In 2022, one in every ten homes that were sold in the U.S. was a flipped house. Flipping houses might seem like a simple side hustle—considering trendy real estate shows often make the process look fun—but in reality, house flipping is not always as straightforward or profitable as TV makes it out to be. While flipping houses can in fact be an opportunity to make money, investors need to avoid some crucial mistakes in order to make their efforts worth the payoff.
Rising mortgage rates and increasing costs for materials are now cutting significantly into real estate investors’ profits. The National Association of Home Builders reports that building material prices have been rising 20% year-over-year, especially since the start of the pandemic.
As a result, profits from flipped homes aren’t as high as they were in the past. In fact, profit margins from flipped homes have dipped to their lowest point since 2009.
To make money from house flipping, the property’s sale price must exceed the amount you paid, plus all the renovations and maintenance costs. In this article, learn how to get started flipping houses, plus mistakes to avoid if you’re a newcomer in the industry. By doing your homework and choosing the right properties to renovate and resell at the right time, you’ll be able to grow a real estate business that turns unsuspecting houses into desirable, profitable homes.
- To be successful at flipping a house, you have to buy and create a home that buyers are willing to pay a high amount to live in.
- It takes on average, six months to one year to flip and sell a property. The faster a flipped house is sold, the greater the profit will be.
- Getting stuck with a house that you’re not going to sell or live in for a while can quickly sink your savings and even bankrupt you due to maintenance expenses.
- To avoid losing money on a real estate investment, buy a house at the right time, find a great location, and budget accurately for renovations.
- Reinvesting the profit you make on flipped homes can generate even bigger profits over time.
How Flipping Houses Works
Flipping houses is also referred to as wholesale real estate investing. To make a profit selling a flipped home, an investor first buys an older “fixer-upper” type of home at a relatively cheap cost, then updates the home and sells it for a higher amount.
A real estate investor who flips houses primarily aims to create marketable homes that buyers want to purchase. This takes knowledge, time and money, plus good timing—therefore patience, organization, and hard work are required.
The most important characteristics that buyers are looking for in flipped homes include:
- Interior renovations: Buyers usually want to purchase flipped homes that have updated kitchens and bathrooms. Open floor plans, new flooring, clean and freshly painted walls, energy-efficient windows, and updated appliances are also typically desired. A new kitchen can cost anywhere from $25,000 to $100,000 (and beyond), while new bathrooms typically cost $10,000 to $25,000, depending on the size and finishes.
- Useable outdoor space: If applicable to the location, buyers often want their homes to have outdoor space that is landscaped and neat. Meeting these standards may require investors to take down trees, level the property, hire a landscaper, and install a deck, patio, and fencing.
- Low or moderate taxes: It’s more challenging to sell a home that has high taxes compared to low taxes since this increases the buyer’s monthly payments. A home with low taxes may sell for a higher price because it allows more buyers to afford it.
- Appealing neighborhood: Location is critical for all real estate investments. The most sought-after homes are in upcoming or thriving neighborhoods with easy access to transportation, stores, parks, and preferred schools.
What Profits to Expect as a House Flipper
What kind of returns can house flippers expect when they invest in a property? The amount of money someone will make when they flip a house depends on factors including:
- The original cost of the home (the property acquisition cost)
- Interest rates on a mortgage or other loans
- Price of materials for renovations, plus labor
- How long the home is being renovated, since it costs money to pay taxes and other fees on the home during the renovation and selling process
- How much the home sells for, which depends on the real estate market at the time
According to research published by ATTOM Data, in 2022, the average return on investment from a flipped house in the U.S. was about 26%, or $67,000.
Some investors, such as those who are also contractors, choose to work on renovating and selling only one flipped home at a time. Others with more money to invest may work on several properties at once. If you need to hire someone else to do renovations for you, this will decrease your profit. However, if you have another job and don’t have much time to dedicate to your flipped house, then it’s best to speed the process up by hiring help.
What to Know About a House Before You Decide to Flip It
There are certain things that real estate investors should know about a property before they choose to buy it as an investment.
Below are “rules of thumb” to consider prior to purchasing a home that you intend to flip:
- Timing is important: Investors ideally want to “purchase low and sell high.” This means you make the greatest profits when you buy a home for a low initial cost but sell it for much more after it is flipped. Therefore, don’t buy a home for a high amount if you want to flip it. Property costs before and after flipping will depend on the real estate market at the time, which is often unpredictable. Working with a real estate agent who is knowledgeable about specific locations will help investors capitalize on the market at the right time.
- The faster it sells, the better: After a house is flipped, selling it quickly reduces the amount of money that will be paid toward mortgage interest, taxes, and loans. When pricing the home to sell, it’s essential to list the house at a reasonable price that will attract buyers, otherwise, the house can sit for a while and accrue costs which eat into the overall profit.
- Budgeting accurately for renovations is critical: If you’re considering buying a fixer-upper, first assess how much renovations will cost to determine if it’s worth it. An older house might be listed for a low cost, but if it requires substantial updates to be sellable, it’s a bigger risk. Work with a contractor, landscaper, and other professionals to get estimates, ensuring your predictions are as accurate as possible.
4 House Flipping Mistakes That Could Cost You Your Life Savings
1. Paying Too Much to Buy the House
James McWhinney, a personal finance writer, recommends following the “70% Rule” when flipping a house. What is the 70% Rule exactly? This rule states, “An investor should pay no more than 70% of the after-repair value (ARV) of a property minus the repairs needed. The ARV is what a home is worth after it is fully repaired.”
A home is estimated to be worth $300,000 after repairs. It needs approximately $100,000 in renovations to be sellable. In this case, an investor shouldn’t pay more than $110,000 for the home, since the “all-in cost” of the flipped house would be $210,000. By paying $210,000 for the home, the investor will profit $90,000 on the project. But if the home is purchased for $250,000, the profit will only be $50,000.
