— A Fix & Flip Investor Guide —
How To Make Money Flipping
by Chris Brown, President, CB Investments
20 February 2017
Flipping is buying property at a discount as a foreclosure or fixer-upper, rehabbing the property, and selling it for a profit.
There has been a boom in people investing in real estate over the last few years as many now view buying real estate as a safer investment than the stock market, and certainly more profitable than savings accounts or bonds. When purchased for the right price, real estate can show significant appreciation over even a short amount of time, especially when buying a distressed property and rehabbing it.
House flippers generally buy properties that are in a distressed condition and selling below market value. By rehabbing the property and bringing it up to average or above average condition for the neighborhood, rehabbers are frequently able to sell the properties at market value, making a good profit even when considering rehab and holding costs.
Being a successful real estate investor/flipper requires knowledge of many different areas of expertise. To name a few:
- Rehabilitation construction process and costs
- Title transfer
- Principles of real estate finance
- Property valuation
- Real estate marketing
Gaining an understanding about all of the physical, legal and financial aspects of the home rehab process will always be a worthwhile use of the investor’s time. This knowledge will help to reduce unnecessary expenses and increase profits.
When it comes to the house flipping process, an ounce of preparation for your flip can save you thousands of dollars.
Developing A Plan
Having a business plan that defines infrastructure, budget, goals, direction and accounting is extremely important. Any partnership or corporation must stay focused on market analysis, budget, profit goals and accounting, and house flipping is no different. Proper organizational structuring will help to make the venture successful and profitable. Find partners with different backgrounds as their differing perspectives will be invaluable.
Forming a corporation or partnership presents several tasks that investors must perform.
- First, develop the Corporation/Partnership with the help of an attorney and/or accountant
- Develop a proper infrastructure and hierarchy to help follow through
- Analyze market conditions to make sure your plan fits into the current market
- Establish detailed internal procedures to insure deadlines, goals and profit forecasts are met
There will always be challenges and unforeseen issues, but having a good plan will increase your ability to succeed in this current market. A flipper with a properly structured network that stays disciplined in their approach will generally be the most successful.
By including two or more people, you can divide the responsibilities and risks while multiplying your skills and network.
Finding A Team
Surround yourself with professionals. This is important for any successful investor. The amount of time and money saved by dealing with knowledgeable professionals cannot always be properly measured. Often, the professional can reduce costs and help to maintain schedules by using their own network. Working with a great team of professionals will make the entire house flip go more smoothly and efficiently.
A good construction contractor to consult on rehabilitation work is a necessary addition to any house flippers team. You’ll also need the ability to find homes that need rehab. Usually, a realtor with access to REO inventory lists is a great place to start. The house flipper needs attorneys or title agents to facilitate the proper transfers of title. In addition, an investor who needs to finance a project needs a rehab lending contact who can handle pre-qualifications and credit issues. An accounting contact to handle and explain tax impacts and reconciliation is equally important.
When deciding whether to pursue a rental property or a house flip, consider the economics of income versus a single big score.
Finding The Property
The most important thing to remember when buying a house as an investment property is that you are buying a house for profit, and not for any other reason. Whether you are buying the house to flip, or to hold as a rental property, the numbers should tell the story. Not that the house is pretty, or in a good neighborhood.
Once you have identified a property that you are interested in, determine the economics of a deal. No matter how good the property looks, make sure you can make money at it. Have your exit strategy clear in your mind, and stick to your plan. This will also be further developed later.
Rehabbing The Property
Once you have bought the property, the next step is the rehab. Make sure your contractor is licensed and capable. Only work with someone you know personally, or about whom you have received excellent references. Be present at the project, don’t leave it up to someone else to safeguard your property and your money.
Also, be careful about your choice of decor — make sure that walls, countertops, flooring, etc. are colors and styles that will appeal to the majority of buyers. Be careful not to inject your personal taste into a house that will be someone else’s home. The property needs to appeal to the buyers, not the flipper.
It’s very easy to over-improve a property, but it’s also very important to establish a strong first impression.
Selling The Property
When it comes to the selling price, you should review the business plan that you established early in the process. Make sure that you have set a price that makes sense for the market and your target profit. It’s also a good idea to know the lowest price that you can accept and still be able to make money on the project. Knowing the lowest price you’ll accept that will still turn a profit will help you negotiate offers. Then have a couple realtors tour the property and give you some suggested listing prices to help you determine market value. Once you have a good sense of the current market value, compare it to your expectations from the beginning of the project. If you were conservative from the start, the numbers will be similar.
It’s best to price the property close to the current value. You can sell slightly below the market price if you want to sell fast and you have enough profit built into the project. If you have more time, then you can price it a little higher. A property will only sell for what the market will bear, no matter what. Do not price it above the market in order to recover your costs because it will not sell at that price. If it doesn’t sell then the property will become stale on the market, creating more problems for you while increasing your cost. You’ll be forced to reduce the price and have wasted time and money.
Renting The Property
Depending on your circumstances, you may decide not to sell at all and rent the property instead. Be sure that your rental price is consistent with the market for the size of the property and the upgrades you installed. It is not uncommon for house flippers to hold onto renovated properties for cash flow over a period of time rather than sell them for instant profit. This can either be a long term or short term strategy.
In a short term case, a house flipper may want to get the property fully occupied with cash flowing in order to make more money from it upon sale. This could happen when a neighborhood is primarily rental properties owned by investors and the house flipper wants to wait until an optimal time to sell the property. In the long term, the rehabber is making an investment to receive positive cash flow over an extended period of time. The house flipper must make sure that any loans on the property are at the lowest possible interest rate. Most rehab lenders are expensive, but necessary because traditional lenders do not generally lend on rehabs. A finished, cash flowing property, however, is a different story. The rehabber should approach traditional lending sources to refinance out of the more expensive loan as quickly as possible.
When renting property, price it as you would when pricing a house for sale. Look at comparable prices per square foot, etc. Compare the features of your project with the competition.
An effective exit strategy is just as important as your entry strategy; it will ensure that you are receiving the best results.
There is a lot to know before leaping in to your first house flip. Don’t go spending thousands of dollars on seminars that promise you’ll get rich quick. House flipping is hard work, and you’ll need those dollars as capital for your project. This guide is designed as a primer for anyone interested in learning how to successfully flip a house for profit. It’s not a guarantee you’ll get rich, but it’s a good place to start for anybody interested in flipping houses. We’re here to help.