House flipping is one of the most popular and well-known ways to invest in real estate. The potential to buy and renovate a property and then resell it for a big profit is enticing for many would-be investors.
However, starting to flip houses requires time, effort, and money. The market is also tougher for house flippers today than just a few years ago. According to ATTOM Data, just over 300,000 houses were flipped in the United States in 2023 – a 29.3% decline from the year before, and the biggest drop since 2008.[1]
But for those ready to do the work, house flipping can still be a lucrative endeavor. We’ll break down what you need to know about flipping houses, how much money you can make, and what steps you need to take to maximize your chances of success.
What is house flipping?
House flipping is a real estate investment strategy in which you buy a home that needs improvements, renovate it, and then resell it for a higher price. The condition of the houses can range from those needing major repairs, such as a complete roof replacement, to those requiring only cosmetic improvements, like a deep clean and a fresh coat of paint.
House flippers focus on properties that might scare away the average buyer but have a lot of potential. For example, a house that has suffered from hoarding may struggle to find buyers looking for a place to live. But if that house is located in a desirable or up-and-coming area, it may represent an investment opportunity.
The key for many house flippers is time. Successful house flipping depends on purchasing and renovating properties quickly and then reselling them fast. The longer an investor holds onto a property, the more money they lose in maintenance, taxes, and interest.
How much can I make flipping homes?
📊 House flipping profits: Inside the numbers
- Average gross profit: $66,000
- Average return-on-investment (ROI): 27.5%
- Time to flip: 169 days
The average gross profit per house flipped in the United States was $66,000 in 2023.[2] However, profits vary greatly depending on local market conditions.
For example, among major cities, San Jose had the highest average gross profit at $275,250 per house flipped in 2023, whereas in San Antonio, the average gross profit was just $12,289.
The average return on investment (ROI) for a house flip was 27.5% nationwide, the lowest since 2007. Again, the ROI varies substantially by local market. Pittsburgh, for example, has the highest ROI in the country, whereas in Austin, flippers incurred a loss in 2023.
Your profit will also be determined by how long it takes to flip the property. The longer you hold the property, the more money is spent on bills, utilities, and upkeep, all of which eat into your final profits.
In 2023, it took an average of 169 days to flip a house, about five and a half months. According to Attom Data, the time to flip has increased in recent years, up from 158 days in 2021.
House flipping for beginners: Pros and cons
Pros
- Potential for significant profits
- Quick return on your investment
- No tenant management required
Cons
- Market demand can shift
- High upfront costs
- Large potential tax bill
When done right, house flipping can be lucrative, with the average house flip generating tens of thousands of dollars.
Unlike a buy-and-hold strategy, where you rent out a property, flipping allows you to make a quick return on your investment, often in less than a year. Also, you don’t have to worry about the risks that rental properties bring, such as difficult tenants, evictions, or prolonged vacancy periods.
On the downside, flipping houses requires a large upfront investment in money and labor. You’ll not only have to come up with sufficient capital to purchase the property, but you’ll also need to budget for repairs and upgrades (and any potential surprises).
House flippers also face potentially high capital gains taxes, especially if they sell the property in under a year. Short-term capital gains is taxed at the same rate as your ordinary income, ranging from 10% to 37% (which could mean a tax bill of up to $37,000 on a $100,000 profit.)[3]
You’ll also be at the mercy of the market. While profits can be great when the market is red hot, demand can quickly collapse depending on economic forces beyond your control, resulting in a much smaller ROI or even a loss.
How to flip a house: A step-by-step guide
Step 1. Set a budget
Flipping houses isn’t a get-rich-quick scheme. You’ll need to budget in advance to account for not only expected costs but also unwanted surprises, such as a change in the market and repairs that can take longer and cost more than anticipated.
When budgeting, many investors aim for the 70% rule. This rule states that you should only pay 70% of a home's after-repair value (ARV) minus the cost of repairs.
For example, if a property has an ARV of $500,000 and needs $50,000 in repairs, you should only pay $300,000 for it (i.e., $500,000 x 70% - $50,000).
However, the 70% rule is just a general guide, not a hard-and-fast rule that will work in every situation. You’ll need to consider other expenses, such as permits, contingencies, inspections, and financing costs.
Also, don’t rush into a deal without doing your due diligence. For example, if an inspection raises issues that could increase the renovation budget, be prepared to walk away or negotiate a lower price.
» Learn how much an investor should pay for a house
Step 2. Secure financing for the flip
Financing a house flip differs from getting a conventional mortgage since you’ll use the loan for an investment property and not as your primary residence.
While conventional loans may be an option, their eligibility and repayment requirements don’t always make them suitable for house flips. You can also look into other financing options with low down payments, such as FHA loans and Fannie Mae and Freddie Mac loans, but beware that these often require your investment property to be your main residence.
Hard money loans from private lenders may be the best option for flipping homes. These are short-term loans whose main consideration isn’t necessarily your creditworthiness or down payment amount but your investment property’s ARV.
"You can grow your real estate portfolio by using private money," says Danny Johnson, real estate investor and host of the Flipping Junkie Podcast. "Friends and family with low-earning savings are potential lenders who'd be happy to earn 6-10% interest. We've funded over 90% of our deals this way."
If you flip the house quickly, interest costs won't significantly impact your profits. However, market delays or issues can lead to high interest rates eating into your returns.
