Created on Thursday, June 10, 2021
Updated on Thursday, June 10, 2021
by Land Century
We’ve put together the ultimate guide to flipping houses to help you get your start on the property ladder. In this article, we cover all the basics from choosing the property to the final sale.
Investing in a house is a huge decision, but one that can have a huge payoff (literally) if you know what you’re doing. There’s a lot that goes into flipping a house, however, so it’s not something you should commit yourself (or your money) to before you know what’s involved.
That’s where this article comes in.
To help you get started in the world of real estate investment, we’ve put together an informative guide to flipping houses. Keep reading to learn more about everything from choosing the perfect place, securing a loan, carrying out the “flip”, and finalizing the sale.
Before we go any further, we should probably clear up what exactly “flipping houses” means.
What is House Flipping?
This is the first question you should ask before you even think about investing in a property.
House flipping is when you buy a property that is also a project, which is usually when you find a house that is older or a bit outdated and renovate it into a modern home, before hopefully selling it for a higher price. You can essentially take any house that needs a little TLC or its layout redesigned and flip it, but the goal of house flipping is to make a profit.
This means that the typical practice of house flipping involves finding properties that are available at low cost as this will make your profit margins much wider when you come to sell. As explained in Forbes, “Rather than buying a property to live in, you are purchasing a home as a real estate investment.”
Another essential element of house flipping is the speed with which you can get through the renovation process, as the changing nature of the property market means the sooner you can sell the house and make your profit, the better.
Now you know what house flipping means, let’s get into it.
Educate Yourself on Flipping Houses
The more you educate yourself and the more you know about flipping houses, the better prepared you’ll be to take on a project of this size. You’ll also be better equipped with the right knowledge you need to make smart investment decisions that result in a profit.
Not having enough knowledge is actually one of the main mistakes that can make a house flipping a flop, as it means there’s less chance you’ll know how to choose the right property, how to actually carry out the flip, and how to figure out all the legal stuff including the sale.
Why Flip Houses?
To put it plainly, flipping houses is a great way of making a large sum of money in one fell swoop. When you compare it to a buy-to-let situation, sure, you’ll have a regular and consistent inflow of cash, but it doesn’t leave you much room to reinvest your profits quickly.
You could play the long-game, buy and rent a property without flipping it and eventually sell it at a later date when the price of houses has gone up, but when you flip a house you reap these rewards much sooner as you could sell again within as little as just a few months.
This still doesn’t make it the right choice for everyone, though.
Flipping houses as an investment model isn’t going to work in every situation, but it generally can in the following circumstances:
- No day job: If you have or want to quit your day job, you could use the profits from flipping houses to pay yourself a salary, only needing to complete a few flips each year to tide you over between projects.
- No deposit: Having enough money saved for an initial deposit is one thing, but it doesn’t leave you with many options after you’ve used it to buy a property. Flipping a house would allow you to make a profit, which you could put down on a buy-to-let property. This leaves you with the money you first invested to reinvest in another flip.
How to Make Money From Flipping Houses
It’s a fairly easy concept to understand, but let’s put this into an equation for you.
Profit = Sale Price - Purchase Price - Costs
For example, if you bought a property for $100,000, spent $20,000 on the costs of renovating the property, and sold it for $150,000, you would make a profit of $30,000.
Calculate Return on Investment
You can also calculate your return on investment (ROI), which is slightly more complicated.
Profit / Cash Invested = ROI
Using the above example, the cash invested was $120,000 and you made a profit of $30,000, so the calculation would be as follows.
$30,000 / $120,000 = 0.25
As ROI is given as a percentage, this would mean you achieved a 25% return on your investment.
Rule of Thumb
So, now you know how it all works, but how do you work out if a property is a good investment?
There’s no way to give a definitive answer to this, as it will depend on the sum you’re hoping to raise and whether you’re planning to reinvest the profits you make from this investment.
There is a general rule of thumb that a lot of property flipping investors stick to, however, which is an ROI of 20%. It’s a good ROI to aim for as it means that even if you misjudge your return and miss the mark by 10%, for example, you would still be making a profit.
