This post has been kicking around in my mind for a while now. Thanks to glamorous TV shows, a lot of people love the idea of flipping houses. I’ll admit that those same shows drew me to flipping in the first place, too! However, these programs are usually more aspirational than actionable – you’ve got to look beyond the silver screen if you want to become flipper.
I had several years of real estate experience before I tackled my first rehab project, and but I was still shaking in my boots when I signed the closing documents for my first flip. A flipping houses 101 guide would have been helpful even though I had some background knowledge. So if you’re a newbie looking to get started in the fast-paced, fun, and exciting world of flipping, here are a few things to keep in mind!
Flipping Houses 101: What You Should Know Before Getting Started
Since there are many misconceptions out there about flipping houses, I think it’s important to clear the air before I share some actionable tips with you. Let’s get a few things straight:
This (generally) isn’t a “no money required” business. It’s common to see gurus promising newbies that they can flip houses, even if they’re dead broke. The irony is that these same companies then convince newbies to invest thousands of dollars in their training or mastermind programs…I’ll stop here, since this is a rant for another post. But truthfully, it’s going to be hard to flip a house with no money unless you’re well-connected to people who can fund everything for you.
I use hard money loans to purchase my projects. They’re easier to get in some ways than traditional loans since they’re based on the property instead of my income/eligibility, but securing hard money isn’t always a given. Even if you do get a hard money loan, expect to bring 10, 20, or even 30 percent to the closing table as a downpayment. And that’s not even accounting for repairs!
Sorry if I’m raining on your parade – it definitely IS possible to flip with no money in (I’ve structured deals like this before!), but it’ll be tough to do this without a track record or investors who trust you right from the start.
It’s a competitive business.TV shows make deal-finding look easy – the investors see a house they want, put in an offer, and voila, it’s theirs! I imagine the TV stars have great connections for off-market deals and they obviously have clout as famous people, but as a beginner, it’s important to understand that there’s a limited number of deals at any given time. If you’ve found a property with great potential, other investors will have their eyes on it too. You’ll have to be creative and decisive when it comes to making offers on houses. This definitely should NOT be a deterrent to anyone who wants to flip homes, but it is helpful to be aware of.
It’s not a sit-back-and-relax business. Building a successful business requires work, and house flipping is no exception. Even if you aren’t wielding a hammer or laying tile, you’ll have lots of high-level tasks to handle at each step in the process. You’ll have to get comfortable with being decisive, taking on risks, and dealing with uncertainty.
Alright, now that the reality check is out of the way, let’s get on with flipping houses 101: actionable tips that you can use to get in the game!
1. Know What a “Deal” Looks Like
I could devote dozens of posts to this topic alone. You won’t get far as a flipper without being able to identify a house that’s a deal.
A deal is NOT simply a house that needs work. While this is part of the equation, there are plenty of houses in every market that need work but aren’t priced for profit-making. A deal is a potential flip that’s priced low enough to allow for profit after you’ve accounted for the purchase, remodeling costs, holding costs, and the fees involved in selling the house at its ARV (after repair value, or the price you can get for it after it’s been all fixed up). Let’s break these costs down a bit:
- Purchasing costs include your downpayment (or the full purchase price if you’re buying in cash), closing costs, inspection fees, and any other costs incurred prior to buying the property.
- Remodeling costs include all fees associated with rehabbing the property, such as contractor labor, material costs, permit charges, and more.
- Holding costs are all the fees you incur while owning the property, like taxes, utility bills, HOA fees, and the interest you’re paying on a hard money or private money loan.
- Sale fees involve agent commissions, charges for listing photos or staging, and any other costs that accumulate as you list the home for sale
Chances are that you’ll analyze scores of homes before you come across a true deal – that’s just the name of the game! Don’t fall into the trap of assuming that a home is a good buy simply because it needs work, or it’s off-market, or it “seems cheap”. I’ll be honest, I’m not a numbers person AT ALL. But you’ve got to be proficient with basic math – and good at doing research – to find a deal.
Let’s look at a hypothetical example to identify a deal. I like to work the math backward since it’s easier to interpret that way. Imagine that you learn about a home in your market that needs some work, but all fixed up, it could sell for $300,000. Let’s say you know that your purchasing costs will be $1500, remodeling costs will be $40,000, your loan/holding costs will be $25,000, and your sale fees will be $20,000. There are formulas for determining each of these costs – we can look at those in detail in later posts since this will turn into a book if we spend too much time on those here! Let’s also say that you want to make at least $20,000 in profit on this flip. So working backward…
The MOST that you can pay for this property is $193,500 if you want to hit your profit figure. Ideally, you can buy slightly below this since unexpected expenses are common while flipping.
As long as you know the ARV on a home, and can fill in each cost variable, you can apply this formula to any property that you purchase to determine the appropriate buy price.
Even if you don’t like math, it’s a core part of flipping houses 101 – and luckily, it isn’t too complex! 😅
Now that you know the math behind finding a deal, let’s talk about what you can do right now to get started on step 1!
Flipping houses 101: Actionable Deal Discovery Tips
- Research, research, research. Hop on your local real estate market website or visit an aggregator like Zillow, Trulia, or Redfin. Find houses that need work and then look at similar homes nearby to determine the ARV. You don’t even have to work the full formula at this point – just try to identify options with this simple exercise.
