Flipping Houses for Beginners: What to Know

According to statistics from ATTOM Data Solutions, flipping houses comprised 7.5% of all home sales in the US housing market in Q1 2020.

The sharp increase is partially attributed to the myriad of house flipping shows which make everyone believe that he/she can make thousands of dollars with no previous experience in real estate.

Although not as easy as presented on TV, this strategy can constitute an excellent way to get started in real estate investing. The key is to have the right personality and the required resources in order to make money quickly, without committing to a rental property in the long term.

This article aims to help all those aspiring first time flippers out there who are not sure where to start. For this purpose, it answers the following questions:

How to start flipping houses?
What financing options are there?
How much money can you make with this real estate investing strategy?

To learn more about how to getting into house flipping, watch our real estate video:

https://www.youtube.com/watch?v=txtDe7NkFl4

How to Start Flipping Houses?

As you probably already know, house flipping is one of the short term real estate investment strategies. Though it requires a number of different steps, these are executed quickly one after the other. Real estate data shows that it takes an average of 180 days to flip a house. However, this period varies widely based on:

Your experience and skills as a real estate investor
Your financial situation
The state of the local market: buyer’s market vs. seller’s market
Whether you are making the fixes on your own or hiring a contractor
Whether you are being a part time or full time house flipper
How many properties you are flipping at the same time

So, let’s take a look at the 7 steps that you need to go through:

1. Set Up a Budget

Just as with any other real estate investment strategy, the first step to house flipping is deciding how much you can afford to spend on an investment property. This depends on your personal savings as well as available financing options. We will discuss the latter in the next section of this article. For the time being, it is important to remember that this strategy does not qualify for conventional mortgage loans, so you will need to look into alternative methods for buying a property.

Setting up a budget is crucially important for narrowing down your property research and implementing the process in the most time- and cost-efficient manner. Once you know how much you can spend on a property, you will be able to focus your search for investment properties for sale within this range. This refers to both the real estate market and the property type (single family home, townhouse, condo, multi family home, etc.).

2. Find a Real Estate Property for Sale

The next step in flipping a house is identifying the best housing market for this real estate investing strategy. You need to take a few factors into consideration when making this decision:

Your budget: Conduct neighborhood analysis to find areas in the local real estate market where the median property price is in a range that you can afford. Because this is a very active strategy, it is important to concentrate on the local housing market. You will need to be close to the property that you buy in order to facilitate your work.
The state of the local housing market: As we will discuss shortly, the most appropriate property types for flipping constitute distressed properties, foreclosures, short sales, bank-owned homes, homes of motivated sellers, and other properties in a sub-optimal state. This means that in your real estate market analysis you should choose an area with limited new residential real estate construction activities and abundance of older, somewhat neglected properties for sale.
Real estate activity: To facilitate the last part of the process – selling the fixed property – you should look for a housing market with high demand from home buyers and real estate investors.

With regards to houses for flipping, as mentioned above, it’s best to focus your investment property search on various types of distressed properties. Basically, you need a property which requires major fixes and repairs in order to get to increase its home value significantly.

There are many different places where you can look for such properties. Some of the most popular options include courthouses, banks’ websites, real estate websites specializing in foreclosed homes, real estate agents, and others.

Another resource you can check out is Mashvisor’s Property Marketplace. With this real estate investment tool, you can search for off market properties in any US real estate market within your budget from the comfort of your own home.

Find Off Market Properties Now

3. Analyze the Profit Potential

The third step in the process of flipping houses comprises of doing some calculations. No worries, you don’t need advanced math skills to analyze the profitability potential of the properties you have shortlisted. Like with other real estate investment strategies, you should choose a few properties to analyze in order to decide on the most profitable opportunity for a beginner real estate investor.

Here are the main numbers you should calculate during your investment property analysis:

Offer price: This is the price which you should offer to the property owner based on median property prices in the local housing market and the current state of the property. Remember that you should pay below market value for the home in order to make money in real estate with flipping houses. However, this should not be a problem as you are looking at distressed properties such as foreclosures, homes of motivated sellers, and other properties in need of repairs.
Cost of repairs: If you don’t have much experience in the real estate industry and in fixing properties, you should consult with an experienced contract. You need to decide how much money you will have to spend on fixes and repairs to get the property into a decent state. Remember to focus on home improvements which do not cost much but which will increase the home value of the property significantly. That’s one of the key factors for success with the fix and flip strategy. If you work with a contractor, you should factor in his/her fees as well. Although hiring a contractor might seem like an unnecessary cost for first time house flippers, keep in mind that this will sizably decrease the time needed for finalizing all the work on the property and will allow you to keep your full time job.
After Repair Value (ARV): The ARV concept refers to the price of the house you are about to flip after performing all fixes and repairs. You should estimate the final sale price of the home you are considering buying before deciding if it makes for a profitable real estate investment opportunity. The After Repair Value should exceed the sum of the initial purchase price and the cost of repairs as the difference is the profit you will make as a house flipper.

4. Negotiate the Price with the Property Owner

Once you have decided on the property that is the best candidate for getting started in house flipping, it’s time to contact the owner or seller. If you have chosen a home from Mashvisor’s Property Marketplace, you can get in touch with the homeowner directly through the Mashboard. With Expert subscription to Mashvisor, you get not only to find off market properties and to access property owner data but also to send emails directly from our real estate investment software platform. Alternatively, you can call by phone.

Getting a good offer price is a real test for the negotiations skills of a house flipper. You should stay focused and not go above the highest price which will make the deal profitable for you after the repairs. Do not get carried away for the sole purpose of buying the property.