If you’d bought a property on the premise of a 10% ROI and the project doesn’t go to plan, you could end up making no profits, or worse, a loss, meaning you’ll have wasted both your time and money. That’s why a 20% ROI is considered a good rule of thumb to aim for.
If you want your house flipping projects to be profitable, another important part of the process is carrying out market research on the area you’re looking to invest in.
You’ll find that the cost of houses varies between different locations, so in certain areas, buying a $250,000 house would be a serious bargain, whereas, in others, that same $250,000 would be considered an extortionate amount. You’ll need to know about the standard sale prices in different areas in order to predict whether you’ll make a profit.
Here are a few questions you should ask yourself before buying in a particular area:
- How much are homes in this area typically selling for?
- How much are bank REOs selling for?
- How quickly are properties in the area selling?
- What size and types of properties are selling the fastest?
Like we said earlier, the more you can educate yourself about the market you’re planning to invest in, the more equipped you’ll be to choose a solid investment.
Choosing the Property
Unsurprisingly, one of the biggest determining factors in the success of a property is choosing the right property in the first place. This means weighing up a number of considerations like the type of property, how big it is, and the local area.
As a beginner, this is one of the hardest hurdles, but if you follow the advice in this guide, you’ll be going into the search with a much better idea of what to look out for.
The area in which a property is situated plays a large role in the sale price of the property, so when looking for houses to flip you should start by surveying the different area possibilities.
Have a talk with one of the local estate agents in any of the areas you’re considering, as most will probably be happy to let you know which areas sell quickly and where there is the highest demand, which can help you pinpoint some house flipping hot spots.
Knowing the area will also hint at who you could ultimately sell the property to, which can be useful information for you to know. For example, a property in a friendly neighborhood area with good local schools will be more likely to appeal to a family of owner-occupiers, which tend to sell quicker because people fall in love with the idea of their future home.
But in a neighborhood that’s known for its properties being bought up by investors, you might end up selling to another investor who will be chasing a better bargain, meaning it will be harder for you to sell it for the asking price and could potentially put a dent in your profits.
The property itself is also, obviously, a huge part of finding the perfect place. Not only does this determine the scale of the project, but it will also determine what changes you can make to increase the value of the property, such as adding an extension or redesigning the layout.
Take a Victorian house, for example. These are typically great houses to flip as the large rooms leave loads of potential for changing up the layout, such as splitting one of the rooms to create an additional bedroom, or by knocking through one of the downstairs walls to create a gorgeously open-plan space where the new owners can entertain their guests.
Ultimately, the best type of houses to flip are the ones that will have the largest pool of potential buyers when you come to sell it. Try to pick a place that appeals to both first and second-time buyers, as by appealing to both sides of the market, you’ll be more likely to sell.
Funding the Flip
Whatever finances you’re using to fund the flip, this is something you need to seriously think about before you invest in any property. Making the wrong decision at this point could cause the flip to be a total flop, causing you all sorts of financial problems later down the line.
Here are some of the main ways you can fund a house flip.
If you have it, one of the quickest ways to complete a flip is to use cash, but this means you’ll have a large sum of money that’s tied up in one investment. You could potentially lose out on another opportunity that comes along, however, it is an interest-free way to invest in the flip.
This means that if you’ll have only been earning the minor amount of interest you accumulate from keeping these funds in a bank account, you won’t miss out on much.
There is the option to apply for a conventional loan to finance a property flipping project, but these can be difficult to obtain for houses that are not in a liveable condition, which is the blueprint for some of the most desirable property investment opportunities.
Home Equity Loan
Having a large amount of equity in the home you reside in can be a useful thing if you’re looking to fund a house flip, as you can sometimes borrow against this value in the form of a home equity loan or a line of credit, otherwise known as a HELOC.
To see if this is an option you can pursue, speak to your lender or credit union.
Hard Money Lender
A hard money loan is “a type of loan that is secured by real property”, often considered a last resort option or sometimes known as a “short-term bridge loan”. Essentially, this is a loan from a private lending company or an individual rather than an official bank loan.
It relies on your collateral instead of your financial position, often meaning that there is a shorter time frame in which to repay the money, therefore is only a short-term option.
