, and a third.
Flipping homes is a team sport – never stop building your professional network.
Lastly, lean on the advice of experienced house flippers who have gone before you. Learn from their mistakes, so you don’t have to make them on your own. Here’s some advice from an experienced house flipper to help you get started.
But most importantly, just start taking these steps! Research and preparation will help you avoid mistakes, but it’s action that will create successful results and earn you profit.
Disclaimer: The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. Please consult your tax advisor. All calculations and information shown here are for illustrative purposes only. All third parties listed above are for demonstration purposes only and are not affiliated with LendingHome. All views and opinions expressed in this post belong to the individuals referenced. NMLS ID: 1125207 Terms, Privacy & Disclosures. Copyright LendingHome Corporation 2019.