House flips are more likely to fail (be unprofitable) than succeed, especially for beginners. Renovations always take longer to complete and cost more than expected, which can leave investors in the hole if they haven’t anticipated setbacks.
In addition, it’s much harder to fix and flip a house than it looks on TV, and many novice flippers are shocked when they find out the extent of necessary work and the possibility that they could lose money on the deal.
To give yourself the best possible chance of success, you’ll have to take a hard look at your goals, abilities, and availability. Learn everything you can before you snap up what seems like an ideal property and end up stuck with a loser.
Table of Contents
1. Know Your Commitment Level
Before you dive in to the fix-and-flip life, sit down and think about how much you’re really willing and able to commit to this undertaking. If you’re going all in on a DIY rehab, make sure you have the skills and experience you need to be successful. Renovating a house involves grueling physical work and dedication to the project. So honestly answer these questions before you decide to take this path:
- Are you able to do contractor-quality work?
- Do you know which permits you needs
- Are you aware of all local building codes?
- Do you have subcontractors to handle repairs you aren’t qualified to make?
- Do you have enough cash saved to cover higher-than-expected costs?
Even if you’re not planning to do all the work yourself, fixing and flipping a house requires a huge time commitment, and the more involved you are in the process, the bigger that commitment will need to be.
While it is possible to work a full-time job and rehab properties, it’s not an ideal situation. Properties undergoing renovations need daily check-ins, preferably when the contractor is on-site.
If you can only get to the property after work and after the contractor (or foreman) has left for the day, you’re more likely to run into problems and delays —and that will lead to shrinking profits.
Gather Pros to Cover the Gaps
Chances are, you’re not a real estate agent and a CPA and a real estate lawyer and a contractor. For any area in which you’re not an expert, hire a professional. There are a lot of intricacies involved in a successful house-flipping investment, and if you don’t know what you’re doing, your dreams of plentiful profits can turn into mountains of debt.
If you are planning on doing as much of the fix-up work as possible on your own, don’t cut costs when it comes to make-or-break parts of the project. Even seasoned contractors call on licensed professionals to fill in experience gaps. Make sure you know what kind of help you’ll need, and take steps to secure it before you get started.
Have a Cash Stash
Financing your flip with cash (or mostly cash) vastly increases your profit potential. Not only will you save thousands of dollars in loan fees and interest, you’ll also be in a better position if the house takes longer than expected to fix or flip (which almost always happens, especially in the beginning).
Remember, to be profitable, the sales price has to exceed the total purchase price, carrying costs (insurance, loan interest, utilities, etc.), and renovation expenses.
Cutting down borrowing costs—interest, loan application and settlement fees, mortgage insurance—leaves more money to invest in renovations. Plus, having a sizable down payment for the property can get you better terms for any money you do need to borrow.
2. Make The Right Renovations
It’s tempting to create a dream house with hardwood floors and top-of-the-line appliances, but that kind of thinking will put you on the fast track to flip failure. When it comes to renovations, you want to make only those that will add value —not just look good.
Small tweaks can make a big, cost-effective impact: for example, painting and putting new hardware on cabinets can add as much value as installing new cabinets but at a fraction of the cost. Remember, the less you spend on renovations, the bigger your investment returns will be. Before you dive in, learn how much typical projects cost.
Know what you’ll spend to re-carpet a house, update old wiring, and spruce up the landscaping. While every flip project is different, some upgrades that almost always add value include:
- Updating kitchen appliances
- Upgrading the washer and dryer
- Repainting inside and outside
- Adding closet space
- Building a deck
- Adding a bathtub (if there isn’t one)
Depending on the area, bringing in some green energy features can increase the home value—but make sure there’s a positive “going green” vibe in the neighborhood before you take on the extra expense.
First Impressions Matter
The first thing someone sees when they’re viewing your property is the outside (“curb appeal”). A neat yard and a fresh coat of paint make a good first impression and convince the buyer to walk inside. Simple touches can help add to the curb appeal, and most of these can be done (as needed) without shelling out a lot of cash:
- Make sure the trim work is freshly painted
- Paint the front door or add new hardware
- Install outdoor lighting
- Plant seasonal flowers
- Repair cracks in the driveway and walkways
- Put in a new mailbox
These minor fix-ups won’t bust your budget, but they will help draw buyers to the house.
3. Price The House Properly
It can be tempting to price your flip house based on how much money you want to make, but if you don’t want the house to sit there unsold you’ll need to come up with a realistic, competitive price. For example, if you pick up a property in a neighborhood where most houses are selling for $150,000 to $175,000, you won’t be able to sell it for $200,000.
