So, you want to be a successful house flipper? Then, knowledge about the business and adequate preparation is a must before you start. In fact, by learning just a few important items, you can already avoid first-timer mistakes. The better prep work you do, the higher savings you would likely make by avoiding potential problems in your project.
You can start with these few steps to start your house flipping business:
1. Get Educated
- It’s not just about finding a cheap house online, buying it, and then selling it with a huge margin. If the business were that simple and easy, everybody would be house-flipping billionaires. You need to learn about many things even before you go out and start looking for homes. But what exactly do you need to know?
- Get a good grasp of the ins and outs of your local real estate market because each market is unique. Where do most people aspire to live at the moment? What types of houses are currently popular? Remember, a quick turn-around is crucial to your success.
- Be an expert in the field of home financing. Will you use cash to buy a house? Or will you acquire it through a home mortgage loan, or maybe take out a HELOC? Make sure that you know the intricacies of home financing before you apply for a loan or make an offer on a house.
- Never skip the tough questions as you start your business. Compute how much you can afford, and if your deal doesn’t go the way you planned it, how much loss can you absorb?
- Learn and practice how to negotiate effectively. The less money that you sink into a house project, the bigger is your potential revenue on the flip. Your good negotiation skills will come in handy when you haggle with contractors, suppliers, and other workers.
- Look around for a good deal. Do your homework on how much it costs to landscape, repair plumbing and electrical jobs. For example, have a base figure on how much you should pay to recarpet a 1,000 square foot home. You have to know these details to increase your chances of getting the best deals possible.
- Build a wide network and keep building it up. Start talking to potential buyers even before you begin looking for an investment house to flip. Relationships matter – so be purposeful to build relationships with future buyers or agents. If you have a buyer waiting on the side when you purchase an investment home, you have a huge chance of selling the house as soon as you complete the updates.
- Start synergizing contractors that you trust – plumbers, electricians, landscapers, house painters, etc. You will definitely need the services of one or all of them when you need to update your investment home. Working with service providers that you trust will save you a lot of stress and more importantly, money in the long run.
- Check which home improvements give a home’s value the biggest boost so you can focus on these items first. These could be giving the kitchen a make-over and installing new kitchen appliances, giving the exterior a new coat of paint, building more closets, making the deck cozier, and adding green technologies. You should avoid home improvements that do little to push the selling price up like installing a pool, putting a whirlpool bath, adding a sunroom to the house, or installing decorative lights.
2. Create a House Flipping Business Plan
If you seriously want your house flipping venture to have a structure and order, then you should make a house flipping business plan. It should contain clear goals, realistic strategies, analyses, and funding methods. You don’t need to have a business degree – if you have a well-defined business plan, determination, and an impeccable work ethic, you’d have success.
A comprehensive fix and flip business plan should be enough for lenders to take you seriously. It will also help you plan for a good exit strategy. You’d be able to put your profit objectives in writing.
Your business plan will remind you to conduct risk management and watch out for potential losses such as going over your budget or delays in your timeline.
Naturally, you want your house flipping business to generate a profit for you. Then it’s important that you know what items should appear in your business plan.
3. Goal Summary
A goal summary will give you focus because you can identify the objectives of your house flipping business more clearly. For some lenders, investors, and partners, this is the part of the business plan where they stop reading, so be sure to make a strong and compelling statement that would capture the essence of your goal in a concise manner.
Your goal summary should contain your specific goals for going into the house flipping business and how you intend to achieve them. A good summary should be 1 to 2 paragraphs in length that emphasizes the most important aspects of the plan and includes how you intend to generate income and the strategies you will adapt.
4. Market Analysis
A market analysis is your snapshot of the area where you properly identify the properties that will provide the best value or potentials.
