Flipping houses can be a lucrative business that has made many fortunes. Although it doesn’t require a specific degree or special schooling to learn how to flip houses, you still must develop the necessary skills and understand the associated risks. Here is a look at the business of flipping houses, so you can decide if it’s right for you.
Is Flipping Houses a Good Business Model?
The short answer is yes! Flipping houses can be a great business if you have a solid plan and you are willing to put in the work. One of the major benefits of flipping houses is that there is no limit to the amount of money you can make. The average flip brings in about $60,000 in profit and typically takes about 6 months to a year to complete. This can be a great way to supplement your existing income or become a full-time business. Plus, if you put the right team in place, flipping houses doesn’t require much hands-on work once you made a purchase, meaning you can earn passive income while you work a full-time job or run another business.
Benefits of Starting a House Flipping Business
There are numerous benefits to starting a house flipping business, which is what makes it a popular investing technique.
Some of the key benefits of starting a house flipping business include:
1. Lump-Sum Payout:
A major benefit of a house flip is that you don’t have to wait a decade to make your money back. Depending on the complexity of the project, you could be finished in as little as a few months and walk away with a nice lump sum of cash. This is what makes it attractive to those who are looking for a short-term payout, compared to waiting years to pay down the mortgage on a rental property.
2. You Can Multiply Your Earnings with Each Successful Flip
For most employees, the thought of asking for a 100% raise is quite literally unthinkable. In reality, a 10% increase would be a very respectable upgrade in most occupations.
However, these limits do not apply to experienced house flippers. Put simply, there is nothing stopping you from flipping multiple houses in a single year. Moreover, the average revenue from a successful flip ($42,000+) is comparable to the average salary in the US ($51,000+). If you flip several houses, you can literally multiply your annual earnings, leading to an annual income that far exceeds a typical employee.
3. Revitalize Old Buildings
Beyond the potential for profits, flipping houses can be rewarding in other ways. Transforming an old, dilapidated building in your neighborhood into a beautiful new home that can be purchased by a young couple or family can be a great experience and will make all the hard work worth it.
4. Opportunity To Generate Passive Income
You’ll have to do a lot of upfront work finding a property to flip, creating a plan of action, and securing financing. But once all the pieces are in place, you only have to do about 5-10 hours of work per week on the flip if you’ve hired a team to take care of the hands-on tasks. This team will include a contractor and other maintenance professionals, a real estate agent, a mortgage broker and so on.
Risks Associated with a House Flipping Business
Even though there are a variety of benefits to flipping houses, there are a number of risks as well.
Some of the major risks include:
1. Lose Money or Ruin Your Credit
There is always the risk that the project will not work out, and you’ll have to accept a loss. If you financed the project with a loan, you run the risk of ruining your credit if the project falls apart. There are all kinds of things that can go wrong during a flip – there could be construction delays or unexpected problems with the home. It may take longer to sell the home than you expected or perhaps it may sell for less than what you wanted. That’s why you always have to have a plan and an exit route to be sure you turn a profit or give yourself an out if things don’t pan out.
2. Hiring a Bad Team
One of the most crucial aspects of flipping houses is hiring the right team. Especially if the project is far from where you live, and it may not be possible for you to be on site every day. Hiring a bad contractor is probably the number one issue that can threaten a flip. Construction delays or inflated costs can eat into your profits and force you into the red. Or if the work is shotty, it will make it harder to find a good buyer.
3. Hidden Costs
It’s important to draft a solid budget before embarking on the project and leave room to account for any unexpected costs. Maybe the lumber is back-ordered, and you have to pay extra to get it delivered on time. Or perhaps the crew uses more energy than expected and you get hit with a high electric bill. If you learn to expect the unexpected, you’ll end up doing fine. But if you don’t leave any room in your budget at all, you may end up running out of money halfway through the project.
The Skills You Need to Thrive as a House Flipper
Although you don’t need to go to school to learn to flip houses, you do need to develop several important skills to be successful.
Some of the most important skills for a house flipper include:
- Ability to Raise Money
- Ability to Estimate Repair Costs
- Ability to Estimate After Repair Value (ARV)
You don’t have to be an expert at all of these skills on your own. For instance, you could employ a mortgage broker and real estate agent to help you secure financing or hire a contractor to help estimate repair costs. But you should have a basic understanding of how to do it on your own, so you can be sure that the person you’ve hired is being honest and accurate.
What is a Good ROI When Flipping a House?
It all depends on the amount of cash you have to invest and the amount of risk you’re willing to take on. The average profit for a house flip in 2020 was approximately $62,300, which equates to a return of about 36.7%. However, that doesn’t mean you should expect that much from your first deal.
On average, most flippers look to make between a 10 – 15% profit on a flip. But, the profits you can expect will vary greatly depending on the amount of risk you’re willing to take on – for instance, a cosmetic flip will yield less profit than a total gut renovation, but there are fewer costs associated with the repairs as well.
Can You Flip Houses as a Side Hustle?
Yes, many people flip houses as a side hustle and earn supplemental income while working a full-time job. If you assemble an effective team to handle the renovations and marketing of the property on your behalf, there isn’t much work needed by the investor beyond the purchase.
But you should still stay on top of the project if you want to be sure you get your money back. Even if you feel you can trust the people you’ve hired to handle the job correctly, there is still a lot that can go wrong. So, while it is entirely possible to flip houses as a side hustle, you’ll still have to put a decent amount of time into organizing and supervising the project, even while others are doing the physical labor.
Can You Flip Houses as a Side Hustle?
Flipping houses isn’t the only real estate investing strategy you may consider. Here are a few other popular investing techniques you may be better suited for.
Rental Property Investing: Buying a rental property is always a smart investment. It’s more of a long-term strategy and you won’t get that large lump sum of cash at the end of the deal. But it has numerous financial and tax benefits that are attractive to many investors.
BRRRR Investing (Fix to Rent): This method involves purchasing a distressed property but renting it out to a tenant rather than selling it to a buyer. This allows you to earn passive income and expand your real estate portfolio, while potentially getting a good deal on the purchase.
Investing in REITs: A real estate investment trust is a company that owns and maintains income-producing real estate. REITs can be bought and sold on online trading platforms, much like a stock or bond. This allows investors to share in some of the profits, without taking on the risks of owning and maintaining the property themselves.
Flipping houses can be a lucrative business, but you must be prepared for the risks. If something goes wrong, it’s your money or credit that is on the line, so you’ll want to be sure to have all your ducks in a row before jumping in. But as long as you have a solid business plan and a trustworthy team, there is no limit to the amount of money you can make.