House Flipping Basics for Beginners

[Juan Diaz]

House Flipping Basics for Beginners

House flipping is not for the faint-hearted. It requires a ton of motivation and dedication to generate a successful outcome. If you are a new investor, the common question you may have in mind is how much does it take to flip a house to make a good profit?

The first thing is you need to have a budget. But, before you create your budget, you need to know the key factors that affect it.

Rehab and Renovations

Aside from the cost of the house, you will also have to spend for the cost of the rehabbing and renovating the house which also includes expenses for materials and contractors. Most of the investors who are new to house flipping prefer to start their venture with single-family property than multi-family properties. The main reason is to cut down the cost of renovation or rehab. Flipping a single-family property is probably less expensive than fixing a multi-family property.

However, the indicating factor of the renovation cost is the state of the home. A home that needs work on the foundation, new walls and a new roof will be more expensive than a home that needs only a bit of TLC or fresh new paint.

Let's break down home renovations in three categories:

Cosmetic:

Cosmetic repair is a type of repair in which the house only needs a bit of TLC like new paint or a new appliance. This can give you a higher return on investment than doing other types of repairs. As a new investor, it's a rule that you should take everything on a step-by-step process. You will eventually learn everything as you go. Do not jump to extensive renovation without experiencing cosmetic repair first.

The goal is to make money by spending the least money possible. You will not get this on our first try. Successful investors honed their skills through trial and error. Put in your creativity and make the significant repairs whether it is for a paint job, upgrading the interior, or replacing an old cabinet. When buying appliances, don't forget to add the cost of delivery and installation cost.

Moderate:

For homes that need kitchen and bathroom remodel or exterior paint, you will need guidance and knowledge of a licensed contractor. This means that labor cost will be higher than a cosmetic repair. Homes in this kind of condition typically have a lower purchase price but you should bring into consideration the renovation costs and the time needed to complete it. The timeframe is very important when flipping a property so you should be careful in your buying decision.

Expensive:

Homes that have serious issues like a need for a bathroom or kitchen remodel, foundation, roof, or a new room will require guidance and knowledge of a licensed contractor. Though the purchase price is low and tempting, you need to evaluate everything including the time, commitment, and money that the property will be needing.

It is not easy to do extensive repair work so if you are inexperienced, there is likely a chance that you can fail or lose more of your investment. The longer it takes you to flip the property, the more money you will spend on carrying costs which includes property taxes, financing, and utilities. You will improve in time. As you continue to learn, the time between purchase and sale will be shorter and so are the costs. When you gain more experience and acquire the tips and tricks, it will help you save more time and money. For all new investors, don't place yourselves in a tight situation where flipping the property takes forever to complete.

Insurance and utilities

Not just the house and renovation costs, there's also legal costs, insurance, and taxes that go with it. If you are investing in fix and flip, you will definitely need to buy property insurance. This varies depending on location so it's better to check the average cost in your area. Your contractors and workers will need electricity, lights, and water to do their jobs. Obviously, you need these utilities running as soon as possible to prevent possible delays. A good idea is to communicate with the previous owner of the house about the average monthly utility bills and work on that budget.

Marketing Expenses

After you have completely remodeled the property, you need to advertise it. If you think that it is a simple and easy task, it's totally different. You may have done placing "For Sale" as well as bandit signs and have rolled in social media to promote your property, but your home will not be solved quickly if you have no other marketing strategies. Consider working with realtors. They have the knowledge of working with buyers and sellers and do a lot of help in getting your property in the market. They basically live and breathe real estate and can find qualified buying in a short timeframe. With this, you have to pay for their services but it will guarantee the experience and time to advertise and sell your property efficiently.

Doing the math

Fix-and-flip investing is not just about figuring out and understanding the cost of repairs but also knowing how to work your budget effectively. You have two choices on how you will pay the property. One is you'll pay in cash and the other is you borrow money from a hard money lender.

Once you get your finances ready, the next thing to crunch is the after-repair value (ARV). The higher the ARV, the better the chance of flipping the house for a good profit. It will also help you create a realistic budget for the project. The ARV is the final projected value of how much your home is worth after all the rehabs and magic are done.

To determine the ARV, check out the competition by looking at the comparable homes nearby which are similar in size, features, or upgrades. Also, look how much the properties are selling in the last three months – this will help you put the correct price tag of your completed property.

The rule of the thumb in determining the ARV is to have at least 70% of the assumed sales price.

Here's a quick formula:

Best bid price = (ARV x 70%) – cost of repairs

For example, if you find a property that has an ARV of $200,000 and you're going to spend $35,000 for the repairs, the highest price you should pay for the property is $105,000. Overbidding on the property will cut your profit potential considering that there are also marketing and other costs in flipping the property.

Return on Investment (ROI)

Is there really a profit in flipping houses? It depends on how you do it. If done effectively, it's an absolute yes. Not all investors succeed. Though fix-and-flip investing creates excitement, it requires a ton of focus, purpose, and sound real estate strategy. Above all, the main objective is the return on investment. If the money you get does not match your efforts, it's time to take a pause and have a further study on how you can correctly make it.

House flipping is a step-by-step process. From estimating how much you're willing to spend up to executing the renovation work, knowledge and attention to details are highly crucial.