Making the Profit
The three most well-known variables when it comes to making a profit on a house flipping project are sale price, total costs, and purchase price. There’s a lot more besides that goes into it, so this next section will take a look at some of these factors in closer detail.
Whilst there are certain things you can do to try and add value, all properties have a market price, so the sale price is one of the factors you have the least amount of control over.
Ways to increase the sale price include adding extra amenities, building an extension on the property to make it a bigger space, or renovating the property to a higher standard. However, these all incur their own costs, which will eat into your final profit margins.
For this reason, it’s important to make all these calculations before you put your money where your mouth is to make sure that you feel confident that the property will make a profit. This means estimating the sale price before you even begin! While it might sound crazy, this can be as simple as finding out what similar houses in the same area sold for.
If there’s nothing close to a match of your property, you can compare a few different options and work out an average for the area, then work out where yours would fall within it. Try to find properties that were sold in the last 6 months or so for more accurate findings.
We just briefly mentioned it, but the costs of flipping a house are so important it’s worth taking a look at this as an individual factor in the process of making a profit on a house flip.
There are several costs involved in flipping a house, and the bigger they are allowed to get, the bigger they will eat into any profit you could potentially make. Here are the 5 main costs associated with flipping a house, although you should watch out for certain hidden costs too.
Stamp duty is one of the charges you have to pay when purchasing a property related to the transfer of assets or property. The amount you will have to pay in stamp duty costs can vary depending on the cost and type of property you’re buying.
Seeing as there’s so much involved in house flipping, there’s also a lot of people involved, meaning there are professional fees to cover in the cost estimates for the flip. This includes:
- Solicitor’s fees times two - once when purchasing a property, and once when selling.
- Estate agent fees (if you choose to sell through an estate agent).
- Broker fees cover the costs of arranging your finance, although you may choose to use cash or go through a direct lender instead.
- Survey fees if you choose to have any done on the property.
As you can probably guess, these professional fees can start to add up quite quickly, so make sure you set aside enough cash to pay them before you get started on other work.
Certain financing options can incur costs of their own, like bridging finance, for example. This includes fees and interest to pay, so you’ll need to calculate this at the start and factor it in.
Another big one is the cost of refurbishing the property, as a complete flipping overhaul will absorb most of your investment (besides purchasing the actual property itself, that is).
It’s also one of the easiest costs to let run away with you, as things begin to add up fast when you’re flipping a house, and it can be tempting to push the budget to its upper limit in the hopes of securing a larger profit at the end of the flip. If you have any builder buddies, it might be worth asking them to check out the property with you as well to get their advice.
Having a home survey done on the house, although an added upfront cost, can be a good idea when you’re flipping a house, as it will flag up any structural issues or works that need to be carried out, which you can then use as a basis for the estimated refurbishment costs.
Holding costs are essentially the running costs, as these cover the project while it’s in progress. The ownership costs include:
- Utility bills
- Council tax (unless the property is in an area where this does not apply)
Whilst these may not be the biggest costs you’ll incur, they still need to be budgeted for.
The third way to try and maximize your profits is to set yourself an upper limit for the purchase price so you avoid properties that will be difficult to increase the value on.
You can figure out what your upper limit should be in terms of making a profit by rearranging the earlier equation:
Profit = Sale Price - Purchase Price - Costs
And changing it to the following formula:
Sale Price - Costs - Profit = Purchase Price
Sticking with the example from earlier, if you’ve found a property that will sell for around $200,000 after spending $50,000 on refurbishing it, you should look for an investment opportunity around the $120,000 mark, as this will make you a 20% ROI profit of $30,000.
Paying a price that is any higher than this figure will reduce your profits, whereas paying less can see you making even more money than you had hoped. However, it can be difficult to get the purchase price down to a point where you could make a profit of this size.
Renovating the Property
The largest task in a house flip is renovating the property, as there’s a lot of work involved.
Now is the time to call in any favors you have with any builders or contractors you know in your social circle. Even better if you can carry out some of the work yourself, as this can massively help to reduce costs and the complications that come with renovating a property.