2. Underestimating How Much Work Flipping a House Takes
A good deal of grunt work goes into flipping houses successfully, including exterior and interior changes that require a lot of labor. If you consider yourself to be “handy,” and expect that you can renovate a home yourself, you may be in for a surprise. It’s common to run into unforeseen issues, such as plumbing and electrical problems, that can wind up costing a lot of money and time to fix.
To be sure you understand how much work it takes to flip a home:
- It’s not a fast process: Consider that the average time it takes to flip a house is between five months and one year. Smaller projects or those completed with a bigger team will take less time than projects being completed by one person. The buying process can take several months, renovations will likely last at least two to four months, and then the house needs to be sold. It’s not uncommon for the entire flipping process to take a year a more.
- The home will need to be inspected: Before selling your house, you’ll need to hire an inspector to ensure the home is safe, up to code, and ready for listing. This can take about a month to finish, depending on wait times. The cost of a home inspector varies across the U.S., averaging between $200 and $350.
- You may need help from an agent and other experts: If you don’t have a lot of time to sell the home yourself—including listing it online, holding open houses, and answering inquiries—you’ll have to work with and pay a local real estate agent. Agents are paid a commission for selling your home, which cuts into your profits. Some investors recommend seeking out help from a team of agents or mentors to help you learn the process and be as successful as possible.
3. Running Out of Financial Resources
Can you really flip houses with no money? Not exactly. Flipping houses is often expensive and requires a substantial upfront investment. First, you need to have enough money to buy the home in cash or via a mortgage, which requires a down payment that is usually 15% to 20% of the property’s total cost. Additionally, you also need to pay interest, insurance, taxes, and renovation costs.
Here are financial factors to consider before flipping a house:
- You’ll need substantial savings: How much money do you need to start flipping houses? This varies widely—it all depends on the location and the specific property. Most likely, you will need at least $100,000 for the bare minimum of a down payment and the cost of renovations. If you want to purchase a home in cash, you’ll need at least $200,000 to $300,000 or more for the whole project.
- A detailed budget ensures you won’t run out of money: If you can’t pay monthly expenses or finish renovations due to insufficient funds, selling the home for enough profit will be hard.
- Weigh the pros and cons of different loan options: Speak to more than one lender or bank about mortgage rates, loan options, and interest rates. Also consider working with an investment group, which can expedite the process of securing funds. Another option is getting a “hard money loan,” a short-term loan for commercial or investment properties that doesn’t come from traditional lenders. Some investors utilize hard money loans when mortgage applications are denied or to avoid waiting a long time for traditional loans.
- Micro-flipping is a good option for first-timers: If you don’t have that much money or time to invest, consider “micro-flipping.” Micro-flipping involves buying and selling properties with limited renovations, often resulting in a faster sale but less profit.
4. Neglecting to Take Into Account Hidden Costs
To budget properly and actually make money once you sell your flipped house, you can’t overlook costs such as utilities, taxes, and insurance that can quickly add up. Other costs to take into account include inspector fees, fees for any new permits needed, and real estate commissions.
When you’re looking at homes to potentially buy and flip, here’s how to not overlook hidden costs:
- Always have a home inspected before you buy it.
- Make sure the house is up to code and doesn’t require any expensive permitting.
- Work with a knowledgeable contractor, plumber, and electrician to understand how much different renovations you’re considering will cost.
- Thoroughly discuss costs with your bank or a mentor, including mortgage payments, interests, and taxes. Make sure you can cover all necessary costs for up to one year.
6 Tips to Remember When Flipping a House
House flipping can be profitable and has the pro of potentially being a side gig while you’re working another job. That being said, it’s not necessarily the best or safest investment strategy for everyone. In some cases, owning a rental property may be a better use of your savings, or investing in something else entirely, such as low-risk stocks.
If you do decide to flip a house, here are key tips to keep in mind:
- Choose a desirable location: Make sure the location is one that will attract buyers, is in demand, and will increase in value. G. Brian Davis, a real estate investor, advises targeting “Class B or Class C properties for your first deal—solid middle-class or stable working-class neighborhoods.” The best cities for flipping homes in the U.S. include Phoenix, Arizona; Charlotte, North Carolina; Atlanta, Georgia; Scranton, Pennsylvania; Kingsport, Tennessee; Reading, Pennsylvania; Pittsburgh, Pennsylvania; Johnson City, Tennessee; and Jacksonville, Florida.
- Understand that the turnaround won’t be immediate: It will take at least several months to buy, update, and sell the home—and oftentimes much longer, such as up to one and a half years. While the project is underway, costs will accrue due to loan interest payments, taxes, and other expenses.
- Avoid going into debt to flip a home: Don’t pay more for the house than it makes sense to (follow the 70% Rule). Up to 60% of houses in the U.S. that are bought to be flipped are paid for in cash to avoid interest payments, which increases your profits.
- Don’t try to make your house flip your dream house: Ryan Pineda, an experienced house flipper, recommends avoiding being a perfectionist or spending a lot of money customizing the home to your unique tastes. Instead, prioritize what most buyers are looking for, including modern kitchens, bathrooms, and appliances.
- Make sure to market the home well: Marketing can make or break your investment. You’ll likely be marketing the home online, therefore, take great photos or have a professional do this. Post your listing on the best websites, hold open houses, and be proactive about selling the property quickly.
- Find a great real estate agent: Working with a great agent can speed up the process of selling your property. Although an agent will require a commission, they’ll help you find the best buyers as quickly as possible.
Want to learn more about making money from real estate? Check out this article: “How to Start a Real Estate Investment Company.”
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