Are you looking for a real business? A business where high risk and hard work can mean big rewards? Have you looked at Real Estate Flipping?
All business has an element of risk, and real estate flipping is no exception. But stick to the numbers and house flipping offers a real opportunity to earn some serious money in an evergreen business.
For anyone seeking an alternative to building online assets, real estate flipping might just be the answer.
Can anyone do house flipping? In theory, yes. You don’t need to be a builder or realtor, though learning some of their skills will certainly pay off.
Is it like they show on the TV? No, of course not. It’s not easy and you won’t make $100,000 by giving a house a quick coat of paint!
But there is some serious money to be made in Real Estate Flipping. Buying and selling property is still a sound business idea.
So here’s the basics of real estate flipping. And because it’s a high risk strategy, let’s start with the numbers; the one thing you can’t afford to get wrong.
Real Estate Flipping – Do The Math
The first rule of real estate flipping is to do the math. Work out how much you’re going to spend and how much you’ll make. It needs to add up!
You’ll have up-front costs that you need to finance:
- The purchase price
- The cost of repairs and renovation
- Property taxes, utilities and maintenance
- Agency commission, fees and closing costs
- Loan interest (unless your savings cover the above)
ARV – And the house flipper’s magic number
Make sure you learn and thoroughly understand ARV. The After Renovation Value is simply, how much the property will sell for once your work is complete.
And the magic number is 70%. Be sure that the amount you spend on purchasing and renovating the property is never more than 70% of the ARV.
Why 70% ?
Here’s the numbers. For example: You buy a run-down property for $100,000.
Similar, well maintained houses in the same neighborhood fetch around $200,000 so you expect to sell for around that price.
You spend $40,000 on repairs and renovation.
Your costs so far are $140,000, that’s 70% of $200,000.
Add fees, commissions, closing costs, taxes and interest and you pay out another $30,000 or so.
Your maximum profit: $30,000
Why you need to stick to your numbers when flipping real estate
$30,000 profit sounds great until you remember that this project will typically take between 6 months and a year.
That’s assuming you get a reasonably quick sale.
And you don’t go over-budget on your renovation.
Go over the magic 70% and you’re asking for trouble. You may not make a loss, but working 6 months for $5,000 ain’t so great either!
Financing Your Real Estate Flipping
If you have a spare $200,000 or so sitting in your savings account then you can finance your first house flipping project yourself.
Stick to your numbers and it’s likely to be a sound investment.
If self-financing isn’t yet an option for you then you’ll need to borrow, and add the costs of that to your calculations.
Who’s going to lend that sort of money? Here’s some possibilities:
- A bank loan
- Home Equity loan on your current house
- A personal loan (friends / family / mentors)
- Government loan
- A loan from private investors
Get the numbers right and you’ll soon be able to finance your own deals from your profits, and/or have multiple projects on the go.
But first you have to find and purchase your first house to flip.
Finding Real Estate to Flip
Your first step is finding the right house. This is going to take you a while.
It’s not just a question of finding a run down property and snapping it up at what looks like a bargain price. There are other considerations.
Location. What sort of neighborhood is it? Do people want to live here? What are the schools like? What are the demographics?
Prices. What are the real estate prices like in the area? How much do ‘nice’ houses sell for here? Are the prices rising or falling?
Know Your Market – and Your Buyer
What sort of market will you be dealing with? Or, who is your buyer going to be?
Is this a quiet community that’s popular with retirees? Or is it an area with good schools and likely to attract young families?
What sort of property will your prospective buyer be looking for?
House Flipping – The Renovation
Remember that renovating a property you plan to sell is very different to working on your own house.
It’s the same as anything in sales – it’s not about you. It’s all about what your prospective buyer wants.
And your product needs to be good enough, not necessarily the ‘best’.
Know buyer – renovate for them
Who will you be selling to? A young, growing family are probably going to want three bathrooms and a big family room.
Working professionals or retirees may have very different requirements. Always keep your buyers in mind and renovate according to their needs.
You might like to have a pink bedroom, blue bathrooms and a green kitchen. And it might look great to some people.
And that’s a mistake when it comes to selling.
Stick to white or neutral colors that won’t offend anyone. If they want a lounge with red walls they can decorate it themselves!
Initial impressions are very important and, even with houses, buying decisions are emotional. You don’t want to put people off by inflicting your tastes on them.
Don’t overdo it
The idea is to do just enough. Do things that add value, but don’t overdo it.
Kitchens and bathrooms need to be clean and modern but, unless you’re dealing with a $500,000+ property, you don’t want to be spending $30,000 on a new kitchen.
Consider the neighborhood too, and don’t price yourself out of the market.
Making the property worth $300,000 isn’t such a great idea if all the other houses on the street are worth around $150,000 – $200,000
Real Estate Flipping – The Sale
At the end of the day it’s all about the sale. Unless you plan to go into rental, but that’s a whole different game. Real estate flipping is about selling.
Be realistic, not greedy
Unless you have plenty of capital and financed the deal yourself, you need to sell as quickly as possible, before interest and taxes eat all your profits.
Set your selling price too high and you won’t be flipping property, just buying a house and sitting on it!
Set a realistic price and, if you stick to your numbers and stay within budget, you’ll still be making a good profit.
Do you need a realtor?
There’s pros and cons to both ways here.
You can certainly advertise and sell property yourself and, of course, you get to keep a whole lot more of the profit. But how quickly can you sell?
A local agent will have contacts and maybe a list of people waiting to buy a property like the one you’re flipping. And they’ll want a healthy commision!
There is no definitive right and wrong here, usually just a balance or choice between speed and profit.
Good Luck – or Good Math
Stick to the numbers and you’ll be fine. You may get lucky sometimes, but real estate flipping should always be a business venture, not a gamble.
In a rapidly rising market you can buy a house, sit on it for six months and sell at a profit. That’s not what we have in 2017.
The key to house flipping today is the renovation. Buy property cheaply. Renovate to add value – but only where it definitely adds value. Sell at market price.
It’s not a magical money making scheme. And it’s not easy. But real estate flipping is a real business – there’s definitely an opportunity if you’re up for some work.
Just stick to the numbers!
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