A quick outline
The business of flipping houses can be both profitable and rewarding, but it’s crucial to know the ins and outs before you start spending any money. Find out how to start a house flipping business in our 5-step guide.
Table of Contents
House flipping is becoming more popular amongst savvy investors who aren’t afraid to roll up their sleeves and put in the work. Thanks to TV shows like Property Brothers and Flip or Flop, and the real estate market performance, the business of house flipping has seen an influx of interest over the past few years. It’s an exciting opportunity for short-term investors and those who’d like to make real estate their career. However, there’s a lot of information to familiarize yourself with before you take the leap, so we’ll delve deeper into each step to help you start a house flipping business.
Should you start a house flipping business?
Let’s start with what exactly house flipping entails. A house flipper will find a property that is selling at a lower price, often below market value. The property could be in distress, in need of major repairs, in foreclosure or even abandoned. After purchasing the home, the flipper will then renovate and repair the home and sell it again at a higher price, to make a profit.
House flipping can be a lucrative business, which we can see by the average gross profit on house flips in Q2 of 2021 in the US, which was $67,000. It’s no wonder house flipping has become such a popular way for people to enter the real estate investment space. If you’re already familiar with the industry, you are more likely to make a success of a house flipping business. However, if you are new to real estate, you may need to take some extra time to learn about the industry.
Another factor to consider is time and effort, so if you have the available time and energy to put into your house flipping business, then you’ll be well on your way to making it a success. If you already have a lot going on, then house flipping may not the best choice for you because it will certainly take up a lot of time.
How much money do you need to start a house flipping business?
Dabbling in real estate isn’t a cheap business, and when it comes to house flipping the biggest expense is buying a property, and then you’ll also need a large amount of available funds for the renovation. Thankfully, there are a variety of mortgage and loan options that you can apply to use, or if you have enough money saved up you could purchase the property cash.
There is no hard and fast rule regarding the amount of money you’ll need to start a house flipping business because there are so many variables impacting the amount, starting with the price of the house, to your credit score, to the location and so on. If you’re approved for a loan, you may not need much of your own money upfront and you’ll just need to cover the shortfall. Estimating your costs at the outset is the best way to gauge how much money you’ll need.
You can also view a more detailed guide on how much money you need to flip a house here.
How to start a house flipping business - Step by step
1. Start with a business plan
Like any business, a plan is a crucial first step to success. Creating a business plan first and foremost will help you stay on track towards your financial goals and make a success of your investment. Don’t spend a cent until you have created an in-depth business plan that includes:
- The purpose of your business
- Your goals for the business
- The financial elements – potential costs and profit, and how much you’ll need for the project
- Market research and a competitor analysis
- Information on the parties involved
- A marketing plan for how you’ll sell the property
2. Set up your business
Once you’ve written a business plan, it’s time to make your business legal and this involves choosing a business entity, registering your entity in the state where you’ll be operating, registering your business name, setting up a bank account and acquiring any licenses or permits you may need.
There are various legal structures to choose from, however it’s advisable to go with one that offers limited liability such as an LLC or corporation. Limited liability protection is crucial in certain instances, and house flipping is one of them. When it comes to flipping houses, there are many variables and a variety of things that can go wrong, so having protection against your personal assets is paramount.
3. Find funding
The next step you’ll need to take is finding funding for your first house flip. Many new investors won’t have enough money to buy a property outright and will need to find funding elsewhere. You’ll need to choose a funding option that suits your business, based on your credit and various other factors that come into play when you’re applying for a loan. Here are few types of funding you could consider:
- Hard money loans: These are loans that you can get quickly, with less stringent lending criteria and are paid out in a lump sum which is ideal for purchasing a property. These loans often have higher interest rates, but they are also short-term loans, so you won’t be paying this interest for too long and you can settle the loan once you’ve sold the house.
- Home equity loan/HELOC: If you already own a property you can tap into your existing equity and use this to cover the cost of the new home. A home equity loan is paid out as a lump sum and a HELOC is a line of credit that you can draw from as you need it.
- Business line of credit: If your business qualifies for a business line of credit, this can be a good flexible funding option to purchase properties and pay for the renovation. The performance of your business would be big factor here though.
4. Connect with contractors and suppliers
Renovating properties requires a team of contractors, from plumbers to electricians, you’ll need a variety of reliable suppliers to work with and a general contractor to oversee the project. Finding suppliers who are reputable and fall within your budget is a vital aspect to flipping houses and making a business out of it.
Once you’ve found a dream team, you can continue to use them for each new project that you take on. Make no mistake, it takes a cohesive team to successfully manage a fix and flip project from beginning to end, so be selective on who makes up your team.
5. Search for a deal
Now that that’s all out of the way, the fun can begin. It’s time to look for a property that you can renovate. The success of your deal depends on the real estate market and the cost of labor in your area. It also depends on the price of the property that you can find, which should ideally be below market value. You can find your first property through a real estate agent or an online platform like FlipScout by New Silver.
