As I research the house flipping business I generate basic questions and try to find the answers so the content is full and complete. I decided to create a post (or FAQ) for the most common questions I found or ran into while reading more about the real estate flipping business. Most of the answers link to more detailed articles if they are available.
Disclaimer: this site does not provide tax or business legal advice. Consult your tax pro or a Real Estate lawyer to get details on your business plans.
What Is House Flipping?
House flipping is basically purchasing a distressed property, usually a single family home, performing some rehabilitation and possibly repairs and then selling the property for a profit. There is a process in selecting a house that is distressed but can be repaired for a reasonable cost. Estimating the cost before purchasing the property is key to finding a profit when it is sold months later.
Where do I get the money to flip a house?
The description above is rather simplistic as there are different methods for purchasing the house and others for completing the rehab. The purchase requires that you take possession of the property to make changes to it. You can use your own money if possible or obtain a short term hard money loan where the lender funds the bulk of the cost at a higher interest rate and you execute the flip.
Another common method is to live in in the house and flip it over the course of a few years. This is called a live in flip. The difference between this and a hard money loan is that you will be purchasing the home as you would any other. There will be a credit check, closing costs and possibly a down payment required. You will get a conventional bank loan and they may have additional requirements since the property is being purchased as distressed.
Are there risks associated with house flipping?
The short answer is yes, there is risk in any business and there is risk in buying and selling real estate as well. The hard loan process is possible because the lenders see little risk in buying the property and having someone else rehab it. For them, the worst case is they still own the property at the distressed cost and can have someone else rehab and sell it.
The house flipper retains more of the risk because you will need to complete repairs, pay contractors, list and sell the property quickly to finally see profit. Projects of this size can be confusing intimidating but the first flip is mostly a learning process. Minimizing risk by learning the process first and cutting costs by producing good estimates can help the first time flipper see a profit on their first attempt.
Is house flipping a profitable business?
The profit generated by each flip project depends on many factors involving project planning and execution. In the business it is stated that the profit is decided when the home is purchase not when it is sold. This refers to an accurate estimate on repairs and upgrades that are completed on time as well as the market price (expected sale price) decided on before you purchased the property.
When it comes to the amount of profit it will depend on the property price and project costs. Part of the skill in house flipping is avoiding property that you cannot profit from. The average gross house flipping profit is over $60,000 with an average flip time of 180 days. According to a recent article by ATTOM Data Solutions, “Homes flipped in Q2 2019 typically generated a gross profit of $62,700”.
How do I search for houses to flip?
The modern day method for searching properties is to use the many online services such as zillow.com or redfin.com. There are also google techniques to use as well as government and probate. You can also simply drive around your target neighborhood and look for “For Sale By Owner” signs to see if they are motivated sellers.
On of the best methods to find distressed properties is to network or partner with a real estate agent who can provide properties from the MLS when they become available.
What is needed to flip my first house?
I like to think that a positive attitude and willingness to learn is all you need to start any venture. With house flipping there are many different skills that will need to be learned from estimating work properly to networking and project management. The first step should be to inventory your skill and monetary situation, ask yourself some of these basic questions:
- What work can be done by you (drywall, painting, repairs)
- Do you have someone that can perform contract work such as electrical, plumbing or HVAC?
- What tools will you need to buy to stay efficient?
- Do you have friends or family to partner with financially or for labor?
- What cash do you have available for materials or down payments?
- Is it necessary to improve your credit?
- Are you in a position to buy a house conventionally and perform a live-in flip?
What type of business is best for house flipping?
Most lawyers will tell you to use the Limited Liability Corporation (L.L.C.) to limit your risk while working on building any business. The LLC is supposed to protect you from problems that may come up while doing business and insulate your private assets from being attacked.
The LLC requires a fee and some paperwork to setup. After that there are some procedural requirements for your business as well as documentation etc. As a single member LLC the taxes will pass to your personal taxes as filing is usually rather simple.
Another option is to use a Doing Business As (D.B.A.) structure instead of the LLC. Many entrepreneurs will use this to launch their business and when it begins growing or showing a profit they change it to an LLC. Be sure to speak with a real estate lawyer to find out if LLC or DBA is best for your house flip plans.
Can I flip houses if I do not have money?
Yes, flipping houses requires money for resources, materials and other non-purchase tasks and tools. Fortunately you do not need to cover all of the costs out of your pocket and if you are persistent you may be able to finance your first flip without any out of pocket costs.
The first method to finance a flip is to partner with someone that can finance the deal and share in the profits. You would be responsible for the project details and some sweat equity but you would not be writing any checks.
The next method would be to find a hard money lender that is willing to finance the full amount of the property and costs for rehab. This is harder for the first timer but there are property owners that have equity or fully paid off mortgages and you can leverage to offset a down payment and take possession.
The last option is not necessarily with “no money”, you can find a bank that will finance the full amount of the house price including your closing costs so you have no out of pocket costs. Then you can live in the property while fixing and upgrading as time, money and materials are available.
Can I flip a house with good credit but no cash?
