"Property flipping" refers to purchasing residential properties, making necessary improvements and selling the property quickly for a profit. The idea around this strategy is investing your money in relatively cheap improvements that will significantly increase the property's market value. In most cases, your goal is selling the home before a mortgage payment is due, further minimizing your investment and maximizes profits.
Property Flipping: A Guide to Help Those in Need
House flipping isn't as easy as it seems on TV, and you need a lot of information and know-how before you get into the business. Unfortunately, a lot of people lose money by not doing their research.
This guide will walk you through the process of flipping a house, and point out some areas where people often run into trouble.
1. Assessing Your Finances
The first step to take before any investment strategy is taking stock of your own resources. Before you get started, you need to know exactly how much money you have of your own to invest, or whether you need to turn to investors. If you don't have enough money to get started on your own, look for a partner who has money to invest and split the profits.
2. Setting up a Team
Flipping houses requires a team of professionals who can help you find, repair and sell properties as fast as possible. You simply can't do this on your own. Your team will include architects, contractors, brokers, insurance agents, money lenders and accountants, who will help you get over the learning curve.
3. Finding the Perfect Property
While you may think this is the easy part, it can actually be the most challenging. You need to find a property you can buy for a low price, give it a quick visual inspection to make sure it can be rehabbed quickly with fairly little money so you can make a profit. Try to focus on properties that shouldn't need major repairs, those that need work that will substantially increase equity. A good real estate agent can be your best friend in this case.
4. Doing the Math
To decide if a house is worth buying, you need to determine the potential selling price when it's fixed. This is known as your After Repair Value, or ARV. Subtract the purchase price, repairs and monthly carrying costs to reach your profit. Make sure you research average sales prices on comparable homes, along with renovation costs in the area. Speak with a real estate professional to get accurate information on long-term trends and sales prices.
If the initial math based on your budget shows the deal will be profitable, you have a great opportunity on your hands.
5. Managing Rehab Work
After the home is purchased, you can't sit back and rely on your contractor to make sure repairs are completed. This entire process needs to be managed tightly by you and a professional contractor who will oversee extensive repairs. You will be responsible for personally supervising the work to make sure it's done properly and on budget, which means you will need to remain on site.
While much of your profits in the end will depend on what you paid for the property, inexperienced house flippers all too often get blind-sighted by delays in rehab work and money that seems to vanish into the home. Allowing contractors to run free or going overboard, spending over the budget, are two easy ways to see your profits disappear.
6. Working Fast
Once you purchase the property, the clock starts ticking. Property flipping is a race against the clock, because the longer it takes to rehab and sell, the less money you make. From financing payments and insurance to taxes and utilities, carrying costs will eat up your profits the longer you own the home.
You have a balancing act on your hands; ensuring repairs are done properly but as fast as possible. You'll also need to hire a good real estate agent who can help you set the final price correctly so the property sells fast. It's a good rule of thumb to estimate 6 months from purchase to sale, but factor 2-3 extra months of expenses into the budget.