Have you found yourself dreamily watching house flipping shows on TV, wishing for the chance to find a home, improve it, then rake in the cash? This is a dream that a smart and ambitious investor can make a reality, with the right tools and careful planning. Our ten-step planner lays out every action you need to take to make your house flipping ambitions successful:
Step 1: Research your market.
Not every flipping market is the same. How do people behave in your local area? Do demographic trends show the population growing or shrinking? Do more people buy or rent? On properties like the ones you are thinking of, what sorts of profit margins are there? When you are new to real estate investing, sticking to the 70% rule is key. (This rule states that your purchase price plus the cost of renovations should add up to 70% of your eventual selling price.)
Step 2: Set a budget.
Look at what you can spend and still come out ahead. This budget will need to include both your purchase price and the amount you expect to spend on renovations. Don't budget all of the cash you have available. Smart investors keep a 20% contingency fund so that they can keep working even if they discover unexpected expenses during the process (they’re always there!).
Step 3: Determine your scope.
Before you start seriously looking at houses, determine how much work you are comfortable doing. Be realistic. If you do not have experience with serious structural or mechanical renovations, your first flipping house is not a good time to take these projects on. For beginners, the best houses are the ones with cosmetic issues that need to be addressed. It's a lot easier to take down some outdated wallpaper, trim some bushes and apply a new coat of paint than it is to handle larger renovation projects like roof replacement or foundation repair. Taking the time up front to create a Scope of Work (SOW) can help you ensure you aren't getting in over your head.
Step 4: Get your financing in line.
The next thing you need to address is how you are going to pay for this. If you have cash to buy a house outright, that is one possibility. However, do not tie up cash that you might need anytime soon. You could wind up with it tied up in your flipping project for longer than you expect.
A traditional mortgage is probably not an option. First, many will not fund a second home without a significant down payment. Most will not include funds for rehab projects at all. In addition, traditional mortgages can take months from application to close; while you are waiting for funding to come through, your dream rehab project could be scooped up by someone else.
Hard money loans are an option that many home investors wind up choosing for its speed and efficiency. It's a short-term loan that can be paid back quickly when your house sells.
Step 5: Interview some contractors.
The best time to find a reliable contractor is before you need them. Take some time to interview several in a range of disciplines now. You'll want to talk to general contractors as well as specialists like plumbers, roofers and landscapers. Get an idea what their rates are, as well as their general turnaround time. Having a list of providers who you feel comfortable with means that you will already know who to call when you've identified the house that you want, as well as what it needs.
Step 6: Find the home you want to flip.
Now the fun starts. With plenty of online tools and resources available, you can get nearly as much information online as you would with the old school MLS listings. Keep your filters narrow, but your search wide: you want to sign up for alerts with every listing site available in your area, but only for the houses that fit your price range, ideal neighborhoods and size specifications.
Step 7: Inspect the home.
When you find a house that fits your criteria, go take a look. Be realistic about how much work a house needs and your ability to get this work completed. Remember, this is an investment. Every decision you make should be backed by your research about what makes a winning sale and what can be managed within your budget. It is also vital to have a professional inspector look a house over before you commit to buy. They can find costly issues that you might have missed. Depending on the area you buy, you may be able to negotiate a one to two-week inspection contingency into your offer.
Step 8: Buy.
Once you've found a home that you are confident you can flip for a profit, it's time to make an offer. Be firm about your limits. You want to make sure that you can make back what you expect to spend. You will also want to make sure you have your financing lined up, run a title check and make sure your contract has the right contingencies in it.
Step 9: Do your renovations.
The home is yours! Now comes the hard work. Make a detailed plan of what improvements you plan to make, as well as a list of milestones to meet. List out each item to accomplish each day and each week. By keeping yourself strictly on schedule, you can be surer that you will be able to turn the house around quickly and in real estate, time is money!
Step 10: List the house for sale.
The final step in your flipping project is the one that is likely to be the easiest. In most cases, you will choose a realtor and allow them to handle all the details from here on out. Look for a realtor with selling experience in your specific market. They will have expertise you can rely on when it comes to pricing, photos and showcasing the features that make your house a winner. While many new house flippers think that they should handle this area themselves by either getting a realtor's license or doing a by-owner sale, the time that you save and the pitfalls you will avoid make a professional's assistance worth every penny.
Every flipping experience is a little different. Over time, it will become easier and easier for you to identify the best candidates, the amount of rehab required, and the improvements that will generate the best ROI. Be cautious and well-informed at every step to ensure that you make the profit you’re targeting on your timelines.