- Subscribe to real estate forums and Facebook groups to read people’s posts about homes they’ve flipped. Sometimes investors will give highly-detailed information with math. You can get a sense of real-world deals by reviewing posts in forums like this.
- Get to know local flippers. Oftentimes, these people are actively promoting themselves and their businesses on social media, so follow them and see what kinds of projects they’re working on. Engage with them and don’t be afraid to ask questions.
2. Assemble Your Team
Flipping a house is like raising a child – it takes a village to get the job done right. Even if you find the deal, fund the deal, and do all the labor yourself, there are still some folks that you’ll rely upon along the way. And that’s just fine! I’d rather trust certain tasks to a professional than try to do them myself since my time and energy may be better spent elsewhere.
Assembling your team refers to finding the people that you’ll work with once you’ve decided to take the plunge and secure that first deal. Some examples of the professionals on your team include:
- Real estate agents
- Private and/or hard money lenders
- Title companies
- General and specialized contractors
- Home inspectors
- House cleaners
The list goes on and on. Basically, you’ll work with many vendors and individuals during your house flipping journey. House flipping 101 is all about being prepared, so it’s smart to start building connections early on. Attending real estate networking events is one of the best ways to build these connections.
Most cities have real estate investors associations (REIAs) that hold regular meetings. Real estate is a relationship business, so as someone new, you’ll often be welcomed at these gatherings and greeted by all sorts of people. Get business cards, connect and LinkedIn, and be open about what you hope to accomplish. You never know if someone is willing to mentor or help you along the way.
Facebook is another great tool for discovering people in your local real estate community. Befriend the flippers, engage with the wholesalers, and seek out lenders so that you can start learning about their individual roles. If you see an opportunity to help someone with a skill that you have, jump on that – good karma goes a long way in a relationship-based business like this.
Facebook groups can also be helpful for finding contractors. You’ll work with many contractors while flipping and they’ll all have strengths and weaknesses. Some will be outright bad, and every once in a while you’ll find one who is excellent. That’s why it’s essential to always have good contractors on hand (along with backups for those contractors!) If you see someone on social media whose work impresses you, hang on to their name and number for later. Start building a list early on so that you’re ready to move fast when the right deal comes.
Flipping houses 101: Actionable Team Assembly Tips
- Get to know people. If you aren’t naturally social, force yourself to attend meetups here and there, or connect virtually if that’s more comfortable for you. Speak with others in the real estate industry to see what they’re doing, and keep a log of the people you’ve interacted with.
- Make your intentions known. As you speak with people, let them know that you’d like to get into flipping and see if they have advice or opportunities for you.
- Use Facebook as a tool to grow your network. Make posts asking for referrals to good contractors, real estate agents, hard money lenders, and more.
- Share your expertise. If you have something to offer people in the flipping industry, let them know! Someone is more likely to mentor and help you if there’s something in it for them, too. People are busy so you have to make the investment of time worth their while.
3. Build A Buffer Into Your Budget
This is a point that I cannot stress enough: it’s crucial to build a buffer into your budget. The amount that you should plan for on top of your projected expenses may vary depending on your comfort level and the size of the project – for example, on small projects ($30,000 rehab and under), I’ll usually tack 5 percent onto my projections. On larger projects, I like to plan for 10-15 percent extra just for added security.
All kinds of unexpected things can happen when flipping a house. There may be problems that aren’t visible to the naked eye, like rotting behind the walls or damaged sewer pipes, that you won’t discover until you dig into the house during the remodeling process. Or you may be required to make unanticipated changes to the layout, plumbing, or electrical systems because of city ordinances that you weren’t aware of. Plan for everything that you know the house needs, but keep some extra on hand for costs that sneak up out of nowhere.
I recently had a project where we ended up far over budget due to some planning failures in the beginning. Planning is a crucial aspect of flipping houses 101, so of course, I beat myself up a bit for those mistakes – but ultimately my buffer saved me. Since I’d planned for additional costs, I wasn’t completely unprepared when it came time to pay the bills.
One of the biggest challenges I’ve had is that I don’t have an inherent sense of what each repair item should cost. This is something that flippers can learn over time, and there are calculators, spreadsheets, and software that can crunch the numbers for you. Starting out, you’ll want to rely on these tools so that you don’t get caught overpaying for your project.
Flipping houses 101: Actionable Buffer-Building Tips
- Download different flipping spreadsheets or deal analysis software, and start plugging numbers in so that you get familiar with how it works (here’s a free spreadsheet – I haven’t tried this one out, but it has high reviews!)
- Walk through a flip with a contractor. Identify various things that need to be repaired, and ask them about the potential costs. Learn about how they arrived at their figures, and figure out the overall rehab cost. Run your numbers with different buffer amounts of 5, 10 and 15 percent.
- Set a budget so that you can start saving for your flipping business. Create a savings account and contribute a set amount each month to put toward your future house flip. Once you hit your goal figure, keep contributing to build up your buffer amount.
As with any business, taking action is the first step toward reaching your goals. If you’d like to see more actionable tips about flipping houses 101, leave me a comment below! Thanks for tuning in!