What exactly is flipping a house? For the real estate investor, it means finding a house that needs work, buying it at a discount, adding value, then selling for a profit. When a flip is done well, many people benefit. The original owner (a distressed seller) gets rid of a problem (a distressed property). The final buyer gets a nice house that does not need any repairs. The street looks better, so neighbors are happy. And the real estate investor earns a reward for improving the house.
The idea of flipping houses has grown in popularity in recent years. TV shows make it look easy, but they’re done by professionals who have lots of experience. If you want to get started flipping a house, what do you need to consider, and what are some important steps?
While you do not have to be a real estate expert to successfully flip house, you do have to do some homework if you want to succeed. Probably the most important consideration is the real estate market to where you will do the flip. What is happening in the area? Are properties appreciating or going down in value? Are people moving in or out? What is the average home price? How long does it typically take to sell a house (days on market)? Are local governments friendly towards investors or do they try to hold up the process with lots of red tape?
Of course, your experience and risk tolerance are important. Are you handy around the house and can you recognize things that need to be repaired? Will you do any work yourself or will you hire contractors? Do you want to stick with relatively easy projects that just need cosmetic updates (like paint and carpet)? Or are you open to things that need more work? Even if you own a construction company, your first flip should be a relatively simple one, because more things are involved than the actual work of repairing.
Who will help with the project? Of course, you may want to consider a realtor for marketing (this could be for finding the flip, as well as the resale). Do you know someone who can recommend contractors with good reputations? Good contractors should help with everything from design and budget to required permits. Is there a title company in your area that works with investors? If the laws are complicated in the area, do you need a real estate attorney?
Will you do the flip in your own name or use a business entity? Many people think this is complicated, but in most states, you can set up a Limited Liability Company (LLC) with just a few forms on the secretary of state’s web site and a small fee. Using a business name affords some legal protection for your personal assets. However, it does not give you permission to ignore laws and building codes, nor will it defend you from the consequences of poor decisions.
How will you finance the property purchase and repair costs? This is the Million Dollar Question.
How to Finance a Flip
Money, or lack thereof, can frequently be an obstacle even if the perfect deal falls into your lap. So, what are some ways you can pay for a flip? Here are some options.
1. Use Your Own Money – but most people don’t have a ton of spare cash in the bank. 2. Partner with friends, family, or another real estate investor – this can spread the risk, but also divides the profits. 3. Get a Bank Loan – this is a low-cost solution and you don’t have to share profits, but most banks do not like loans to flip houses. They think they are risky and too short a term. Banks like long term loans with no risk. 4. Use a Hard Money Loan – Hard Money is actually easy to get because it is a private loan against a “hard asset”, in this case a house. Private money costs more than bank money, because it is not backed by government insurance. These loans are short term, usually 1 year or less. They can come from an individual or a finance company. It just so happens to be one of our specialties at Complete Business Capital.
For all of these methods, you will need to put some of your own money into the deal. Loans will typically require down payments of 10 to 30%. There will also be closing costs (realtor commissions, title, insurance, taxes, etc.). And you will need some cash or credit available to start repairs. Sign up for our mailing list below to learn how lenders look at flip loan scenarios.
This is not in all-inclusive list, but some of the major things involved with flipping a house include:
1. Market research 2. Finding the property and initial analysis 3. Negotiating with the seller 4. Detailed repair list and expense budget 5. Loan request and approval 6. Closing process 7. Doing and/or monitoring the work 8. Marketing the finished product 9. Completing the sale 10. Learn from the experience and repeat the process
Take some time to do a little research on house flipping. The website Bigger Pockets has good free information on their blog. See if there is a real estate investing club in your area. If so visit and get to know some of the members. You can benefit from their experience and may find some good partners. You will especially want to learn how to analyze deals from a finance perspective. Start off with our free PDF download of our “Sample Rehab Project Scenario for a New Investor”. To get immediate access to your copy, join our mailing list below.
Complete Business Capital helps business of all sizes secure financing to grow and succeed.
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