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. Here are just a few of the considerations you need to take into account if you're thinking about investing in a flip house.
2019 California Housing Market Analysis
Right now, California is in a pretty strong buyer's market. The median home value in California is around $548,700 and home values have gone up 2.6% over the past year. Zillow is predicting that they will be rising another 2% in the next year. The median price of homes currently listed in California is $539,000 while the median price of homes that sold is $493,100.
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 $1,194,300 but in Fresno, the median home value is $212,700. 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 Tell if a California Property is a Good Investment
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.
How to Turn a Profit When Flipping a California House
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).
Paying Cash vs. Taking Out a Loan
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).
5 Best Cities in California for House Flippers in 2019
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 $295,500. The home values have been going up 3.7% since last year and are expected to rise another 2.6% by next 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.
In Rancho Cucamonga, the median home value is $524,400, which has risen 4.2% over the past year. Home values are expected to rise another 2.4% in the next year. The median price of homes currently listed in Rancho Cucamonga is $529,000 while the median price of homes that sold is $505,700. Homes are only spending an average of 81 days on Zillow, which is a fair number for flippers.
California's state capitol has a median home value of $327,200, which is very reasonable considering California's typical high home prices. Home values in Sacramento have gone up 4.5% over the past year and Zillow predicts they will rise 2.3% within the next year. The median price of homes currently listed in Sacramento is $325,000 while the median price of homes that sold is $315,900. Homes in Sacramento are only spending an average of 74 days on Zillow, which is lower than other cities with big populations.
Ontario, California is right next to Rancho Cucamonga and has a higher home value. Ontario's median home value is $425,700 and they are expected to rise another 2.3% in the next year. In previous years, Ontario saw a 4.9% rise. The median price of homes currently listed in Ontario is $447,900 while the median price of homes that sold is $436,900.
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 $859,500. These home values have gone up 1.2% over the last year. As a flipper, you'll want to be prepared to put an offer in on a house because the flipping competition here is high.
Next Steps for California House Flippers
Whether you are just getting started or have been flipping houses for a while, we always recommend that you work with an experienced agent. Clever can help find you one that fits exactly what you are looking for.
When it comes time to sell your new flip, Clever Partner Agents work for a fraction of the typical commission rate, helping you maintain the highest possible margin on your flip while also bringing in a great price and ensuring the sale goes through without a hitch.