With the advent of HGTV, house flipping became an updated trend, with television personalities magically renovating a home in a mere hour. But house flipping is a real thing and can be very profitable if you know what you’re doing.
Strategic Planning and a Little Hard Work
Home flipping is a type of investment vehicle where buyers purchase a piece of real estate not to live in but to generate income in the flip. Most investors have a strong appreciation for the fact that it looks nothing like television and takes hard work, time, and money. But if you are willing to apply some strategic steps, you may find that house flipping is a fun and profitable form of investment.
#1 The 70% Rule
Rule number one: never pay too much for the home to begin with. A standard rule of thumb for home flippers is the 70% rule. An investor should never pay more than 70% of the after repair value, or ARV, minus the cost of repairs. This means that for a house with an ARV of $250,000 that needs $50,000 of repairs or upgrades, the investor shouldn’t pay more than $125,000, ie. $250,000 X 0.70 = 175,000 - $50,000 = $125,000.
In addition, the cost of holding the property must also be considered. Each day that passes costs the investor money since, as owners, they are responsible for any taxes, insurance, utilities, and mortgage payments on the property.
#2 Investing Sweat Equity
Those who are professional carpenters, electricians, and plumbers can be particularly adept at flipping homes. But you don’t have to be a professional builder or skilled professional to be successful at flipping homes. You should have the knowledge and skill to invest some sweat equity, or be prepared to take less in profit by contracting the work out.
If you are handy enough to do most of the installations and renovations yourself, you may find that house flipping is something that you enjoy and provides you with a profitable income.
#3 Having the Time
Home flipping can be a time-consuming enterprise. While the strategy is always to buy low and sell high like any other form of investment, home flipping relies on creating added value as quickly as possible, limiting the amount of financial exposure.
Finding the right piece of property takes time, and then once the home is purchased, it requires the time to repair and renovate it. While that can be fine for someone who doesn’t work a full-time job, if you do, it can eat away at your weekends and evenings. Having enough time to devote to fixing up the home is essential.
#4 Knowing the Market and the Neighborhood
Before you purchase a house to flip, you should fully appreciate and understand the market and the neighborhood you are considering. While there is a good deal of gentrification going on today, there can be a real learning curve when trying to time an up-and-coming neighborhood, one that has already priced you out, or one that will not be attractive for a good long while, if ever.
Real estate investors classify neighborhoods from A to D. The better deal you get in the better neighborhood, the greater your likelihood of profit may be. In contrast, property in a D neighborhood, even if you have beautifully upgraded the home, can languish on the market for a very long time.
#5 Securing Adequate Financing
Investors never want to use their own money for house flipping, if possible. But it can be challenging to secure financing for homes that are being used as an investment.
Conventional lenders will usually not consider these types of homes for mortgages. If you have significant equity in your primary home, you can look to a cash-out refinance or home equity line of credit. These both use your primary home as collateral. There are other alternative lending options out there that may be better suited to finance a home flip, however. Speaking with a skilled mortgage professional to understand your financing options is important before embarking on any house flipping enterprise.
