5 Money Making Tips When Flipping Houses
Are you in the house flipping business? Do you want a sure way to make a profit? You’re not the only one. House flipping has made a comeback in recent years, rising to the highest levels since the 2008 financial crisis.
It can present a wealth of opportunity for real estate investors looking to make a big profit in a small amount of time. It can also bring headaches, stress and you can lose money, with 3 in 10 homes selling for a loss. How can you make sure you’re in the black with every flip?
Keep reading for our top 5 tips to run a house flipping business.
1. Do You Have a Business Plan?
Do you treat your house flipping business like a business or a side gig?
There are many arguments for and against business plans. However, a business plan is required if you need to secure outside funding. It also serves as your roadmap. Let’s face it, investing in real estate is unpredictable. You don’t know if the market is going to be up or down in a few weeks.
You don’t know if issues will arise during the home renovation.
A business plan helps you map out those scenarios and mitigate your risk. If you have a strategy in place, banks and investors will take you more seriously. Here’s what you have to have in your house flipping business plan:
- Business Goals
- Lead Generation Plan
- Market Analysis
- Investment & Financing
- Sales & Marketing Plan
- Team Bios
After you drafted your business plan, take it to a few trusted advisors for some feedback and revise accordingly.
2. Buy at the Right Price
You’ve heard “Buy low, sell high.” Yes, that’s true in real estate, but you have to understand: just because you sell high doesn’t mean you make a profit. The magic number you’re looking for when buying a property is the ARV, or after repair value. This number is an estimate of what the home will be worth once it’s renovated.
The standard rule is to follow the 70% rule, meaning you shouldn’t buy a home for more than 70% of the after repair value. Many house flippers only look at comps in the area to determine the ARV. By just looking at comps, they’re missing potential variables in the neighborhood or that particular home.
To get an accurate ARV, enlist the help of a real estate broker who can come up with a number for you. That segues into the next tip.
3. Have a Top-Notch Team
Real estate transactions don’t happen in a bubble. It takes a team of professionals to make them happen. As a business owner, you may be tempted to take on everything yourself to save some cash. Don’t. There are too many legalities and pitfalls for you to navigate by yourself. You’ll probably end up losing money in the process.
If you don’t have a realtor on your team, you put your business at risk. A realtor will give you accurate market data and industry knowledge that will take the guesswork out of buying a home. For example, if you were going to buy a commercial property like this rehab center, you’ll want a commercial real estate expert. The best part is that a realtor’s commission fees are usually paid by the seller. There’s no reason not to have a realtor on your side.
You can spot check a home and while it may be structurally sound, hidden issues may lurk underneath. That’s why you need an inspector on your team.
A general contractor is an essential team member. After all, who’s going to get the permits and take care of the details for your renovations?
Make sure you bring the contractor in before you buy the home to get an estimate of what the renovations will cost. That will also help you determine your ARV.
Protect yourself and your business by hiring a real estate attorney. They’ll create the contracts and make sure your business is within the rule of law. They’ll also advise you, which will protect you from lawsuits.
Do you know how much you’ll pay in capital gains taxes? How about making sure you have the right business structure? That’s where a good accountant comes in. They’ll take care of the tax details so you won’t have to.
4. Improve the Home, but Not Too Much
When you renovate a home, be sure to keep the updates simple. If you’re buying a property in a neighborhood valued at $175,000, do you need marble floors and custom cabinetry? No. Learn what other homes in the neighborhood have and be aware of what types of living spaces buyers are looking for.
5. Be Flush with Cash
You will need to have the cash to avoid paying for private mortgage insurance. Not only that, but traditional lenders would want about 25% down on the property to get the best interest rate. Private lenders can fund your project with a short-term loan, but you will still give up 10-15% in interest. Other private lenders might sign off on a loan, but you have to have a solid track record.
You Can Have a Successful House Flipping Business
Your house flipping business isn’t a made for TV special, it’s serious business. To succeed, you have to have a plan, the right team, and a firm understanding of what buyers want. While there are a lot of risks involved, you can mitigate it with the right planning and patience.
If you need assistance with your business, Sky Five Properties can help you acquire and renovate properties all over Florida.
Take a closer look at our services today.