Step 3. Find the right house to flip
Target less expensive properties in desirable neighborhoods, such as those with top-rated schools or rising property values. Focus on homes that require only cosmetic repairs, like new floors, countertops, paint, and landscaping.
While properties with major issues, such as foundation damage or toxic materials, might be cheaper, they come with higher risks, costs, and renovation time.
There are several ways to find potential flipping opportunities:
- Wholesalers: They often have contracts for properties needing work and can resell them quickly. Ensure you get proof of an inspection or conduct your own inspection before finalizing the deal.
- Investor networking groups: Engage with experienced investors online through forums like Facebook and Reddit or attend in-person meetings via Meetup. Networking can provide valuable insights and leads on potential investment opportunities.
- Traditional real estate agents: Partnering with a realtor can help you find the best house-flipping opportunities. Realtors often have deep local market knowledge and can identify neighborhoods or properties with high ROI potential. As Itay Simchi, founder of Proven House Buyers, says, "A real estate agent's local market knowledge can significantly impact an investor's success by providing valuable insights into property values, trends, and potential risks.”
By leveraging these resources, you can maximize your chances of finding profitable house-flipping opportunities.
» Find an investor-friendly buyer's agent with Clever
Step 4. Plan the updates and repairs needed
Once you’ve purchased the property, your next task is assembling a contractor or subcontractor team.
Option 1. Hire a general contractor
Hiring a general contractor can be the least stressful option, especially if you lack renovation experience. The general contractor will manage the hiring of plumbers, electricians, carpenters, and other necessary trades. However, this means you have less control over the work and the selection of individual subcontractors.
Option 2. Act as your own contractor
This gives you full responsibility for hiring, vetting, and potentially firing subcontractors. While this approach offers more control and allows you to negotiate directly with each subcontractor, it involves significant work. If done correctly, you'll build valuable connections for future projects.
In either case, ensure that a contract is signed before work begins. The contract should include a waiver preventing subcontractors from placing a lien on your property for nonpayment, instead requiring mediation to resolve payment disputes.
Step 5. Begin renovation and redesign of the house
When renovations begin, prioritize addressing the most serious issues, such as structural problems, which are more likely to cause delays or lead to unexpected expenses. Save cosmetic fixes for last, as they're generally more routine and less likely to cause major headaches.
Schedule regular meetings with your contractor or subcontractors to keep the work on schedule and within budget. During these meetings, review progress, discuss any deviations from the plan, and address any changes in cost estimates.
Also, remember to collaborate with architects, inspectors, and local building officials to ensure that all work complies with building codes and safety standards.
Once renovations are complete, conduct a final walkthrough. If any work seems incomplete or unsatisfactory, promptly address it with the contractor or subcontractor.
Step 6. Stage the home, put it on the market, and sell it
The final step is getting your property sold. You’ll need to decide whether to work with a real estate agent or try for sale by owner (FSBO).
While you'll save money on realtor commissions with FSBO, homes sold with realtors tend to sell faster and for more money. Our study found that sellers using an agent sell for nearly $50,000 more on average than those who don't.[4]
A realtor can assist with getting your house ready for sale by helping with staging, listing it on the MLS, pricing, and showings. Because realtors often have a network of local buyers, they can potentially help you sell your property before it even needs to be listed. Realtors are also invaluable for negotiating a strong selling price and ensuring a smooth closing process.
Another advantage of using a realtor is adding a long-term member to your house-flipping team. Having a trusted agent to return to for each house flip saves you the stress of marketing and selling each property on your own. This lets you focus on finding and working on your next investment opportunity.
» Find an investor-friendly listing agent with Clever
FAQ
How much money do I need to start flipping houses?
The amount of money you need to start flipping houses can vary widely based on the location and condition of the property, and if you can secure financing. Most house flipping projects require a substantial upfront investment to purchase the property. A modest house flip might require $50,000—100,000, while more ambitious projects could need $200,000 or more.
What is the best state to start flipping houses in?
The best state to start flipping houses depends on several factors, including market conditions, budget, and personal goals. Some metro areas in California, such as San Jose ($275,250), San Francisco ($170,000), and San Diego ($153,000), have shown particularly high gross flipping profits according to Attom Data. Boston also offers impressive gross flipping profits at $158,000, while the New York metro area provides lucrative opportunities with a gross flipping profit of $154,750.
Ultimately, the best state for you depends on your specific location, financial resources, and investment goals. Consider starting in an area where you have market knowledge and access to resources.
What is the 70% rule in real estate?
Real estate investors use the 70% rule to determine the maximum price they should pay for a property they intend to flip. This rule states that an investor should pay no more than 70% of the property's after-repair value (ARV) minus the cost of repairs. For example, if a property has an ARV of $500,000 and requires $50,000 in repairs, the maximum purchase price should be $300,000 ($500,000 x 70%—$50,000). However, the 70% rule is a general guide and not a strict rule. Investors must also account for other expenses and the potential for cost overruns with their repair budget.
What are the IRS' rules for house flipping?
The IRS has specific rules and guidelines for house flipping, which can impact how your profits are taxed. Profits from house flipping are generally considered ordinary income rather than capital gains. This means they're taxed at your regular income tax rate, ranging from 10% to 37%, depending on your income level. And, if you flip houses as part of a business, you may also be subject to self-employment tax, which is an additional 15.3% tax on your net earnings from self-employment. Consult with a qualified tax professional for more specific advice.
