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Do you dream of flipping a house in sunny California? The market in California has cooled, which gives investors the opportunity to jump in. Before you decide to take the plunge into flipping houses, read this guide.
If you've never heard of flipping houses, it's when investors purchase a house in need of renovations or major upgrades and will turn around and sell the home for a profit once it's the work is finished. In 2018, the average profit from a flip was over $65,000. This number is captivating enough to get tons of people thinking about flipping houses.
However, flipping a house can be a long and complicated process, so it's recommended that anybody looking to invest in real estate does their research.
We're here to help. Our guide to flipping houses in California breaks down the process, including how to find and analyze profitable deals.
🔍 This guide includes:
2022 California housing market analysis: Median housing prices in major California markets, and price forecasts.
How to find deals: What to look for when evaluating flips, and how to use software to help you.
Analyzing deals: How to run the numbers to guide your purchases.
How to finance flips: Should you pay cash or finance your flip with a loan?
Best cities for California flippers: Where investors might have the best luck flipping homes in California.
2022 California Market Analysis
Right now, California is in a pretty strong buyer's market. The median home value in California is $774,899 and home values have gone up 22% over the past year.
Some of the prices in California vary depending on region, so you'll need to take that into consideration as well. For example, the median home value in San Francisco is $1.6 million but in Fresno, the median home value is $365,650. As you can see, this can make quite an impact as to where you decide to flip houses.
It's always recommended that would-be house flippers partner with an experienced, local real estate agent who knows the market inside and out. They will have knowledge in all areas throughout the state and which ones will prove to be the most profitable.
How to Find Cheap California Properties
When you're looking for an investment property, there are some key considerations that need to go into assessing a prospective investment.
To start, you'll want to look find the cheapest house possible in a great neighborhood. Some of the best areas for flipping in California are San Diego, the Bay Area, and Irvine. They have thriving economies, a wide array of activities, and draw in many tourists. Attributes like these are what will make your property thrive in the market.
Most investors recommend following the 1% rule investment strategy, which is that you should be able to rent the house out for at least 1% of the purchase price.
You should also check the county appraisal value to determine if you will be making a profit off the home. This information is easily accessible on the county appraisal district website.
Pro tip: The best deals are usually homes that only need cosmetic repairs, or homes with very motivated sellers - and you probably won't find them on Zillow.
Types of homes that make for good flips often include foreclosures, pre-forecloses, short-sales, and abandoned of neglected properties.
One way to find properties is to use real estate investing software that offers driving for dollars and batch skip tracing features. In particular, skip tracing has grown in popularity with investors because it helps automate the process of finding and contacting the owners of off-market properties.
How to analyze deals to turn a profit
When flipping houses there a lot of numbers you need to crunch. One of the most common formulas to use in house flipping is the 70% Rule. The 70% Rule says that you should never pay more than 70% of the after repair value (ARV) of a property, minus the cost of needed repairs.
Before you get started, you'll need to figure out how much you can afford to spend on the property, plus the cost of repairs and upgrades. Then, you'll take that number and look for properties in your price range, and evaluate how much money in repairs you'll need to make for each property.
The amount of money you'll have to put in depends on where in California you're investing. As we stated before, the median home value in California is $548,700. If a home's ARV is $550,000 and it needs $20,000 worth in repairs, the 70% Rule says you should pay no more than for that property.
$550,000 (ARV) + $20,000 = $570,000
$570,000 x 0.7 (70%) = $399,000
The 70% rule is easy to calculate and is a great guide to follow to keep you from overpaying for property in California. House flippers should always keep in mind that the cost of flipping a home is the total of the purchase price of the property, the repair and renovation costs, the carrying costs, and the cost to sell the property (including marketing expenses).
How to finance California flips
If it's within your budget and financial abilities, invest with cash. House flipping can be risky and if something goes wrong or there's a delay, you won't have to pay interest for the time you're repairing and trying to sell the property.
By using your own finances and avoiding accruing any debt, you can take as long as you need to get the house ready to sell. When people take out home loans to fund a flip, it can create desperation to sell, thus selling at a lower price.
However, it's unrealistic to think every flipper has the cash to invest in a property and pay for repairs and upgrades. As an investor, you do have a few loan options that will give you the chance to buy, flip, and sell.
You might want to reconsider taking out a traditional home loan because these types of loans take longer to close and you will still need to pay closing costs even if they advertise having low fees and interest rates. Another issue that flippers frequently run into is not getting approved in time.
Lenders always perform an extensive check on your finances and if anything negative stands out to them, this could further delay the loan process. This process can be especially frustrating if you are planning on buying a foreclosure or short sale home.
A safer option would be to save up the cash needed to fund your flip. This can help you avoid paying interest rates during the renovation process and gives you some wiggle room to wait out the market if needed.
Let's take a look at an example of what can happen if you take out a loan to fund your flip. Typically, you will need to take into account some unexpected repairs and possible delays that make the project take longer than expected.
Selling Price: $300,000
- Purchase Loan: $250,0000
- Renovation Loan: $30,000
- Estimated Interest Paid Over Six Months: $2,240
- Repairs: $2,000
- Closing Costs: $15,000
Your Profit: $760
Obviously, a profit of $760 is not going to be worth the long months of hard work. As long as you understand the potential financial implications of home loans and you properly finance during the flipping process, home loans can be a great tool to use to get into the house flipping industry. Your main goal should be to make sure you are getting a profitable ROI (return on investment).
»MORE: Find properties that meet your criteria with DealMachine!
5 Best Cities in California for House flippers in 2022
Once you know how you plan to finance your flip, it's time to find the best cities in California that will bring you a higher ROI (return on investment).
Modesto is known for its culturally rich city center that's surrounded by beautiful suburbs. The median home value in Modesto is $442,285. The home values have been going up 21.9% since last year. Modesto has a thriving agricultural industry which brings in an abundance of workers looking for housing. This beautiful city is also close to Yosemite National Park, which has a very large number of tourists visit all year.
2. Rancho Cucamonga
In Rancho Cucamonga, the median home value is $758,847, which has risen 23% in the past year. The median price of homes currently listed in Rancho Cucamonga is $739,000. H On average, homes in Rancho Cucamonga sell after 18 days on the market compared to 22 days last year, according to Redfin.
California's state capitol has a median home value of $502,228 which is very reasonable considering California's typical high home prices. Home values in Sacramento have gone up 21% over the past year and are expected to rise further in 2022. Homes in Sacramento sell after only 7 days of being on the market, which makes flipping homes faster and more profitable.
Ontario, California is right next to Rancho Cucamonga and has a lower median home value. Ontario's median home value is $636,165 and they are expected to rise further in 2022. In previous years, Ontario saw a 4.9% rise. Homes in Ontario spend an average of 23 days on the market, down from 28 days in 2021.
We all know Irvine as one of the biggest tech powerhouses in the state. The booming economy has helped raise the median home value to $1.24 million. These home values have gone up 28% over the past year. As a flipper, you'll want to have financing plans in place and be prepared to put an offer in on a house quickly, because the flipping competition here is very high.