Flipping houses may look easy — after all, it’s as simple as buying a rundown property, paying someone to do the repairs, putting on a fresh coat of paint, and then selling at a huge profit, right?
Not so fast. Repairs needed on a flip can get out of hand quickly if you’re not careful, and finding a good flip property at a basement bargain discount can be tough. Plus, there’s that pesky problem of having enough capital to invest before you eventually sell for (hopefully) a big profit. You need a decent amount of cash to start flipping houses and you may think being a “flipper” is out of your reach, especially if you’re young. But, there are ways to do it by thinking creatively. Here are some things to consider before jumping into house flipping.
Make Sure You Have the Skills and the Time
If flipping houses were easy, more people would do it. As a young flipper, you likely have the benefit of having more time on your hands than others who may have a family, are less flexible, and/or have a demanding full-time job. You’ll need this time to wait for the right property, form the connections needed, and then, of course, perform the actual renovations needed on the home to sell for a profit.
First, you’ll want to be able to determine what a home is worth and accurately estimate repairs. This will help you figure out the purchase price. The first big mistake you can make is paying too much for a property. The 70% rule is a good standard to go by — it says you shouldn’t pay more than 70% of the after-repair value (ARV) minus the repairs needed.
While you’re waiting for a great property, use this time to learn everything you can about fixing anything and everything related to home remodeling. You may do this by working as an apprentice to someone in one of those industries, like a plumber, electrician, carpenter, or even another home flipper. This is the best way to learn how to do it on your own and will cut down on your risk when the time comes to put in some major sweat equity on your own flip.
If you don’t have a handy bone in your body, you may want to reconsider your dream of flipping houses. In that case, you’d need to hire a professional to complete most of the renovations and repair work, which can significantly cut into your profit. Unless you take the time to catch up on these skills, you may end up losing money on your investment, rather than making it.
Build Your Network
Whether its offering advice on getting started in the flipping industry, lending you money, or providing professional services you’ll need after actually purchasing a property, your network will prove vital to your success as a flipper. By being transparent about your goals and attending real estate investor meetings in your area, you’ll be best positioned to buy and flip your first property.
Find the Money
Finding financing to fund your flip is probably one of the hardest parts of the gig. For some interested in flipping, this is enough to stop them in their tracks. If you have a lot of earning capacity through a full-time job or other means, you may have enough in savings to provide a down payment and qualify for a traditional mortgage. But, be aware that the terms won’t be as good as those for an owner-occupied property — expect higher interest rates and a smaller amount of money at your disposal.
You’ll probably need to come up with a down payment of 20% of the purchase price, plus the full amount to fund the repairs. However, depending on the condition of the flip when you purchase it, your lender may not be willing to fund the purchase through a traditional mortgage at all since they see it as too risky.
Thankfully, there are several other avenues to find financing if you can’t or don’t want to invest your own money into the flip.
Wholesaling is when someone contracts with a seller to purchase a (usually distressed) property at a discount. They then find another buyer for the property by marketing it well and assign the contract to the new buyer before closing. Thus, the wholesaler never takes title and never pays a dime of his or her own money. Instead, they make a profit based on the difference between the original contracted price and the amount paid by the new buyer.
Wholesaling may be a great way to get started as a flipper, without being on the hook to perform any of the repairs yourself or pay any money upfront. However, you’ll need to make sure you have an exit strategy in case you can’t find a buyer before closing and have an attorney review any contracts to make sure you don’t make an error. Once you’ve had some success at wholesaling, you can look into cherry picking a few of the properties you find for your own flips.
A private investor provides his or her own money for you to purchase the flip and is usually part of an investment group or partnership. In exchange, the investor will get an agreed upon return, usually a certain percentage of the final profit. It’s not uncommon for the flipper and private investor to split the proceeds 50-50. They provide the capital investment and you provide the sweat equity.
Hard Money Lenders
Hard money loans are short-term loans used to buy fix-and-flip properties. Underwriting is based more on the borrower’s history of rehabbing homes and the potential of the project, rather than credit history. However, you will need another property to put down as collateral, unless you have cash to use as a down payment.
If you’re considering investing in a fix-and-flip property, connect with an experienced, local agent for guidance and support throughout the process. They know the nuances of the area, can help you find investment properties, and may have an idea of the ARV of properties you are looking at purchasing.
Clever Partner Agents are also able to offer on-demand showings — sometimes in less than an hour — so you know you won’t miss out on a good flip deal. Plus, you’re eligible for a $1,000 buyer’s rebate on any home you purchase for more than $150,000.