02 Jun How to Flip a House in 5 Steps
Real estate investment has been a trusted avenue for making good money for centuries. House flipping is another such avenue where your fortunes can change if you do it just right.
If you are a seasoned real estate investor or a newbie trying your hand at fix and flip properties permanently or as a side business, then you are at the right place.
How to Flip a House? Is There a Quick Guide?
There are no shortcuts, but every business has some ground rules. This is why we will go over the basic steps to flipping a house to get an idea on how to start.
Anyone looking at fix and flip properties should look at the neighborhood, market statistics, evaluate the condition of the property, legalities, overall budgeting and estimated profit.
Here are the Pointers on How to Flip a House for Beginners in 5 Steps:
1: Research: Use Knowledge to Flip a House
This is one of the most important and crucial steps when it comes to flipping a property.
There are plenty of ways to buy a property, but many investors are inclined towards direct sales from the owners instead of realtors or auctions. If you want to flip a house, try looking at FSBOs – For Sale by Owner. This is because these homeowners want to sell and usually entertain your offer. Moreover, the realtor fee is usually avoided which reduces transaction costs. This also means there would be more time to verify the property as opposed to the ones at auctions.
However, since these kind of properties are in demand, getting to these properties is not easy.
2: Valuation: After-Repair Value is the First Step to Flip a House
Once you have zeroed in on a property, evaluate its after repair value, or ARV, using the 70% rule of flipping a house. The rule dictates that the investor should not pay more than 70% of the ARV of a fix and flip property minus the repairs and upgrades. Note that the ARV is speculative, but your profit depends on it.
For instance, a bank may not write a mortgage on a property unless the appraisal assures the financial institution that the property’s ARV is enough collateral for the loan. An appraisal is typically based on comps. Therefore, your ARV should be as well.
3: Entry Price: 70% Rule
Once you are satisfied that the property has the potential to fetch good money after repairs, get into details and outline the business plan for the fix and flip property. These include the money you spend on the house, the renovation plan and the exit strategy to sell the asset. You can also look at flip a house loans, as a financing option. Now let us go deeper.
The equation involves the maximum purchase price, renovation/repair budget, timeline, financial costs and carrying costs to reach the target profit margin.
Investors aim typically aim for 30% profit of the ARV depending on their appetite for risk.
To put it simply, this is the formula for fixing and flipping a house:
ARV x 70% = $X – Renovation Costs = Maximum Offer Price
An example of the above equation:
Say $500,000 is the ARV and $75,000 in renovation costs, then the purchase price should be no more than $275,000. If you can’t buy the property for around $275,000, it’s better to look for another house to flip.
4: Costs: Don’t Over Improve
You need to assess the neighborhood so that you do not overshoot the renovation and repair budget while being mindful of the timeline. Your repair cost should be balanced with what buyers are willing to pay for a finished product in a particular market.
For example, a high-end neighborhood requires better aesthetic appeal and premium interiors. A more modest neighborhood would mean a leaner investment.
In some markets, “upgrades” don’t get you a return from cost-conscious buyers; this will lower your profit margin.
Once you have an idea about the cost, assess the finances and look at various financial outcomes. You can look at loan parameters here.
Moreover, time is money here, literally. Every day spent on the repair timeline is added to the carrying costs. This “fixing” phase should stick to the timeline.
5: Sale: Flipping a House
Once the renovations and repairs are done, don’t wait to put the property on the market. This is because waiting will incur more carrying costs.
If you have done the math right, once you have fixed the property, it should be marketable to home buyers in the neighborhood in the price range of your estimated ARV.