How to Start Your House Flipping Business

[Account Closed]

Starting a house flipping business is exciting, but it can also be overwhelming. With so much to learn, and so many decisions to make, no one flips their first house without encountering at least a few hiccups along the way. Flipping is hot right now—due in part to reality TV shows that make it look easier than it is.

In fact, according to one study, some markets—such as Buffalo, New York—are at all-time high. For newbies thinking of getting into the game, this means the competition is stiff. You’ll need to bring you’re A game and use every advantage you have. By forming a well-rounded view of what home flipping entails before you get your feet wet, you may be able to avoid the usual pitfalls.

Begin by building your house flipping business on a solid foundation. The following pointers will tell you how.

House Flipping Basics for the Novice

Do your homework.

Before you dive headlong into house flipping, it’s essential to spend some time researching it. House flipping is a multifaceted undertaking and you’ll never know it all, but to attempt to do it without some due diligence on the education front would be disastrous, not to mention just plain foolish. You don’t need to spend thousands on online courses, but you do need to do some reading. The Book on Flipping Houses by J Scott is a great place to start. 

Of course reading books by the experts is only one way to learn. Do you have any friends or family that have experience with house flipping? If so, don’t let a resource go to waste—ask them about their experiences, their successes, and what they wished they’d done differently. Better yet, see if you can mentor under them.

Master the math.

Don’t let the manual labor fool you—at the end of the day, house flipping all comes down to a numbers game. If you don’t roll up your sleeves and dig into the math on the front end, you could find yourself in a money pit further down the road. Luckily, you don’t have to be a rocket scientist to flip houses. The math is simple and straightforward—fifth grade level.

The first—and most important—equation to learn is "The 70% Rule." This formula tells you the maximum price you can purchase a particular property for, and still be able to sell it for a profit—the Maximum Allowable Offer (MAO). To do this equation you have to know the after repair value (ARV) of the property. This amount, usually determined by your real estate agent, is an estimate of how much a particular property will sell for, once all the repairs and renovations have been completed. Once you've established the ARV, multiply it by 70%, and then subtract the anticipated cost for repairs.

Know your market.

Flipping a house is a lot of work and you’re going to be there nearly every day until it sells. That’s why it’s important that the house you purchase is fairly close to where you live—eliminating the extra wear of a long drive at the end of a hard day’s work. For this reason, it’s vitally important to know your local market, your town, city, or area. Check out what properties are selling for and how long it’s taking for them to sell. When considering a specific property, ask questions like: Is there a school nearby? How about amenities such as parks, grocery stores, and libraries? What are the demographics of the area? All of these things can help you determine your profit margin.

Assemble a solid team of contractors.

It may take some time, but if you’re going to be in this business for the long haul and you’re not doing the hard labor yourself, you’ll need to build a team of contractors that are dependable and trustworthy. Of course this is easier said than done—quality work for a reasonable price is a rare commodity. By far the best way to find these individuals is to get a referral from other investors you know. Don’t rely solely on someone else’s word though, be sure to shop around for multiple bids—weighing price against reputation. The contractors you hire should be licensed, bonded, and insured. When negotiating the cost of a job, ask questions, be specific about what is included and not included in the work, and get it in writing.

Be patient.

Rome wasn’t built in a day—neither is a house flipping business. Although time is of the essence when it comes to profit, don’t rush through your first house flipping venture, purchasing an overvalued property, allowing shoddy workmanship on the rehab, and selling to the first buyer who makes an offer, out of fear. Give yourself the time and space to make thoughtful decisions. And cut yourself some slack when something doesn’t go as planned. House flipping is all about the unexpected—but with flexibility and persistence the patient investor will find his, or her, way through the obstacles.

As with most things in life, although there isn’t one single path to beginning a successful house flipping business, what you put into it corresponds to what you get out of it. Or, as the financial analyst and advisor, Paul Clitheroe, said, "Invest in yourself. Your career is the engine of your wealth."