How to Flip Houses and Make Money

Flipping a house is buying the property for the lowest possible price, repairing and selling it a profit in a short amount of time. Careful consideration needs to be applied to finding and pricing the property and repairs so a profit can be made.

Is it all talk and made up television shows or can you make good money or at least a living from buying, fixing and selling houses for real?

How much money can be made flipping houses? The average gross house flipping profit is over $60,000 with more realistic numbers at $35-40,000 with an avg flip time of 180 days. The pros are said to flip up to 30 houses per year at $35-40,000 per flip which would be $1.2M per year.

Some cities have a higher gross return per square foot than others so the gross profits and returns as reported by AtomData is an average. Reading blog posts and testimonials online makes me think the more common profit margin is closer to $35-40,000 per flip after costs. This type of business is time and labor sensitive so we explore both the costs and profits that can be made.

House Flipping for a Living

I define making “money” as a reasonable number for a small family to live on outside of the top 5 largest cities (big city living wages are much too high). We will focus on an annual income as most flips can take 90-180 days to complete. The living wage in the United States is roughly placed between $62,000 to $72,000 per year per household for a family of 4.

In this case we have defined “making money” as about $66,000 per year profit from flipping houses. This is after all debts are cleared, contractors are paid and costs are calculated for a given project. We are not considering income taxes since that depends on many factors.

Given these stats we can calculate how many houses need to be flipped per year to achieve a living wage. Going back to our first statement on profit, the average flip can return $35,000 – $40,000 so that means 2 flips are required per year to “make money” or sustain a “living wage” in the United States.

It’s About Location, Location, Location

It is said the top 3 most important factors in real estate is location, location and location. Since the profit for any flip is calculated when the house is purchased the location and market values are very important to consider if were going to make money. Some areas will average a higher profit because of their location.

Regarding the house location, we are concerned with the ability to sell the property when the repairs are done. Ideally, the market includes a pleasant, safe neighborhood close to amenities such as:

Quality Schools
Grocery Stores
Hospitals and general health care
Shopping
Bus routes

This type of location is easier to flip as the property will not be listed for any length of time before sale.

A professional house flipper may simply pass on a house due to the bad location and therefore low sale price. This opens some opportunity for the beginning flipper to make money (and gain experience) by improving houses in a less than optimal neighborhood at lower cost and lower profit.

What Is The 70% Rule?

The 70% Rule states that you should buy a property at 70% of the After Repair Value (ARV) minus the costs for repair. This allows a flipper to quickly decide if a property is worth looking in to as it has enough profit to justify the work. I have read that most professional flippers do not use this number as some think.

The 30% discount is roughly defined as a %15 value for profit and %15 for fixed costs such as repairs. As an example:

70% Rule: Max Price = ARV * .7 – Repairs

Foreclosure Sale: $80,000
Neighborhood Value: $160,000
Max Purchase Price = $160000 * .7 = $112,000

In this example the purchase price is over $30,000 less than the max purchase price. If the formula works out exactly as defined it looks like this:

Purchase Price: $80,000
Repairs: $160,000 * .15 = $24,000
Final Sale: $160,000
Profit: $160,000 – $80,000 – $24,000 = $56,000

If this could be done twice a year in this price range, you would be pulling in a 6 figure income while only flipping 2 houses per year and that would satisfy the US living wage questions and then some.

Do I need To Raise Capital to Make Money?

An important part of the process of flipping houses is raising capital or structuring finances in order to purchase the house, pay for rehab and get it on the market in a reasonable amount of time. There are methods to structure loans such as owner financing or land contracts where the flipper can take ownership of the property long enough to turn a profit.

Another option is ‘hard money’ loans that have a short term and higher interest rate than traditional mortgage. In fact, the normal loan period is 12 months or less. The house flipper can secure a loan to purchase, repair and sell the house in under 1 year.

There is an important distinction when considering the amount of money that can be made. The experienced house flipper does not use their own money, they pay contractors or a general contractors to perform the work and then partners with a real estate agent to sell the property. The process becomes more about time and project management.

How Can I Budget My Time?

As the flipper increases their experience they will also increase the number of houses flipped per year. The question arises as to how valuable is their time and labor if they are performing much of the rehab work. Eventually the flipper will need to balance the time to find profitable projects with the time spent offsetting labor costs.

At first it is cost effective to purchase a single property and spend a few months doing repairs, cleaning and painting. When this becomes 5, 6 or 8 properties, it becomes a full time job to do the same work just to save on labor costs. At this point your time will become too valuable to be spent painting living rooms and planting flower gardens, which is the good news.

The next stage to maximize gain is to learn to interview, hire and manage contractors. In the course of the first few flips a contractor may already have been needed to perform licensed work or tasks that the flipper was not comfortable with. The challenge here is to put together a dependable team that do good work and fit their costs into the rehab budget. Doing this successfully opens the door to performing multiple flips per year.

Can You Provide an Example?

Using our approx $35-40,000 profit per flip as an average we can per-calculate and make some assumptions or just spitball projects through the course of 1 year. Lets play with some numbers and see how much the house flipper can make.

The experienced flipper can flip a house in an average of 90 days. If we assume that our flipper can find a new property every month the first 3 years looks like:

PROFIT PER FLIP	# OF FLIPS	ANNUAL PROFIT
$40,000	10	$400,000
$40,000	12	$480,000
$40,000	12	$480,000

At this level it is clearly a full time job and will require many hours to manage. Each flip will need a hard money loan to purchase and time to work with your team. There will be multiple teams, managers and maybe a search team to find more properties. The work will need general contractors, an assistant, a finance officer and I would say an office too but who needs that in the era of the Internet 🙂

The professional house flipper is said to be flipping up to 30 properties per year. With our numbers that would be $40,000 x 30 = $1,200,000 profit per year. Looking at the time required to complete 30 flips per year, there would need to be a complete team handling the day to day operation with the professional finalizing decisions.