This is similar to “if I don’t have money” question as you will be looking for a lender to borrow from. Another option with good credit would be to find a bank and get a conventional loan with the closing costs rolled into the loan. This is called a Live-in Flip where you will perform the repairs over the next 2 or 3 years to offset taxes.
Can I flip houses if I don’t know anything about fixing them?
One of the key aspects of running a house flipping project is to put together a good team of contractors or labor. This is important because the wrong people will cost more money, time and frustration to get the project completed. You will need their expertise for accurately estimating costs as well completing the work on time.
My suggestion is to get educated on the lingo and basics of home improvement so you can communicate with a contractor efficiently. Don’t be afraid to ask questions and if you get fuzzy answers or an attitude, find another contractor, this is a business not a bar.
How do I flip a house I live in?
Performing a live-in flip is where your purchase the property using cash or a conventional loan. You then repair and update the house to get it ready to be sold after the next 2 – 5 years. The benefit of this is that you are not tied to a hard money loan that has a deadline of 12 months or so and you can use more of your own labor for the repairs even if you need to learn how.
Another benefit to the live-in flip is it exempts the owners from capital gains tax when the house is sold. You will be required to live in the property for 2 years before selling it to benefit. Be sure to ask your tax professional about details.
Flipping a house is intimidating, how do I get past the fear?
This is a common question and I find that life changes can generate fear and doubt in any individual especially when dealing with large monetary values. Getting started and doing it is most important to alleviate the fear of change.
My recommendation is to educate yourself as much as possible. The aspect that causes fear is the “unknown” where we get the “what if I fail” ideas from. The more you understand the full process and each stage the easier they will be because you will run into less of the unknown. Then after the first time while “figuring things out” and talking with people you will understand it better and look to be more efficient on the 2nd project.
What if renovations cost more than estimated?
This is a tough position to be in as any additional costs will cut into the profit when the property is sold. The reality is that this will happen on 1 project at some time. The best advice here is to try to avoid cost overruns that cut into profits. When this occurs you will be leaning on your contractors expertise the most to fix and minimize the cost.
To avoid this it is best to have well vetted contractors where you can trust their estimates and some padding in your rehab costs in case of issues. We want to plan for the worst and hope for the best so the profit is not affected by a setback.
If the worst case happens renting the property might be an answer. You will need to own the property but if there is cash flow you would be turning lemons to lemonade.
Do I have to get a home inspection done?
The short answer is yes, get an official home inspection done before buying any property. You may have hard money lenders, banks or insurance that require this anyway. The home inspection will help with identifying things you might not recognize as a new house flipper.
Do I need a partner?
A partner can be a good and bad decision depending on the understanding you come to with them. If they are considering to just finance the flip then the work may be split with you taking on the project management and labor responsibilities but no monetary costs.
Realistically many flippers will partner with a good friend or family and pool resources to start flipping. You might have the cash or credit but they have the skills and labor for example.
How do I find contractors to do the work?
I think finding some a good contractor for your team is one of the keys to success. They will affect the costs and the timeline of your project so you are looking for a good work ethic, a clean labor process and enough experience to help you with estimates.
There are many ways to find some good contractors including family and friends. Sometimes the best “partner” is a contractor who can do much of the work and knows someone who can fill in the blanks when a project is more complicated. In my research I found a few different avenues for contractors such as:
- angieslist.com
- contractorconnection.com
- Real Estate Investors references
- Visit Home Depot or Lowes at 6am to catch contractors
What’s the best method to find a selling price?
This is called the Comparative Market Analysis (CMA) where you will use other properties to compare sale prices and find a good estimate for your house. If you are currently a home owner my suggestion is to estimate the price of your own house comparing it with homes sold in your neighborhood as a practice run. This is the area you know best and can easily visit, or walk past, the house down the street to see why it sold for 10% more than the others.
Is there group or club for real estate flippers?
Yes, there are Real Estate clubs all around the country that usually reside in or around the major cities. These are great resources to meet like minded individuals and network with professionals. I found a good list of clubs on the bigger pockets website. Choose your state and nearby city to find the closest club.
Where can I learn home improvement or take classes?
In today’s highly connected internet market there are many online and offline resources where you can learn basic home improvement skills. Youtube is a great resource as many channels focus on showing you how to accomplish each step as well as the pitfalls you might encounter.
- Local hardware stores offer training
- Digital DIY books (kindle)
- Help friends with their home improvement projects
- Youtube has tons of videos in remodeling and more
- Udemy.com has low cost course
What are common improvements that require permits
Much of the work done in a fix and flip will be on the visual side of things. This would be drywall, painting, flooring or carpet, tiles and appliances. Some rehab work will require a permit from the city and an inspection to complete. These should be identified and extra time planned for the inspections that usually take weeks to schedule.
Some work that commonly require permits:
- Additions to floor plan and garages
- Installing fences
- Plumbing, Electrical and HVAC
- Installing or replacing windows
Please consult the local city and state to clarify their ordinances and home improvement permit requirements.