It’s hard not to turn on HGTV and get hooked on TV shows where regular people build wealth through house flipping. As they turn distressed properties into beautiful move-in ready homes, they make it look so easy!
While these shows sometimes feature seasoned real estate professionals, some are regular individuals, just like you. It’s almost easy to imagine yourself in their shoes, putting a bid on a property and jumping in to turn a profit on your fix-and-flip project.
Since the height of the housing crisis in 2009, the house-flipping market has experienced steady growth. In 2022, 114,706 single-family properties in the US were flipped in the first quarter alone–representing 9.6% of all home sales, or 1 in 10 transactions—the highest level since at least 2000 (ATTOM Team, 2022).
So, what is house flipping and is it right for you? Read on as we examine house flipping, its pros and cons, and tips on getting started. You may find that while it isn’t as easy as it looks on television, and plenty of risks are involved—it can come with great rewards when done right.
What is house flipping?
House flipping, or fix-and-flip investing, refers to buyers who purchase distressed properties, fix them up, and then flip them (resell them for a profit). When you flip a home, you’re buying it not as a residential property but as a real estate investment.
When flipping a house as an REI, you are a short-term owner of the property as you make renovations to make it market ready—typically anywhere from a couple of months to a year. The main goal is to buy low—think distressed property—and sell high—after you’ve fixed it up—earn a profit.
What are the pros and cons of house flipping?
Building wealth. Short-term project timelines. Watching your vision come to life as you renovate a distressed home. It sounds great, doesn’t it? It’s true—becoming a house flipper can come with many rewards. But it also comes with many risks you must be aware of before jumping in. Let’s take a look at some of the pros and cons of becoming a house flipper.
Pros
- You can make a decent profit. Nationwide, the gross profit—the difference between the median purchase price paid by investors and the median resale price—on typical house flips was $63k in Q3 of 2022, according to ATTOM Data’s US Home Flipping Report (ATTOM Team, 2022). That’s a nice profit for potentially less than one year of work!
- Depending on your goals, it can be a side hustle or a full-time job. If you’re looking for a way to pad your income as you work a 9-5 job, house flipping can help you earn more money for traveling, your kid’s college tuition, savings or retirement. Other REIs ditch the 9-5 and eventually move into a full-time real estate investing business.
- Diversify. You can mitigate risk by investing in different types of assets. Adding real estate to your investment portfolio can help diversify your holdings, and flipping properties is an excellent opportunity to cash in those investments.
- Revitalize neighborhoods. The median age of a home in the US is 39 years old, and it needs upgrading and renovating (National Association of Realtors, 2022). That’s a lot of opportunity for house flippers to help increase home values in areas where distressed, outdated properties are dragging down prices. So, as the demand for move-in-ready homes continues to grow, residential REIs and their efforts to revitalize these aged homes are needed more than ever.
Cons
- Unforeseen issues. As any seasoned REI will tell you, with some properties, you need to spend a good amount of money on fixing up your properties, especially if unexpected issues with the house arise. Not every problem can be found in an inspection. They sometimes lurk behind the walls or under the floors—think mold, termites, plumbing and electrical issues. Once you start renovating, you could potentially be forced to reach outside your budget to fix these issues.
- The property may not sell as quickly as planned. As long as you own the property you’re flipping, you’re responsible for paying all the costs that come with it. These costs can include mortgage payments, property taxes, homeowner’s insurance and other ordinary homeownership expenses. That’s why house flippers need to have an extra nest egg of capital set aside just in case.
5 tips for getting started
To reduce risk and increase your odds of success, you must know what fundamental steps to take before flipping houses. Below are five steps to take to get started in house flipping.
#1. Know your local market
To set yourself up for success, it’s crucial to research and understand your home market thoroughly. Walk through as many open houses as possible and meet with local experts to discuss the state of the local economy. It’s also a good idea to work with a local real estate agent who knows the market inside and out and can advise you throughout this home-buying process.
Think outside the box and remain focused on gathering information to help better inform your choices. Also, make sure you are always going back to the math. Real estate investing is a numbers game, and crunching those numbers will tell you if flipping makes sense in a specific geographic area.
#2. Plan your budget using the 70% rule
What’s the 70% rule? It’s simple, to determine the maximum price you should pay on a property, the 70% rule dictates that you should pay no more than 70% of the after-repair value (ARV)—the value of the property after you’ve completed the renovation—minus repair costs (Davis, 2021). Let’s look at an example of the math in the infographic below.
#3. Assess your skills and knowledge
Successful house flipping requires specific skill sets. Some examples include general contracting, construction, real estate, design—you get the idea. It’s almost impossible to check all the boxes, and where you don’t have the skillsets yourself, you should know how to find professionals to bring their skills to the table.
Assembling your team of experts before getting started will better position you for a successful project. To help you find, fix and sell a property, your team should include experts like a lender, general contractor, real estate agent, and insurance agent.
#4 Finance your house flipping project
Before you can buy your distressed property, you must have the money to do so. It would be nice if you could finance your fix-and-flip projects with the same low-interest rates and repayments as a traditional mortgage. However, the reality is that banks and credit unions are often unwilling to provide the capital on distressed properties and on the terms that an REI needs to execute a fix and flip.
Fortunately, you aren’t limited to traditional financial institutions, and there are various ways for real estate investors to fund a successful flip. These include private money loans, hard money loans, and cash. We’ll cover financing in a future blog.
#5 Find and buy your property
This can be a very challenging endeavor. Why? Because you must first consider the potential resale value of the property to ensure you get the highest margin of profit—not how much it costs now.
Many REIs turn to foreclosures, distressed properties and fixer-uppers. As long as you have a good contractor on your team to help you understand the level of work needed, this is the best route to go to buy low and sell high.
Once you’ve found the right property, you’re ready to make an offer and purchase the property. But keep in mind that with really good deals can come stiff competition from other buyers. That’s why it’s important to know the maximum amount you can pay for that house to remain profitable before going into the deal.
Final thoughts
Becoming a house flipper can be quite lucrative when done right. However, there are risks involved, especially for new REIs. You must start with the basics first and take the time to educate yourself on the process—start small and work your way up to bigger and more complex projects, learning as you go. Remember, things aren’t always as they seem on TV, so don’t dive into house flipping headfirst.
While the information shared above helps get you started, any seasoned REI will tell you that they are constantly learning and picking up new tricks and tips. Make sure to return to the Getting Real Blog for more insights on going from being a newbie to being savvy as an REI.
References
ATTOM Team. (2022, December 15). Home flipping declines again across US.. during third quarter of 2022 as investor profits hit 13-Year low. ATTOM. Retrieved January 20, 2023, from https://www.attomdata.com/news/market-trends/flipping/attom-q3-2022-u-s-home-flipping-report
ATTOM Team. (2022, October 21). Home flipping spikes across the US in the first quarter of 2022 but profits drop to 13-year low. ATTOM. Retrieved January 20, 2023, from https://www.attomdata.com/news/market-trends/flipping/attom-q1-2022-u-s-home-flipping-report/
Davis, G. B. (2021, November 19). What the 70% rule means: House flipping 101. Kiavi. Retrieved January 20, 2023, from https://www.kiavi.com/blog/what-is-70-rule-in-house-flipping
National Association of Realtors. (2022, June 10). Aging housing stock prompts remodeling boom. www.nar.realtor. Retrieved January 20, 2023, from https://www.nar.realtor/magazine/real-estate-news/aging-housing-stock-prompts-remodeling-boom
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