Properties that are distressed or in foreclosure are often used because they have motivated sellers who need to get the home sold quickly, and they’re usually willing to take a lower price for the property. Make sure to factor in the scope of the renovation project that you’ll need to do, when determining if a project is feasible.
Many house flippers use the 70% rule to decide whether a property is worth flipping or not. What is the 70% rule in house flipping? To use the 70% rule, you need to know the After Repair Value (ARV) of the investment property that you are hoping to flip. Once you have the ARV, you simply multiply it by 70% and then deduct the expected rehab costs, to work out the maximum price that you should offer on the house. This will help you decide if the property is a good deal or not.
Tips for creating a business plan
If you’re ready to hit the ground running, here are a few great tips on how to create a simple house flipping business plan.
- Be clear on your goals: Any future investors or partners will need to easily be able to see the mission, vision and goals for your business from the business plan. They should also be able to see the steps that you’ll be taking to achieve these goals.
- Real estate market analysis: Include a section about the real estate market in the area that you’ve chosen. This should involve looking at the real estate sales and trends in the area and showing data on any home price increases or decreases over the past six months.
- Start with an executive summary: Starting with an overview of your plan is a good way to hook the reader, by showing them a quick look at your idea and how you plan to achieve it.
- Marketing plan: A comprehensive marketing plan is essential in your business plan, to show how you’re going to market the property to attract buyers. Partners or investors will want to know that you have a good idea of how to sell the property, before they think about investing in your business.
- Be concise: The clearer and more concise you are, the better. Avoid long-winded paragraphs and jargon, this can lead to the reader losing interest or glazing over certain parts of your plan and you want to keep them engaged.
- Know your audience: It’s important to know who your business plan is aimed at, so that you can tailor it to what your audience will want to know. For example, if it’s for investors, make sure that your financial section is well fleshed out and focus on how you’re going to make a profit in more detail.
How to flip your first house
Flipping your first house is the most exciting part of the entire venture. Now, all the effort you’ve put into preparation and research can culminate in your first project.
Step 1: Start the search
Get to know the neighborhood where you’re looking for a property. This means researching the real estate market to find areas that might be up-and-coming, or where homes are generally older. These areas can provide a better opportunity for a house to flip. Then find a property that you’re interested in flipping.
Step 2: Crunch the numbers
You can use the 70% rule to determine if the property is a good deal or not. The rule states that you should only offer an amount that is 70% of the ARV of the property, minus the necessary repairs. Make sure that you have worked out a budget both for the property purchase, and for the repairs that need to be done.
To get a better sense of the numbers involved in a typical house flip, have a look at our detailed house flipping cost breakdown.
Step 3: Assemble a team
Gather a group of professionals as your team to renovate and repair the property once you’ve found a suitable one. They will be instrumental for your first project and you’ll rely heavily on them throughout the process, so make sure that they’re reliable and have previous work to show.
Step 4: Finance the project
Finding the funds for your project is the next big task you’ll need to do, and this can take the form of many different loan types. Decide on which type of loan works for you and get a proof of funds or pre-approval letter before you start property hunting.
Step 5: Purchase the property
Once you’ve found a property that fits the bill, it’s time to purchase it. You may need a real estate agent to assist you at this point. This is also the time when you’ll need to get your team ready and make a comprehensive list of what needs to be repaired.
Step 6: Renovations and repairs
It’s time for your team to shine, and this is the part where your repairs and renovations are done. It’s a good idea to have a general contractor overseeing the project to make sure that you stay on budget and within your timeline.
Step 7: Flip the property
Once all the work is done and the house is looking great, it’s time to sell it. You can list it on the MLS (Multiple Listing Service), on a real estate website or get a real estate agent to sell it for you. It’s important to sell it at the right price so that it sells quickly, but still ensuring that you make a profit. Once the house is sold, you’ve officially completed your first house flip.
Helpful resources to get your house flipping business off the ground
There are a variety of useful resources for real estate investors that are easily available for those who are new to house flipping and trying to get their business going.
- BiggerPockets: This is a very popular real estate investor networking website with thousands of resources available on a myriad of real estate investing topics. From podcasts to free downloads, BiggerPockets can be a useful tool for those starting their house flipping journey.
- New Silver: While we are focused on being a short-term lending solution for real estate investors, we also offer a host of articles with useful advice on many topics, including flipping houses.
- Incfile: This website will allow you to compare the different types of business entities, to see which option best fits your needs. You can then set up your business on the platform by forming the applicable legal structure.
- US Legal Forms: This website offers specific real estate forms for all your real estate needs, including real estate offer forms, deeds, contracts, liens and more.
- QuickBooks: QuickBooks matches you with an online bookkeeper who understands your business. They’ll manage and maintain your books with guaranteed accuracy, which is a great financial help for getting your business off the ground.
Final Thoughts
Building a house flipping business is a great opportunity and you can make a success of it if you put in the time and effort to plan and prepare properly. Make sure that you educate yourself on the entire process, beginning to end, and get ready to put in the work so that you can reap the rewards. In other words, the best way to increase your chance of success is to ensure that you know what it takes to open and run a house flipping business from the ground up, before you begin.