Buying a house for resale has been a phenomenon in real estate investing since the end of the 20th century. Reality TV shows starring house flippers helped amplify the strategy to everyday investors around the world.
House flipping has experienced a surge in popularity over the last decade. After a
downturn during the 2008–2009 recession, the average gross profit from a single flipped house has nearly doubled in the last 10 years.
How can you best take advantage of this profit-making opportunity? Here are some tips for flipping houses to consider.
Why Increasing Property Value Can Increase Profits
The goal of a home flipper is to earn income by raising a property’s value in the real estate market. Generally, this aim is achieved by making home improvements and increasing the property’s curb appeal. The owner holds on to the property long enough to boost their equity in the house then resells it at a higher price to gain profits.
A few flippers hold on to their houses for a long time without making many improvements at all. Property values usually appreciate on their own over the years, especially in growing housing markets. Some house flippers avoid renovation costs and stay patient while their equity increases.
Still, the image of a handyman taking a sledgehammer to drywall remains the popular perception of a house flipper. Those who aren’t afraid of a little sweat may realize profits in relatively short order if they follow the right path.
Best Tips for Increasing Your ROI Flipping Houses
Before you begin your adventure, here are some tips and strategies that can help you come up with a solid plan to flip houses.
Research and Analysis
For a prospective house flipper, research entails targeting a promising housing market and identifying the right location. Professional flippers study the real estate market and review other resold flipped homes to analyze profit potential. They often seek recently foreclosed homes that won’t take as much work to flip.
Other flippers prefer distressed homes or those in need of extensive repair. In those cases, research on renovation costs and other homes’ after-repair value (ARV) can be especially beneficial. A trusted real estate agent may have easy access to that information.
Develop a Budget
One reason some house flips don’t succeed is the investor’s failure to set a realistic budget. Renovation costs involve more than contractors, materials and equipment. A well-planned renovation budget includes analyzing the costs for:
- Purchase price: How much the flipper pays for the property, including closing costs and mortgage lender fees
- Repair expenses: Renovation costs, including materials, equipment, labor and permits
- Contingency fund: A portion of the budget covering unforeseen expenses in emergencies
- Holding and financing fees: Recurring expenses like insurance, property taxes, loan interest rates, utilities and other financing charges
- Consultation fees: Fees for contractors, property inspectors, real estate agents, financial experts and other professionals
- Compliance costs: Money spent to make a property compliant with environmental and safety regulations
The budgeting phase is also a good time to set a project timeline, which helps the flipper prioritize certain repairs or issues and monitor project expenses as they come up.
Assessing Potential Profitability
As a house flipper sets up their budget, they should also estimate their potential income from the project. Some of the factors to be considered include the following.
After-Repair Value (ARV)
ARV is the project market value of the property after the flip is complete. It’s calculated using several factors, including sales prices of comparable properties, market patterns and trends and the scope of the repair effort.
Potential Profit Margin
Profit margin is the percentage profit that a home flipper will make when a property is resold. It’s calculated by dividing net profit by the total amount of investment, then multiplying the result by 100. Net profit is how much a flipper makes after deducting fees and costs from the gross profit.
Return on Investment (ROI)
ROI is similar to profit margin. While profit margin focuses on the viability of a single flipped house, ROI is applied more broadly to the entire portfolio of a house flipper’s investments. It’s a crucial figure for house flippers taking on multiple properties at the same time.
Establishing a Reliable Team
Flipping a home requires an entire task force of trusted professionals. The right team navigates through all the complexities of financing, building, protecting and selling the home. A solid house-flipping team includes:
- Financial and legal partners: Real estate agents, insurance agents, lawyers, brokers, title companies, accountants
- Renovation workers: Contractors, architects, electricians, HVAC specialists, landscapers, roofers, plumbers
- Property evaluators: Inspectors, appraisers, structural engineers
- Compliance experts: Permit specialists, surveyors, environmental consultants
This team needs to have no weak links. It’s preferable for all the professional staff to have experience in flipping houses — it’s even better if it’s the only area they focus on. Whoever makes up the team, flippers must be certain of their trustworthiness and reliability.
Renovation and Design Strategies
The goal of flipping a house is to make it as desirable as possible and increase its curb appeal. This involves renovation aspects like exterior appearance, landscaping, outside maintenance, design details and overall cleanliness. A home flipper must also address issues inside the house and come up with cost-effective solutions for those.
It’s crucial to address the most urgent maintenance matters first. Many flippers focus heavily on kitchens and bathrooms, two big residential selling points. Windows, doors, flooring and landscaping also frequently need upgrades.
Many architectural strategies are available. Most realtors suggest painting the exterior with neutral colors to broaden the home’s appeal to potential buyers. Open floor plans, natural light, energy efficiency, entryway upgrades and landscaping are other factors to consider.
Effective Marketing and Selling Techniques
A professional house flipper needs to take advantage of all the marketing strategies that make sense for their projects. Some of the opportunities they might focus on in this step include:
- Staging the home for a professional photographer
- Creating a 3-D virtual tour or walk-through video
- Using social media and online real estate platforms
- Setting up open houses or private showings
- Consulting with a real estate agent with marketing skills
The house flipper might also choose to prepare and distribute printed promotional materials.
Dealing With Challenges
Road bumps are inevitable in house flipping. Construction and renovation problems often arise, many completely unexpectedly. Structural issues, problems with electricity and plumbing and the discovery of asbestos or mold are just some of the complications that can inflate a home-flipping budget.
Away from the property, some owners have trouble lining up appropriate financing or getting the right permits. There’s also the greater real estate market to consider, as flippers often have to contend with market fluctuations and competition.
Ensuring a Smooth Transaction and Closing
Paperwork is the key to making the deal final and cannot be overlooked. Every relevant piece of documentation needs to be unfailingly accurate and timely. Final inspections should take place before the house is even put on the market.
Other administrative functions in flipping a house are common to all residential real estate transactions. These include negotiating a final selling price, filling out the closing paperwork and completing property ownership and asset transfers.
See You on the Flip Side
These tips for flipping houses have helped many professionals earn a respectable living in a still-developing marketplace. House flipping can be a profitable venture for those who are financially responsible, willing to work, adaptable and patient. If that fits your profile, you might be ready to flip.
Frequently Asked Questions
Do you need a license for flipping a house?
You don’t need a real estate license to become a home flipper. You should work with licensed professionals in construction, legal and financial areas.
How hard is it to start flipping houses?
It entails a lot of planning, prep work, money, effort and — most of all — patience to flip houses. But it can be rewarding.
What to fix when flipping a house?
You should address whatever needs are most pressing, especially structural concerns and potential dangers. Many flippers choose to work on kitchens and bathrooms first.
