3 Key Tips To Start Flipping Houses For Profit
Despite being a relatively competitive industry, there is still plenty of money to be made flipping houses. According to Attom Data Solutions, the average house flipper in the United States makes approximately $60,000 gross profit per flip. While these numbers are obviously attractive to property investors, there are some challenges that you need to be aware of if you want flip houses for profit. The goal of this article is to highlight 4 key tips, while providing a simple example at the end.
Key Tip 1: Workout how much you should pay for the property
The underlying goal of any house flip is to buy low and sell high. Generally, this process has four major steps:
- Identify a property that has been poorly maintained
- Purchase the property for less than its potential value
- Upgrade it with renovations that are known to increase the resale value
- Sell the house for a healthy profit
However, before you can proceed down this path, you need to know exactly how much you should pay for the property. This is where the 70 percent rule can act as a very good guideline. According to the the 70 percent rule:
Maximum Purchase Price = After Repair Value * 70% – Expected Repair Costs
The best way to workout the after repair value (expected resale value after renovations) is to use comparable properties in the area. For instance, if the average 3 bedroom 2 bath house in West Hartford is worth $240,000, it stands to reason that your investment property will be worth a similar amount, provided the features are more or less the same. In that case, it would make sense to use a hard money lender based in Connecticut to help purchase the property.
For the repair costs, you will need to set aside a confirmed budget that you can make available for the project. Once you know these two variables, (after repair value and repair costs), you can simply plug the data into the 70 percent rule formula. It will give you a target purchase price that makes it very realistic to generate profit in the deal.
Key Tip 2: Use speed to save money
It might not be obvious to inexperienced investors, but most good house flippers run their projects according to a very tight schedule. The reason is simple. The longer it takes to flip the house, the less money you will make in the deal. Every month that the project goes on will present a new set of holding costs that the investor is obliged to pay while they remain the owner of the property. These holding costs include:
- Loan repayments
- Property tax
- Property insurance
- Water, electricity and utilities
By reducing the number of months that you hold the property, you automatically reduce the holding costs that you are liable to pay during the fix and flip. As long as you don’t jeopardize the quality of the renovations, aiming to flip the property as fast as possible should be one of your key objectives, from the day you first take ownership until the house is officially resold.
Key Tip 3: Sell the house before your short term loan expires
In most cases, property flippers will use a fix and flip loan to purchase their investment property. This is mainly because hard money lenders are much more likely to actually lend you the money you need to purchase a fix and flip.
Where banks are slow, overly administrative and risk averse, hard money lenders tend to be quick and flexible. Even though the interest rates are typically higher, hard money loans make it feasible for investors to actually complete fix and flip projects.
Despite being very useful to property investors, there is one catch that isn’t immediately obvious. When you take out a hard money loan, you are obliged to pay the full loan amount back when the loan terms expire (usually 12-24 months after the loan begins). In most cases this isn’t an issue, because the sale of the house makes it easy to pay back the hard money loan. But if you do struggle to sell the house in time, it could potentially fall into foreclosure.
Given the risk of losing the house altogether if you fail to sell it, it makes perfect sense to have a concrete sales strategy in place from the beginning. You should have a very firm understanding of what comparable properties in the area are selling for, and you may need to enlist the help of a real estate agent to help accelerate the sales process. Make sure you keep this risk front of mind as you run through each step of the fix and flip project. Selling the house quickly is essential if you want to maximize profit and minimize the risk of foreclosure.
