Want to know how to flip a house for a huge profit? Join the crew! Research from Trulia shows that flipping houses has been on the rise across the nation. Just over 6% of all home sales were house flips in 2016. That’s the highest percentage in a decade! (1)
All you have to do is watch an episode of any popular house-flipping show to get why it’s so appealing. A thirty-minute segment makes it look pretty easy to flip a house and make a huge profit. Seems simple enough, right?
What Is House Flipping?
House flipping is when a real estate investor buys houses and then sells them for a profit. In order for a house to be considered a flip, it must be bought with the intention of quickly reselling. The time between the purchase and the sale often ranges from a couple months up to a year.
There are two different types of house flipping:
- An investor buys a property that has potential to increase in value with the right repairs and updates. After completing the work, they make money from selling the home for a much higher price that what they purchased it for.
- An investor buys a property in a market with rapidly rising home values. They make no updates, and after holding the property for a few months, they resell at a higher price and make a profit.
We’re mainly focusing on the first definition of house flipping, providing you with tips to help you choose a property, make renovations, and sell the smart way.
Is Flipping a House a Good Investment?
Flipping a house may sound simple, but it’s not as easy as it looks. Let’s be real: A house flip can either be a dream or a disaster.
Done the right way, a house flip can be a great investment. In a short amount of time, you can make smart renovations and sell the house for much more than you paid for it.
But a house flip can just as easily go the wrong direction if it’s done the wrong way. We’ve all heard house flipping horror stories—the ones where what seemed like a good deal turned into a house with a shaky foundation and a leaking roof. At the end of the day, a house flip may not make you money. It actually could cost you thousands.
If you decide to flip a house, you certainly don’t want to lose money. You want to make a wise investment and reap the rewards.
How to Flip a House in 5 Easy Steps
Step 1: Finance the House Flip With Cash
House flipping can be a risky endeavor, and it’s easy to see why adding debt into the mix only makes it more dangerous. Here’s why we always recommend you flip a house with cash:
- First, flippers who take on debt for their purchase pay interest for months, which only increases the amount they have to sell the house for just to break even.
- Second, using debt to finance a flip can cause you to act out of desperation. If you can’t get the house sold, for example, you’re likely to lower your price and cut your profit. Cash-only flippers can wait out a slow market.
Let’s imagine at a real-life scenario: You purchase a house to flip for $130,000. You finance an additional $30,000 for renovations and hope to sell the house for $200,000 to keep a nice profit. Sounds like a great plan, right?
All seems to be going great until an unexpected repair costs an extra $2,000. And then renovations take six months instead of four, costing you an extra $3,000. When you list the home, it sits on the market for a month before you’re forced to drop the price and sell it for $185,000. A month later you close and get your payout.
Here’s how that breaks down:
Selling Price: $185,000
- Purchase Loan: $130,000
- Renovation Loan: $33,000
- Estimated Interest Paid Over Eight Months: $4,240
- Repairs: $2,000
- Closing Costs: $15,000
Your Profit: $760
Do you really want to make $760 from eight months of work? That’s a house flip gone wrong!
If you had flipped the house with cash, desperation wouldn’t have forced you to sell low. With the power to wait out the slow market and save all that money on interest, you could have pocketed a $20,000 profit on the same deal!
Unless you can pay cash, the financial risk of house flipping is just not worth it.
Step 2: Know the Market
A lot of house flippers get excited about their next project and can ignore this less glamorous side of the business. If you don’t have a good understanding of the market and real estate trends in your area, though, you could run into the following issues:
- You don’t know if you’re actually getting a good deal on the house you’re buying. Dave recommends buying investment real estate at 80% of market value, minus the cost of repairs.
- You can’t accurately identify the home’s potential value. Your vision for the home must fit the reality of the neighborhood and the ability of the neighborhood’s residents to afford the home you create.
- You don’t know how to price the house. If you’ve bought a house in a neighborhood of mostly $130K–150K homes, you’ll want to price your flip at the lower end of that range when it’s time to sell.
So how do you get a deep understanding of the market that makes for a successful flip? Find a real estate agent with years of experience in your area. Your agent can help you target your home search to the right neighborhoods based on your price point, budget for renovations, and desired profit.
You may think that house you found online seems like a steal at $145,000 and has lots of potential. (Just think of what you could do with that kitchen!) But if the nicest and biggest house in the neighborhood sold for $160,000 three months ago, any renovations would probably outprice the neighborhood. And you’d be stuck with a house you couldn’t sell.
It pays to work with a real estate agent who knows the market like the back of their hand. And then when you’re ready to sell, your agent can use their knowledge to price the house competitively so that you get top dollar. Working with a rock star agent can help you make a smart investment that keeps your finances on track.
Step 3: Make a Budget for Your House Flip
Don’t wait until after you purchase an investment property to make a budget. Know your price range for purchasing a home, making any repairs, completing renovation projects, and selling it before you seal the deal.
Make sure to identify any cosmetic projects as well as any expensive overhauls like plumbing or electrical problems. If you don’t have a background in construction, a contractor can tell you what needs fixing and how much it will cost. Surprise repairs can make or break a flip, so be sure to do your homework here.
When you’re under contract, use your inspection period to get a home inspection and any other specific inspections you may need. It’s always better to spot problems on the front end than be surprised down the road.
Step 4: Invest in Smart Renovations
Dreams of gleaming hardwood floors, on-trend light fixtures and fabulous kitchens with professional-grade stoves can quickly cause your renovations to get out of hand. That’s why it’s important to know your budget upfront and then make sure your updates stay on track and actually boost the value of the home.
Don’t forget that big renovations—like kitchens and bathrooms—can easily make or break your flip. Take the kitchen, for example. According to the 2017 Cost vs. Value report, the average amount spent on a major kitchen remodel is $62,158. The average recouped is only $40,560. (2) That’s not the kind of ROI you want to see when you’re flipping a house.
If you’re renovating a house that you hope to sell for $220,000, don’t put $60,000 into custom cabinet installations, high-end finishes and that dream kitchen island! Instead, consider a smarter renovation that focuses on refinishing the existing cabinets, adding granite counters and replacing appliances. You’ll spend less, with a lot higher likelihood of recouping your costs.
While you might invest in a couple big updates on a flip, don’t underestimate the power of small tweaks. Things like a fresh coat of paint, updated hardware and new landscaping can make a huge impact!
Step 5: Get Guidance From a Local Real Estate Expert
Can you make money from house flipping? When it’s done the right way, you definitely can! In 2016, flipped homes sold for a median price of $189,900 with a gross profit of over $60,000.(3) Keep in mind that the gross profit doesn’t include the amount spent on repairs and renovations. But if you’re able to flip with cash and stay in your budget for renovations, it’s completely possible to make a great return on your investment!
The key to flipping a house successfully is to do it with cash, make a smart investment in the type of house you purchase, choose renovations in your budget, and sell it quickly. Having a real estate agent on your team helps make all of that happen!
Whether you’re buying a house to live in for years or to flip in six months, a quality real estate agent can provide the market knowledge and practical guidance you need to make a smart investment.