A brief outline
When you think about flipping houses, you may think this is a daunting real estate investing strategy. However, armed with knowledge and the right tools, house flipping can be a successful strategy that many investors have generated profits from. It requires work, but house flipping can also be rewarding. The key is to know what the challenges are and how to solve them, before you start flipping houses. Let’s answer the question, is it hard to flip houses?
Flipping houses can be a lucrative strategy for real estate investors. The process of flipping a house starts with buying an investment property (usually a distressed property that falls under market value), rehabbing the property, and selling it again to make a profit. While this strategy has proven to be successful, there are risks involved for those who don’t know what they’re doing. Let’s take a closer look at what is involved with house flipping, as we answer the question, is it hard to flip houses?
Can anyone learn how to flip houses?
Flipping houses isn’t as easy as it may look on popular TV shows. However, the beauty of this real estate investing strategy is that there are no rules about who can do it. Anyone can learn to flip houses, with a few key elements that start with knowledge, the right planning and enough business savvy.
Two important factors are required to flip houses: good credit and enough cash. Invariably flipping houses will require getting a loan, and investors won’t be able to get a loan without good credit. The first step for anyone who wants to get into house flipping is to build a good credit score because the higher the credit score, the better the interest rates they will get.
Lenders will often require a down payment of 20% to 25% of the property’s purchase price. Which means that investors need to have a fair amount of cash on hand to cover this. These loans will typically have higher interest rates as well, so this is also important to bear in mind.
What are the main challenges when flipping houses?
While flipping houses can sound like an attractive investing option, it comes with many risks. Things don’t always go smoothly and there are some challenges that can crop up along the way for those who choose to flip houses. Here are the main challenges that investors face with this strategy.
Challenge 1: Finding the right property
Not every distressed property that is selling below market value will be a good property to flip. Picking the right property can be a challenge when it comes to house flipping because investors need to look for potential. A house needs to gain a certain return on investment to be profitable.
Finding the right property involves buying in a neighborhood with a high demand, finding a property that is selling below market value, looking at comparable home prices in the area and knowing the renovation and repair costs.
For investors who want to flip houses, properties like this can be found at auctions, on foreclosure lists or as short sales. A real estate agent can be a valuable source of information as well. Knowing exactly what to look for in a property is important, before beginning the search.
Challenge 2: Lack of funds
One of the biggest problems that investors who are flipping houses should be aware of is running out of money. There are many extra costs that can occur, and often investors who aren’t experienced in flipping houses will run out of money on their first project.
Investors who decide to use a credit card for the renovations are taking a big risk because if the renovations cost more than expected or the house doesn’t sell as quickly as expected, these expenses can get out of control. Credit card interest rates are typically high and running up a huge credit card bill that can’t be paid off quickly is a recipe for financial disaster. Renovations often cost more than expected, so factoring a buffer into the initial calculations is wise.
It’s a good idea to calculate the budget based on the project, instead of the other way around, to avoid running over your costs and budget. It’s also a good idea to find the right financing option to suit your unique needs, by comparing interest rates and other features such as speed of closing.
Challenge 3: Understanding the market
A key element of successful real estate investing is understanding the local real estate market. When it comes to flipping houses, this is a vital part of the success of a project. It takes time and research to understand the market and knowing when to buy and when to sell a property is imperative in a flipping project. Consulting a local real estate agent to find out more about the market can be a great help for those who are going to flip houses.
One of the biggest mistakes new investors often make is to rush into a house flip without researching the market enough beforehand. This can quickly lead to problems if the demand in the area isn’t high or if interest rates are up. Which means that the house flip could be less profitable than expected, or the house may not sell quickly.
Challenge 4: Project delays
Renovation projects are well known for having delays, and this is one of the biggest challenges that real estate investors who are flipping houses will need to face. Whether it’s contractors not working quickly enough, delays with materials or equipment, delays are common and investors should be prepared for these.
To avoid delays, investors should choose contractors carefully, and not be afraid to pay a little more for better quality services. There also needs to be a plan B, so that if there are any delays, the project will not be negatively impacted.
Challenge 5: Assembling the right team
When it comes to house flipping, a team is needed, and this team can make or break the entire project. Assembling the right team can be a challenge, particularly for new investors who don’t have trusted contractors to work with. Finding a reliable and highly skilled team is vital to the success of the project because investors rely heavily on this team to get the house renovated and then sold.
The best way to find the right team is to work off recommendations and hire specialists who are highly skilled in their areas of expertise. Working with licensed and skilled professionals will lead to less problems down the road, so this is a must.
What are the main skills you need to flip houses?
Flipping houses is a business, and as such, there are certain skills that a real estate investor will need to possess or hone, in order to make a success of this strategy.
1. Networking
House flipping involves networking all the way through the process, from finding the property to selling it. The type of people real estate investors would need to network with are real estate agents, wholesalers, other investors, contractors and accountants. Flipping houses requires a team, and this team cannot be found without networking in the right places, with the right people. This is an invaluable skill that is vital to making flipping houses a success.
2. Negotiating
Being able to negotiate is a necessary skill which is used to make higher profits when it comes to house flipping. For example, being able to negotiate a seller down from $150,000 to $140,000 will save you $10,000, which you can put towards renovating the property or simply take as a saving. Negotiating comes in handy with property purchasing, dealing with contractors, and with selling the home.
3. Estimating property value
A useful skill to develop is being able to estimate the value of a property quickly. This will save you money in the long run, as you will be able to spot an overpriced property and save yourself the trouble of purchasing it. Information that will assist with being able to estimate a property’s value includes the local real estate market ins and outs, comparable property prices in the area, the average sales price and days on market for the area.
