House flipping skyrocketed after 2008, when millions of homes went into foreclosure and investors scooped them up for pennies on the dollar. Then, within a few years, came the resurgence of the TV shows (there are dozens of them now) where a house was bought, fixed, and flipped in under an hour—or so it seemed.
Those shows sparked flip excitement, and suddenly everyone who’d done some puttering around the house was looking for property to flip in the hopes of scoring huge profits. Most of them lost money and got out.
Some people stuck around, learned a lot, and slowly became successful real estate investors. With lessons learned, you can start investing in flip houses the right— and profitable—way from the start.
It looks super easy on TV: buy a house, slap on some new paint, and sell it right away for a huge profit. They make it look fun and stress-free, but that’s TV; the real-life version is very different.
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Two Ways To Flip Houses
There are two basic types of house flipping:
- Fix-and-flip: You buy a low-priced fixer-upper, make some key improvements, and sell it for a profit.
- Live-in and flip: You buy an underpriced property in good structural shape, spruce it up over time while you live there, and sell when the property value has increased.
Most investors go for the straight fix-and-flip—it’s what all the shows are about—and this chapter will focus mainly on this strategy. This is not an arena to enter casually (especially with gargantuan dogs like Zillow joining in), but it is possible to collect big profits with the right approach.
If you’re not in a rush, and the property you choose doesn’t have any issues that make it uninhabitable, the live-in and flip strategy may work better for you. Both strategies come with profit and loss potential, but you can tilt the odds in your favor by doing your homework before you buy.
There’s a third way to invest in flip properties, but it’s less popular because you have significantly less control over the outcome. With a hold and flip investment, you buy an underpriced property in an expected up-and-coming neighborhood and hold it until property values increase. Without the time to wait or the means to write it off if the increase never materializes, this would not be a good investment strategy.
If you’re handy around the house and love DIY home projects, a fix-and-flip investment could be perfect for you. These projects need to move quickly to be profitable and require a major time commitment (even when you don’t plan to do most of the work yourself).
If you love a challenge, have good credit and a pile of cash, and know your way around tools, this could be an ideal investment opportunity for you. Expect your first flip to be a learning experience rather than a profit bonanza (practically no one makes a lot of money on their initial flip). Pick up as many skills and make as many connections as you can to make your second flip a winning investment.
2. Live-In and Flip
With this strategy, you buy a house to flip, and live in it while doing the repairs. This can be a great way to get your feet wet in the house-flipping space because it gives you more time to get things done. Plus, when you plan to live in the house, it transforms a lot of the finances normally associated with house flipping.
For example, you can get a regular home mortgage and use regular homeowners insurance, both of which can be much less expensive than if you were doing a standard fix-and-flip. Plus, if you live in a home for at least two years, then capital gains from the sale may be completely excluded from taxation.
That means taxes won’t eat a huge chunk of your profits, leaving you with more cash to buy your next hold-fix-flip.
The Idea Behind House Flipping
The idea behind profiting from house flipping is the same as with other types of investments: sell it for more than you paid, and pocket the difference as profit. According to ATTOM Data, the average house-flipping gross profit (before any expenses were taken into account) for the second quarter of 2018 across the US was $65,520.
That sounds like a lot, but it’s down about $4,000 from earlier in the year, and the numbers vary widely depending on where you are. Keep in mind that a lot of people lose money or break even when they flip a house, and (again) that’s before taking their expenses into account.
There are a lot of factors that play into this, but the most important is choosing the right property, followed closely by having an accurate flip budget.
The 70 Percent Rule
To limit the financial downside while maximizing your profit potential when you flip a house, you need to know your costs before you buy a property. To start, you need to know how much the property is really worth so you don’t end up overpaying.
Then, you need a realistic estimate of the repairs and renovations the property needs to be attractive for buyers. Armed with that information, you can calculate the perfect price for your flip property by using the 70 percent rule.
The 70 percent rule is a guideline to help real estate investors make the best deals. According to this rule, the purchase price shouldn’t be more than 70 percent of the after-repair value (ARV, how much the house should sell for after all the repairs are made) minus the total cost of those repairs.
The Need for Speed
One key to maximizing profits involves what happens in between the purchase and the sale and how long that takes. In house flipping, speed is your friend on the selling side. The longer you hold the property, the smaller your profits will be. That’s because you’ll still be paying all the costs associated with holding the property, which could include:
- Mortgage interest
- Property taxes
- Homeowners association fees
The sooner you sell, the sooner you shed all of the costs that are eating into your profits. And the longer the house is on the market, the more likely you’ll have to drop the asking price, which deals another blow to your profits.
Avoid These Red Flags
No matter how much you like a house or think it could bring in big money, avoid buying potential flip properties that have even one of these red flags:
- Old or damaged wiring
- Lead paint
- Roof issues
- Structural issues (such as a cracked foundation)
- Termite damage
Any of these issues requires a huge investment of time and money, two things you don’t have to spare when your goal is to flip the house.
When Inspection Isn’t an Option
Sometimes it’s just not possible to get an inspection before you close on a house, and that’s more likely to be true with distressed properties bought at auction. In fact, in some cases, you won’t even be able to see inside the house before you buy it.
This increases the risk that you’ll end up losing money on the deal, since you won’t know what’s wrong with the house and won’t be able to budget accurately for renovations and repairs. Without knowing the real value of the property, it’s difficult to know whether you’re paying a reasonable amount for the house.
New home flippers should avoid buying any properties without an inspection. After you’ve had a few successful flips and built a solid flip team, you might be willing to take the gamble.