Are you considering flipping houses to earn money? A lot of people do it – and thanks to HGTV and home improvement shows, house flipping has never been more popular. However, these shows have also given rise to some misconceptions.
A lot of our Addition Financial members express interest in finding investment properties and they ask us how to start flipping houses. We can help with the financial aspects of house flipping, but we’re not experts on the construction elements.
We reached out to some real estate and flipping experts to ask their advice. Here’s what they had to say.
Learn from an Expert
The one piece of advice provided by most of our experts was to find an experienced house flipper to act as a mentor. Mike Qiu of GoodAsSoldHomeBuyers.com said:
“My advice for someone starting out would be to not only seek advice from a veteran in the field, but be willing to offer help to them, in exchange for knowledge and experience. There are no books or forums that can replace in-the-field experience for a construction project. Seeing a house flip in motion, and watching an experienced person go through the steps is invaluable.”
Owen Dashner of Sell My House in Omaha Fast adds:
“My best beginner tip is to join your local Real Estate Investor Association (REIA) and your local meetup networking groups. If there are none in your area, start one of your own. This is where you will start making contacts with the investors who are players in your town. Be a sponge, soak up any information shared at the meetings you attend, and make friends with the successful flippers, agents, lenders, contractors and title reps in your area.”
Most areas will already have an REIA for you to join. You can search for your local chapter on the national REIA website.
Choose the Right Properties to Flip
One of the most common mistakes first-time flippers make is choosing the wrong properties to flip. If you choose a property in a less-than-desirable area, or you underestimate the amount of work required to make it sellable, you may end up losing your shirt.
Shawn Breyer of Georgia Foreclosures told us:
“When you are purchasing a house to flip, don't only rely on Realtors to find properties to purchase. Another option to find deals is to sign up to be on a wholesaler's email list. A wholesaler is someone who sends out marketing to find properties that need repairs at discounts. These properties will be anywhere from 40%-60% of the after repair value (ARV). To find wholesalers, search for We Buy Houses [your city] and you'll find websites of these companies.”
Owen adds:
“Focus on buying cosmetically distressed houses in neighborhoods with desirable school districts. These houses should ideally be built after 1978 (no lead paint) and in areas with houses that are a similar size and style, so that it will be easy to establish comparable sales. Starter homes in good areas with low inventory sell like hotcakes.”
The takeaway here is that a house that’s in bad condition isn’t necessarily worth flipping. By focusing on the area where the home is located and its resale value, you’ll minimize your risk of investing in a money pit.
Crunch the Numbers
There’s a tendency among first-time house flippers to overestimate the resale value of the properties they buy. The problem with that, of course, is that you may end up losing money instead of getting a decent return on your investment.
Nick Disney of Sell My San Antonio House told us:
“My #1 tip for people who want to get into flipping houses is to learn how to assess the ARV or After Repaired Value. The ARV is the amount that you believe you can sell the house for after you have completed all the necessary repairs and it is the most important number in house flipping. This number can be calculated by looking at what other comparable houses in the same area have sold for in recent months. Once you know your ARV, you can subtract your cost of repairs and the amount of profit you plan to make and the amount left over is the maximum that you can pay for the house. This simple formula can keep you from paying too much upfront which can lead to being stuck without any profit in the end.”
He goes on to point out that not calculating the ARV can lead to difficulty selling the house after the repairs are complete. When a house sits on the market, you’ll be required to continue paying the mortgage, property taxes and other related expenses. It’s likely that you’ll eventually need to reduce the ARV to sell the property.
Create a Realistic Schedule
How long do you think it will take you to flip your first house? According to our experts, the chances are good that it will take longer than you think.
Aaron Cambden of Fairview Estates says:
“One thing that everyone overlooks is that it takes a lot longer than you might think. If the house is in really poor condition, it is going to take longer than you had planned. If you can see that it's in tough shape from the surface, 9 times out of 10, once you delve deeper into it, there will be hidden problems that you had no idea about. So, be prepared to keep a flexible timeframe so that when you have a bad surprise you feel comfortable pushing back the finish date.”
On a related note, it’s important to create a schedule that doesn’t require you to work to the point of exhaustion. Rob Gavin of Aluminium Bending Specialists told us:
“If you're flipping the house and doing the work yourself, you should know when to end the day. So many people fall into the trap of finishing one task and just starting another small one. That small task then turns into a huge one and before you know it it's 9 pm on a Tuesday and you need to go home. Set an endpoint of the day and stick to it as best you can.”
Flipping a house is a lot of work. Building some wiggle room into your schedule – and ensuring you have the working capital to complete the repairs and sell the house you’re flipping – will minimize your risk of losing money (or your mind) in the process.
Manage Your Expenses
Scope creep is a real problem when you learn how to start flipping houses. It’s essential to get a handle on the work that needs to be completed before you put the house on the market as well as how long it will take.
Rick Rentas of Renovation 320 offers this advice:
“In terms of budgeting for renovations--nothing is set in stone. there will always be surprises that pop up during the renovation. That's why it's important to have contingencies in your budget in order to be prepared for worst case scenarios. Flipping houses is not like what you see on HGTV. You can make mistakes that will ruin your project and where you will lose money.”
On a related note, first-time house flippers sometimes make the mistake of trying to do all the work themselves thinking it will save them money. Nick had something to say about hiring contractors as a way of managing costs:
“One of the biggest misconceptions that I see is that many people want to do all the work themselves. Most of us aren't skilled contractors and it would take us much longer to do the work and it usually wouldn't come out looking as good as if we had hired the right person to do it. This often just leads to frustration and it slows down the process and ends up costing you in the long run. If you do not have the skills and experience to complete the projects correctly and in a reasonable amount of time, you should really consider hiring a professional from the start.”
As you begin searching for houses to flip, be realistic about your skills and abilities. If you have no experience with construction or renovation, you’ll be better off hiring a professional. It will cost less than doing the work yourself.
Protect Yourself
The value of any home you flip will increase as you complete repairs and renovations. You will need to have enough insurance to cover the home’s increased value according to Tonya Bruin of To Do-Done. She notes:
“Remodeling projects can add up to 25 percent to a home's value, yet many homeowners make the mistake of forgetting to increase coverage to protect their investment. Most homeowners' insurance policies require 100 percent of the home’s replacement cost, so it’s critical to raise your home’s policy limit before the remodeling project begins.”
This advice underscores the necessity of crunching the numbers before you buy a property to flip. Calculating the ARV will help you determine how much insurance you need to protect your investment.
Flipping houses can be rewarding and lucrative if you can avoid the most common mistakes first-time flippers make. The advice here should help you have a great first experience with flipping.
Need an investment loan to flip your first property? Click here to find out how Addition Financial can help!
Posted on Jun 30, 2020
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