It will compare houses that are similar to the types of properties that are on your crosshairs for flipping. By doing a market analysis, you can purchase properties at their fair prices and do the appropriate rehab to meet your ROI. Here are the components of a market analysis:
- Recent comparable properties (not older than 6 months)
- Demographic information (such as from the Census Bureau)
- Price trends of real estate in the area you’ve selected
- Development plans in the area that are coming soon
- Turn-around time or the number of days a property stays on the market before a buyer grabs it
5. Funding Sources
You must specify in your business plan how you will fund your business. Will you be using your own cash savings, or will you rely on financing sources? If you’re going to opt for financing, your overhead costs will increase as well as your timelines.
However, having a steady source of funds is good because you can be more aggressive in terms of doing simultaneous house flipping projects in several locations.
One of the things you should carefully consider is the balance between paying interest for borrowed funds and the resulting leverage you can get from it. Lenders will charge points and interest and will also add to the number of days before you can close a property. However, by using loans, you can free up your cash and use it for other projects. Financing will also help you acquire properties you may not have been able to purchase if you’ve relied exclusively on your cash on hand.
Take the case of a flipper who has $100K in savings. Imagine if that flipper spends his $100k to purchase and renovate a single home, then sells it for $125K. He just made $25K or 25% and did not have to pay a single cent in interest. Isn’t that a good financial model?
Now, suppose that flipper followed a different approach with his $100K. Instead of paying outright cash for a single project, he uses his savings to make repairs and a small down payment on several properties while financing the rest. He then does 5 flips just like the project described above. Each of them required a $20K in down payment and repairs but he takes the rest of the purchase from his loan.
Using average rates, the financing costs will run about $6K per project or a total of $30K (more than the $25K profit in the scenario above). But if you look closely, you will see that the house flipper made a profit of $125K before deducting the $30K financing cost. So, you can see that he made $95K, which is more than double the income he would have generated using his savings alone. Leverage broadens the capacity of the flipper even up to 4x more and gives him the prospect to earn a lot more
Financing options for a fix and flip investors include hard money loans, investment group loans, business credit cards, and rehab loans. There are investors who choose not to use financing and instead use all cash to fund the projects. That is perfectly alright as long as you have the money to do it. You can also combine the two avenues so that you have your cash and financing fund sources working together at the same time.
6. Build Your Team
When you are comfortable with your cash or financing situation, the next step is building up your house flipping team. The team will help you find, fix, and push the property, using their combined experience, knowledge and wisdom to do it much faster.
Even if you’re an experienced realtor or businessman, you cannot do everything alone. Having your team of experts will help you be more productive and get more things done. Plus, your team will also be your subject matter specialists so that they can prevent problems or at least anticipate them and be ready with solutions before they happen.
Here are some of the professionals who can help you with your house flipping project:
Realtor – A realtor can provide you with valuable information like a Comparative Market Analysis and data on closed sales within the area where you operate. Yes, having a realtor in your roster could cost you some 6% of the sale price of your project, but he can be a good investment that can reap big dividends on current and future projects.
Contractors – A pool of contractors that includes plumbers, carpenters, HVAC technicians, landscapers, and electricians would make your house-flipping life easier and less stressful. The key is to get someone who is trustworthy and comes with good recommendations, a competitive rate, and a valid license. Interview potential contractors and try to see if you and they are a good match and could work well together.
Lender – You might need access to a lender at some point during your project even if you are using your own cash. More so if you can’t or don’t want to use cash to purchase your investment house with cash. Your local bank could probably give you the most favorable financing rate, but their processing time might be too long or too slow for the fast-paced business of house flipping. Try to look into private rehab lenders and hard money lenders if they will fit within your financial projections.
Architect – You can get a good architect through referrals, either from your realtor, your general contractor or from friends. You can use an architect selectively by giving them larger projects such as redesigning the façade, adding more rooms or giving a new layout for the kitchen and dining areas. If you don’t use an architect for the larger jobs, such as changing the house’s structure, you might compromise its structural integrity and eventually cause you to spend thousands of dollars more in repairs.
These professionals can help you shorten your learning curve and eventually make your timelines faster than if you were to approach your project as a one-man team.
There is always a preparation stage before you go into any business and it’s all the more important if you want to flip houses. Educate yourself, prepare a good business plan, and assemble an awesome team – to name the few integral ones.