4. Estimating renovation costs
Being able to accurately assess a property and the work that needs to be done on it, is an invaluable skill for house flipping. Real estate investors who can walk into a home and quickly estimate rehab costs will be able to make better investing decisions and choose properties where they can make the most profit.
5. Project management
A fix and flip project requires excellent project management skills, so this is something investors need to develop. The project can take anything from 3 months to 6 months and a rock-solid plan needs to be in place, to ensure the success of it. The steps involved in the project need to be managed the entire way, and this includes estimating costs, budgeting, guiding the relevant parties and keeping the project on time.
6. Raising funds
Flipping houses requires a fair amount of capital, and most investors won’t have this readily available. So, they must raise the funds, typically for the property purchase and the renovations both. Learning where to find capital is the first skill that any investor who is flipping houses will need.
7. Marketing
Knowing how to successfully market a property in the real estate world is imperative to a profitable house flipping project. It’s all well and good finding an affordable property and increasing its value through renovations, but if you cannot sell it, you won’t make a profit. This means selling it quickly and for the right price so that you can maximize your profits. This applies to all house flippers, even if real estate agents are involved. A real estate agent may do the legwork, but you’ll still need to have a plan.
Do you need lots of money to flip a house?
Real estate investors who are beginning their house flipping journey may be wondering how to fund the flip. Most investors won’t have the cash-in-hand at the outset, so there are a few options available. Let’s take a look at some of the factors to consider before looking for a loan, and how to find funding.
70% Rule
The 70% rule is a guideline often used by house flippers. Basically, it states that the maximum amount you should spend on a flip should be 70% of the after-repair value (ARV) of the property, minus the cost of repairs. So, if a house has an ARV of $200,000 and will need $40,000 in repairs, you would only want to spend $70,000 on the purchase price. This leaves you with a comfortable margin for profit.
While the 70% rule is a good general guideline, it’s not set in stone. Factors like the current market conditions and your own level of experience can impact how much you’re willing to pay for a property. But in general, following the 70% rule can help you stay profitable in the house flipping business.
Down Payment
When it comes to house flipping, the down payment is one of the most important considerations. The size of the down payment will dictate how much money you need to borrow and, ultimately, how much profit you can make on the sale. A typical down payment for a house flip is 20% of the purchase price. However, if you can put down more than this, you may be able to get a better interest rate on your loan.
Keep in mind though, that a larger down payment will also mean more of your own money is at risk if the flip doesn’t go as planned. As such, it’s important to carefully consider the amount of money you’re comfortable putting down before moving forward with a house flip.
Hard Money Loans
Hard money loans are most commonly used by real estate investors. These are asset-based loans, meaning they’re secured by the property being purchased. They are typically short-term loans, lasting 12 months or less, which is ideal for house flipping purposes. S
Hard money loans have higher interest rates than traditional loans, but they can be a helpful tool for real estate investors who need access to capital quickly. These loans can be used to purchase investment properties, make repairs or renovations, and even pay for closing costs.
Lenders such as New Silver provide Fix and Flip loans for this purpose, where the loan is based on the deal itself, instead of the borrower’s personal finances. New Silver’s Fix and Flip loans are 24 months, and up to 100% of the construction can be financed. Loans start at $100,000 and can go up to $5million. These loans are essentially geared towards real estate investors who are going to flip houses.
Other ways to fund a house flip
There are a few different ways to fund a house flip, other than hard money loans.
- One option is to take out a personal loan from a bank or credit union. While the interest rates on a personal loan are higher, the process is quick and easy.
- Another option is to get a home equity loan or line of credit. This can be a good option if you already own a home and have some equity built up.
- If you’d like to go the private lender route, you can appeal to family and friends who may want to help you invest. This can be a great option for those who want to avoid extra costs.
- Tapping into your 401(k) is another option, however as this is your retirement fund, this can be risky. The approval process for this is easier and you’re borrowing your own money essentially, but the risk is higher if the project isn’t successful.
- A newer option for real estate investors who are flipping houses is crowdfunding. This method uses funds from a group of people, raised online as a collective. Investors can get access to higher amount via crowdfunding, but the process can be slower.
Whichever option you choose to flip houses, make sure you have a solid plan in place and realistic expectations for your return on investment.
Can you make lots of money flipping houses?
House flipping has become a very popular real estate investing strategy. Over the last 5 years the number of house flips has grown from 5.7% of all home sales, to 9.6% as of 2022, according to ATTOM Data. In 2021, the average amount of gross profit made by house flipping across the US was $65,000 and in 2022 the average gross profit was $67,000.
Final Thoughts - Is house flipping a risk?
Many people have made a fortune by flipping houses however, the risks should not be underestimated. The most common mistake that new house flippers make is over-improving the property. It’s important to remember that you’re not trying to create your dream home; you’re trying to create a home that will appeal to a wide range of buyers. That means keeping the renovations simple and focusing on cosmetic updates that will make the biggest impact.
Another potential pitfall is over-leveraging yourself financially. When you’re taking out a loan to finance the purchase of a property, it’s important to be realistic about how much you can afford to borrow.
Finally, it’s also worth considering the financial risk of ending up with a problem property. Even if you do everything right, there’s always the possibility that something will go wrong during the renovation process or that the market will take a turn for the worse. Despite these risks, flipping houses can be a great way to earn a profit, but it’s important to go into it with your eyes open and be prepared for anything.