Property flipping has gained a lot of popularity in the real estate industry over the last few years. In 2017 alone, more than 200,000 homes underwent flipping in the United States – the most ever experienced in the previous 11 years. In the second quarter of 2021, house flips reached 800,000, nearly 5% of all home sales in that year.
These figures only tell part of the story. Property flipping is not only becoming more popular but it’s also becoming more profitable. Many people are making a fortune flipping homes and you could be one of them. While there is no one-size-fits-all answer to the question of how much money you can make flipping houses, it’s definitely possible to make a lot of money flipping homes if you do it right.
TV shows may make property flipping look simple; take dilapidated homes and convert them into jaw-dropping and chic abodes. However, like any other business, it’s essential to understand the full scope of the process; otherwise, its risks will wear you down financially, emotionally, and physically.
This guide explores everything you need to know about property flipping. It starts with the definition, explains how it works, the steps involved, its benefits, and concludes with the pitfalls to avoid so that you can succeed in this venture.
What is Property Flipping?
Property flipping is a profit strategy where an investor or flipper buys a real estate investment below market value, renovates it, and sells it at a higher price, making a profit. Old homes and foreclosures are the best properties to flip because you can buy them relatively cheaply, improving your potential profit.
For example, if you purchase a home for $100,000 and spend $10,000 on renovations, you can sell it for $150,000, making a profit of $40,000. It’s important to note that not all flips will result in such a large return on investment; the potential profit depends on the market conditions and how much you spend on renovations.
There are two types of property flipping:
Fix and flip:
Buy a property that has the potential to increase in value with the right renovations. Make the necessary refurbishment and sell it for a higher price. This is usually the most common type of flipping and the one that TV shows focus on.
Purchase and resell
Buy an investment in a market with quickly rising home values, hold the property for a few months, resell at a higher price and make a profit. Here, you’re taking advantage of market conditions rather than fixing and flipping a property.
What Are the Steps Involved in Property Flipping?
Understand the following steps of flipping houses to increase your odds of success and reduce your financial risk:
Step 1: Have a Team of Experts
The first step in property flipping is putting together a team of qualified professionals. Each of them will guide you through a different facet of the flipping process. In particular, you’ll require finding a lender, real estate agent, and a general contractor. These people will help you find a property, finance it, and renovate it so that you can sell it for a profit.
Step 2: Figure Out Your Financing
Once your team is in place, the next step is to figure out how to finance the flip. Cash payments are a perfect option if you don’t want to end up with too much debt. They also protect you from paying high interests, or have a rush to sell the property at a low price. However, even without cash, there are financing options that you can use, such as:
Traditional bank financing
This financing option involves getting a loan from your local bank. The process is straightforward: decide the loan term, put up the appropriate down payment and receive the cash into your account . To qualify for this loan, you need good credit and a track record of successfully flipping houses.
Home equity loan
A home equity loan is fundamentally a second mortgage that allows you to repay your flipping loan over a fixed term and interest rate. The disadvantage of this option is that your house serves as the collateral. If you fall behind on the home equity loan, the bank can foreclose on your house.
Hard money loan
Home money loans are designed for people who don’t necessarily have excellent credit but need money to complete their renovations. This loan is more flexible than a bank loan but its interest rates fall in the double-digit range, making them a more expensive option. Their short payoff period means you might have to sell your flipped house quickly to avoid a big balloon payment.
Step 3: Create a Business Plan and Budget
While buying a primary residence is an emotional process, purchasing an investment to flip has a lot to do with numbers. Therefore, it is wise to work up a simple budget and business plan. They will bring order to the entire process and help you not to overspend which may reduce your profit.
Step 4: Get the Preferred House
Here, work with a real estate agent to tour potential homes which meet your needs and budget. Once you find one that impresses you, bring in your general contractor so that they can estimate the work required to renovate the property. Once you find one that meets your bottom line, go ahead and buy the investment.
Step 5: Do Renovations
This is one of the most exciting and critical steps in the property flipping process. Expensive on-trend light fixtures, fabulous kitchens, and gleaming hardwood floors may be tempting. However, to profit, stick to your budget when doing renovations. These renovations focus on kitchens and bathrooms the most. A good strategy is to invest in high-quality materials that will not go out of style anytime soon, but avoid unnecessary details which will add costs without returns.
Step 7: Sell the Home for a Profit
Once done with renovations, let your real estate agent put your home back on the market. When selling, ensure that you meet your bottom line. Add up the total amount you’ve spent on buying and renovating the property and come up with a reasonable list price. To find out your financing costs use a mortgage calculator, which allows you to compare interest rates from different lenders.
What Are the Benefits of Property flipping?
Potential Quick profits
The most significant advantage of buying and reselling a property is the outstanding profits it can bring you within a short time. For example, one successful residential home fix-and-flip that takes 90 days to complete can make you between $50,000 and $80,000, a significant gain compared to the amount of work you may have put into the renovations.
Networking
The property flipping world has professionals from diverse fields such as contractors, realtors, lenders, and home inspectors. By Interacting within these circles, you’re likely to make several contacts that can help you with future investments. Besides, these contacts can come with future potential business opportunities.
Tax Benefits
When you flip a property for a profit, you may be able to claim the profits as capital gains. This tax benefit can considerably reduce the amount of taxes you would have paid on the income. The tax law on capital gains is complex, so speak with an accountant to find out if you qualify.
Less Risky Than Stock Market
Investing in stocks is a high-risk affair where you can easily lose your investment. Conversely, flipping houses offers you a tangible asset that has the potential to sell at a higher price than the one at which it was purchased. This stability reduces your risk as an investor.
Do You Need Money to Flip Property?
In most cases, you will need to put some of your own money into the flipping project. This is usually in the form of a down payment which allows you to control the property. In some cases, you may also need to finance the purchase and renovations using a mortgage loan. However, there are several ways you can make flipping a property without money. For example, you can join forces with another investor who can provide the necessary funds or find a property that needs minimal renovations.
What Are the Pitfalls Involved in Property Flipping?
It may look easy to flip a property; buy it, make a few changes, return it to the market, and make a profit. Social media may portray it like this, but buying a property to rehab and resell has potential pitfalls. Like other rewarding activities, solid preparation and information can help you avoid the following pitfalls:
Inadequate Cash
Flipping a property is expensive from acquisition to renovation. While there are many financial options available, finding these deals from a legitimate vendor is challenging. To avoid getting stuck, research your financing options to determine the mortgage type that best meets your needs and find a lender that offers low-interest rates.
Insufficient Knowledge
To be successful in property flipping, you need to know how to choose the right property, in the right location, and at the right price. For example, in a neighborhood of homes worth $200,000, don’t buy at $160,000 and sell at $300,000. The market is far too efficient for that to occur regularly. Also, understand the applicable tax laws and learn when to count losses and exit before your project becomes a money pit.
Bottom-Line
Property flipping is a lucrative industry to explore. Learning to do it right may be challenging, but nothing will be unattainable for you if you have the right attitude and proper knowledge. Commit yourself to understanding the nitty-gritty of the market, learn from your mistakes along the way, and shine in the field.
While flipping a property offers several advantages over other investments, it’s important to remember that it is not a get-rich-quick scheme. Like all investments, there is always some element of risk involved. By following the steps outlined in this guide, you can minimize the risks and maximize your profits.