Get an Inspection
As we’ve already mentioned, a home inspection is a must if you’re buying a property to flip and sell on. This will give you a more detailed breakdown of any work that needs to be done on the property, and any urgent issues or repairs that require your immediate attention.
Create the Scope of Work
Once you have the results of your home inspection or survey report, you can start to create the scope of work, which involves costing up each area of work that needs to be carried out.
This should be a detailed list of everything that needs to be done, and you can work with a contractor to determine costs for the work, as you won’t want to realize halfway through the refurbishment that you’ve run out of money for the rest of the work to be completed.
Main Contractor or Individual
Unless you’re planning on carrying out the work yourself, you will need to hire a contractor or company to do the work for you. However, it can be hard to find a decent contractor that you can trust not to rip you off or fudge you on the dates they’re aiming to complete the work.
If you have friends who are also property investors, they might be able to recommend a good contractor. Alternatively, you can hire individuals to carry out the work on your property, allowing you to build up a list of reliable workers who you can hire for future projects as well.
Make a Timeline
The goal with house flipping is to complete it with a quick turnaround, so creating a timeline for scheduled renovation work can help the process go a lot smoother and faster as well.
If you chose to hire a contractor, they can help or complete this for you, but if you’ve gone with individual contractors and you’re project managing the flip yourself, you’ll need to make sure you’ve created a schedule that’s not unrealistic but not too generous, either.
Click here to see a great example of a timeline for a complete house renovation project that you can use as a guide to creating your own.
It’s always best to take a flexible approach to any estimated completion date, as building work can often end up taking longer than predicted if there are any issues that you run into.
We’re all guilty of taking our eye off the ball from time to time, but if you do this during a house flip, you could be looking at serious delays. If you’re never around, the builders you’ve hired could be working at an unacceptable pace or could prioritize other work over yours.
Especially if you’re project managing the flip, you need to try and make sure you’re constantly popping by the property to check on how the work is progressing.
Nothing can slow up a house flip or cause building work to come to a grinding halt like unsettled payments, so scheduling them ahead of their due date will ensure there are no hold-ups due to not paying fees on time.
With that being said, never pay for work that hasn’t actually been completed yet. You can pay for the cost of materials upfront, but if it turns out that you’re not happy with the work once it’s been done it will be much harder to convince the contractors to change it if they’ve already been paid for it.
Make the Sale
The final stage of flipping a house is selling it for a profit, so there are a few tricks of the trade we’d like to share that can help you get a faster sale.
Stage the Property
This is the act of strategically placing furniture, art, trinkets, and homely items around the house to make it appeal more to potential buyers. The goal is to make it look more lived in, so the prospects can imagine themselves living there, and to show off its potential.
If you have a better brain for business than you do an eye for aesthetics details, you can hire a professional staging company to come and transform your property into a home by filling it with hired furniture. To keep costs to a minimum, you can also tweak minor changes like a new set of curtains or a vase filled with flowers set out on the table. A tray of freshly-baked cookies wouldn’t hurt, either.
Advertise Online or Through an Agent
When you come to start thinking about selling the property you’ve worked so hard to flip, you’ll probably be looking at one of two main options: to advertise online or to try and sell the property through an agent.
If you decide to use an agent, do your research and make sure you choose someone who’s going to do the best job of selling your property for the best price. Agents local to the area will often have a better knowledge of the buying and selling trends, which can be useful.
For those who are flipping a house on a budget, advertising the property online yourself using one of the online property selling websites is a cheaper alternative to an agent.
Setting the asking price for the property you’ve flipped can be a difficult task.
On the one hand, you want the price to reflect all of the hard work you’ve put into flipping the house, and you’ll likely want to make as big a profit as possible. On the other hand, you need to keep the price to something reasonable and realistic for the area you’re selling in.
Think about whether you care more about maximizing profit or completing the sale faster, and if the answer is the latter, you might want to make your pricing more competitive.
The people of America have gone flipping crazy, with the number of houses being bought to flip increasing by 5.8% from 2018 and 2019, and rising further again in the last two years.
Flipping houses is a big commitment though, and it’s a challenge not everyone can commit to. If you do, we hope that this article has given you enough information to continue your market research and to decide whether this is a viable investment opportunity for you.