These days, there are a lot of misconceptions about house flipping. That is in large part because reality TV shows do not show the whole story behind a project house. On HGTV, there are any number of shows devoted to house flipping or fixer uppers, and they often feature a glamorous version of real estate transactions that take hours instead of weeks, or homes that seem to be remodeled within days.
House flipping in real life can be quite different from what you see on TV—but that does not mean it cannot be just as rewarding and, of course, profitable. What it does mean is that you will need to dispense with some of the things you’ve seen on TV and prepare yourself to be patient, do a lot of planning, and invest your remodeling budget wisely.
Read on and we will show you what it takes to flip a house for profit along with some of the upgrades that will offer you the highest return on your investment.
It All Starts with the Right Home
One of the most important parts of house flipping is choosing the right home to flip. Often on house flipping shows, you will see investors buying a home sight unseen without much consideration of what the project will entail. While occasionally the deal dynamics will dictate purchasing a home sight unseen, most investors will inspect a home in detail prior to closing a deal.
Buying the right home requires careful diligence. When looking at a home, thoroughly assess the floorplan and the home’s overall design. If you think the home may need an addition of some sort—an expansion to make a small kitchen larger, an additional bedroom, or another bathroom—it may not be a good candidate for flipping since these types of upgrades can be both costly and time consuming and, as a real estate investor, time is money.
Be patient as you search for the right home, especially if you are a new investor. It can take a while before you find a home that is within your price range and offers plenty of potential. Decide on a few neighborhoods you would consider investing in. This will be your “farm area” and you should understand who the buyers and sellers are in these neighborhoods. The best homes already have the infrastructure and floorplan that suits the neighborhood. For example, if most of the homes that sell in your farm area are 3 beds and 2 baths, it will be easier and often more profitable to renovate a home that already has 3 beds and 2 baths, rather than expanding.
Visible Upgrades Versus Invisible Upgrades
Mechanical systems and structural issues are another thing to watch out for when searching for a home to flip. Keep in mind that in general, the visible upgrades that you make will be the ones that offer the best ROI, while invisible upgrades—like new plumbing, a new roof, or a new HVAC system—often don’t add any value at all. It’s the cosmetic details that make a big impression among home buyers. If you replace a home’s entire plumbing system or repair a failing foundation, these are expensive projects that buyers tend to overlook in favor of things like layout or curb appeal.
Upgrading to Sell, Not for Yourself
When flipping homes, it is easy to invest emotionally into the project. Everyone should take pride in their hard work; however, newer investors sometimes find themselves over-investing in their flips. This can be costly to your return on investment (ROI) and we advise new investors to avoid designing their dream house. Always remember that the project is about creating profit first and foremost.
This means that you should go into the project with your ARV (after repair value) already laid out and stick to this so that you don’t end up going over budget on repairs and renovations.
While you may love certain styles, colors, or amenities, avoid defaulting to your personal style or desires. For example, you may think an en-suite master bathroom is a necessity, but buyers in your farm area might rather have a finished basement. A boldly tiled red kitchen backsplash may be the height of fashion, but to many others, it may be a sign that they will need to redo the backsplash shortly after moving in.
Do Your Buyer and Demographic Research
Another thing often skipped over on HGTV is the background information that should be gathered prior to purchasing a fixer home. Research comparable homes in your farm area to gather this information. From the data, you will learn:
- The demographics of people purchasing homes in your target neighborhood.
- How much you can reasonably expect to sell your project home for.
- The types of upgrades that see the highest return on investment.
For example, in an area that is popular among older, retired people, retirement-friendly upgrades like bathroom hand railing or wheelchair and walker accessible may be quite popular. However, in a neighborhood where young people are purchasing family homes, buyers could be looking for beautiful backyards where their children will spend their afternoons playing. If you are seeing trends among comparable homes—like newly upgraded wood flooring featuring prominently among many of them—then these are the kinds of upgrades you should consider.
Which Upgrades Will Improve Your ROI the Most?
This can vary from area to area—which is why it is so important to research comparable sales, as discussed above—but in general, there are certain upgrades that tend to offer a high ROI no matter the location.
- Attractive front doors and garage doors add lots of curb appeal, and they make a great first impression when buyers first arrive to view the home. Sometimes a new coat of paint in a contrasting color from the home’s siding is all you need, and sometimes you may need to replace front doors or garage doors. Either way, this is an inexpensive project that can add a lot of value.
- Kitchen remodels are always a good idea since this is one of two rooms that buyers tend to focus on when they are touring a home. Cosmetic upgrades like new paint, a new backsplash, or new flooring can really help to increase value. Major kitchen upgrades like replacing cabinetry can also offer you a return on your investment, but the expenses are higher, so the return may not be quite as large as those gained through simple cosmetic upgrades.
- Bathrooms are the other area that buyers pay a lot of attention to. Focus on things like refreshing grout in tile work, adding a new shower door if the existing one is old or dated, or replacing the toilet and sink. These are all inexpensive upgrades that do wonders for the final sale price of a home.
- Simple exterior upgrades can make a big difference. This does not mean you should build a deck, but it does mean that you can see a significant return on things like new shutters or updated landscaping featuring flowers and healthy plants. You can also dress up the outdoors by installing outdoor lighting, or by replacing things like doorknobs, the mailbox, and other details to help give the property a finished, polished look.
What often distinguishes an experienced investor from an inexperienced investor is the understanding of which upgrades are necessary, and more importantly, which upgrades are not. Cabinets can be painted over rather than replaced and wood floors can be refinished to bring back some shine. An updated trim kit can freshen up a shower or tub, without requiring an expensive replacement.
Remember, the realities of house flipping are quite different from what you’ll see on TV. Many investors turn a tidy profit from flipping homes (the average gross margin is about 40%!) but doing so requires that you invest your renovating budget wisely. Approach the process with the mindset that less is often more in order to keep your project running smooth and under budget and you will be on your way to becoming a great real estate investor.