In fact, you probably will end up selling somewhere toward the lower end of that range. To avoid excessive lag times and the drag of having to keep lowering your price (which can make potential buyers think there’s something wrong with the property and bypass it completely), set your price in keeping with the appropriate comps in the neighborhood.
You can also order an appraisal to get an objective view on the property value. Be aware that other things will come into play when you’re ready to sell.
For example, homes sell better in spring than winter. A glut of homes for sale in the same area makes it harder to get your asking price; a lack of for-sale homes will make it easier. Bottom line: be realistic about the probable sales price range before you buy your investment property.
When people are looking for houses, they usually search in a price range. Those ranges are often measured in ten- (sometimes five-) thousand-dollar increments (such as $220,000 to $230,000), so a home price at the top of a range gets as much play as a lower price.
If you decide to lower your price, move it down enough to change its range (for example, lower it to $219,000 rather than $220,000); that way your audience will be expanded to include people searching in the new range.
Pay Attention to Comps
Before you set a price, look at what other homes in the neighborhood are selling for, especially those that have similar characteristics to your investment property. The best way to do that is by viewing “comps,” data from a comparative market analysis (CMA), easily available to real estate agents. To make your own accurate comp list, include these filters in your search (on any real estate sales website):
- Within a half-mile radius from your property
- Current listings (no older than three months)
- Similar square footage (within 10 percent)
- Similar age
You can also go online and get a “Zestimate” based on Zillow’s (www.zillow.com) individual home market value estimator. (While you’re there, make sure that all the information listed is correct, since millions of people use Zillow as a starting point for home buying.)
Get Help from Your Real Estate Agent
Real estate professionals are better at pricing houses than you are. They know how to move properties fast—but are motivated to get the highest price reasonably possible because their commission is based on it. Your real estate agent is familiar with the market and can come up with a competitive price that still lets you reap some profits.
He or she will also know exactly how to stage the house for maximum buyer appeal. In addition, your real estate agent has access to the CMA and knows how to use it to your advantage.
They can also weed through the comps for currently listed properties, pending sales, and properties that have already sold (or been taken off the market) to come up with a beneficial price point.
4. Protect Your Investment
For your protection, it’s best to not purchase property in your own name, but use a holding company instead. That serves the dual purpose of shielding your personal assets from any liabilities arising from the business property (like a contractor being hurt) and protecting your investment from being lost to a personal judgment (like a tax lien).
At the same time, you can reap other benefits by creating a holding company for your investment properties, such as:
- Extra tax advantages
- Simplified accounting
- Streamlined transfers to heirs
The key to cementing that protection is to keep personal and business finances completely separate all the time. That means, for example, never using a personal credit card to buy renovation supplies at Home Depot.
If your flipping business needs cash, make a formal contribution to the company rather than paying the contractor with your personal check. In addition, treat your business like a business: run it professionally and in accordance with all federal, state, and local laws.
Keep your bookkeeping up to date. And while you can form these companies DIY, it’s better (especially if you’re working with partners) to have an experienced real estate lawyer set it up for you.
Make Sure to Be Fully Insured
A lot can go wrong during renovations, and bulletproof insurance coverage will be your first line of defense if disaster strikes. Insurance for fix-and-flip properties can be expensive, making many flipping newbies shy away from complete coverage.
The goal is to balance the cost of premiums with the benefits you’re getting: buy the right kinds and the right amount of coverage.
This can be tricky, because some insurance companies won’t want to cover vacant properties, and coverage you do find can be much more expensive than regular homeowners insurance. In addition to vacant (or unoccupied) property coverage, house flippers should consider purchasing:
- Fire and hazard coverage
- Sewer/septic backup coverage
- Vandalism and theft insurance
- Errors and omissions (E/O) coverage (a professional liability insurance)
- Workers compensation insurance (if there are employees like a building super or maintenance workers on-site)
- Flood insurance (depending on where your property is situated—like at the bottom of a hill or in a flood plain)
- Umbrella insurance (to cover anything not covered by other policies)
Some companies may combine these policies in one big policy, but make sure your coverage is as comprehensive as you need. You can look online to check out real estate investment insurance offerings on the National Real Estate Insurance Group website (https://nreig.com).
If you aren’t sure which insurance coverage your investment property needs, work with a professional who has experience with flipping. Visit the National Association of Insurance Commissioners at www.naic.org to find a reputable agent.