If you cannot reach a reasonable price with the first property owner, move on to the second best option which emerged during your investment property analysis.

After you have reached a consensus with the homeowner on the property sale price, you should complete all procedures related to buying a real estate property.

5. Repair the Property

Depending on your skills and preferences, this might be the most exciting step in flipping houses: namely, fixing up the property. In some cases the repairs will need to be just basic and cosmetic before you can resell the property with a significant profit margin. In other cases, you might need to nearly rebuild the property from the base up.

Thus, it is crucially important to know exactly what you are getting into before getting started. Vising the property with an experienced contractor and even a home inspector is a must. In this way you will avoid unpleasant surprises once you or your contractor starts working on the property which would cause delays and inflate your overall expenses.

During this phase, you should stick only to the repairs and fixes which you have initially planned. Don’t get tempted to overfix the property as you are not the one who will live there eventually. Throughout the process, remember to treat the house as an investment property rather than your own home.

6. Market the House for Sale

As soon as you are done with the repairs and the property is in a decent, livable state, it’s time to move on to selling your home. The best real estate marketing strategy in this case is to market the property to your own real estate network. However, if you are a beginner real estate investor, you might not have such a network yet.

The good thing about marketing when you flip a house is that you can sell your house to both real estate investors in traditional and Airbnb rental properties and home buyers. If you plan to do flipping houses for a living, it is a good idea to start building relations with other real estate investors in the local housing market. They are always in search of profitable opportunities and have more available cash than homeowners. Thus, a real estate investor can turn into an ongoing source for selling your repaired homes as he/she expands his/her rental property portfolio.

7. Negotiate the Sale Price with the Property Buyer

Once again, it’s time to negotiate. If you are selling the property to an experienced real estate investor, he/she will have a pretty accurate idea of the home value in the local market. Thus, it is important to have estimated the ARV accurately and to ask for a price which does not exceed the home value significantly.

If you are selling to first time home buyers, you might have more leverage as the more knowledgeable party in the real estate deal. Nevertheless, you should take into consideration that home buyers have limited financial resources and are not usually able to pay in cash.

And now you have learnt how to flip a house in 7 steps!

But before you can make an educated decision if that’s the right way to make money in real estate for you, we should find the answers to a couple of more questions related to flipping houses.

What Financing Options Are There?

As a beginner house flipper, you are rightfully concerned that you might not have enough cash to go through with this strategy. After all, you have not only to buy a real estate property (albeit a distressed one) but also to fully fix it before marketing it.

To ease the fears of all new real estate investors, let’s take a look at the available options for financing house flipping:

Cash: If you have enough savings in the bank, flipping a house can be a quick way to increase your cash in a low-risk manner.
Hard money loans: As most first time house flippers don’t have enough cash and conventional mortgages do not apply to such short term real estate investment strategies, you can resort to hard money lenders. These are special financial institutions and companies which loan money to different types of real estate investors including house flippers for a short period of time. As such, the interest rates are significantly higher than with conventional mortgage loans. Nonetheless, because the loan period is short, the total interest amount does not add up to a significant sum. Hard money loans are backed up by the real estate property.
Private money lenders: A private money loan is somewhat similar to a hard money loan, but the lender is an individual. This is a real estate investor who’s looking for an absolutely passive way to make money in real estate and thus loans money to other investors to buy properties, repair them, and flip them. In many cases this might be someone from your own network such as a family member, a relative, or a friend. The terms with private money lenders are more flexible than with hard money lenders, so you can negotiate the loan period and the interest rate.
Real estate partnership: Another arrangement similar to borrowing money from a private lender is forming a real estate partnership. In this arrangement, you will do the legwork related to buying a property, fixing it, and selling it, while the other partner or partners will finance the real estate deal.

So if you are wondering can you really flip houses with no money, the answer is yes. The key is to find a good financing source such as a hard money lender, a private money loan, or a real estate partnership.

To learn more on how to flip houses with no money, read Flipping Houses with No Money Can Be Done! Here’s How.

How Much Money Can You Make with This Real Estate Investing Strategy?

Last but not least, before you are ready to decide if flipping houses is the right strategy for you to get into real estate investing, you need to know how much money you can expect to make.

What Is the 70% Rule in House Flipping?

If you’ve done some research on how to flip houses, you must have read about the 70% rule in houses flipping. While this rule is pretty simple, it will assure that you emerge with a profit from such a real estate deal.

The 70% rule states that you should not pay for a house more than 70% of the ARV minus the estimated repair costs.

Let’s have a look at a quick example:

You are looking at a distressed property. The house will need $20,000 in repairs to sell for $150,000 after fixing. What’s the maximum price you should agree to pay for this property?

70% of the ARV = 70% x $150,000 = $105,000

Maximum offer price = $105,000 – $20,000 = $85,000

So, you should pay about $85,000 for the house initially.

What Is the Average Profit on a House Flip?

Another important factor is how much you can expect to make per deal in flipping houses. According to national real estate data collected from house flippers, the average gross profit is about $60,000. Meanwhile, the average net profit on a house flip amounts to $30,000.

If you think about it, making $30,000 net in the course of a few months is a pretty good deal for a beginner real estate investor. However, you should keep in mind that you can’t expect this kind of profit from your first house flip. It will take a few attempts until you build the right team of contractors and build the necessary real estate network of property sellers and property buyers and until you get a hold of the process.

How much does the average house flipper make?

How much money you can make as a house flipper and whether you can turn this into a source of living depends on your experience and personality. If you can handle a few deals simultaneously, if you build a strong team and network, and if you go through deals quickly and efficiently, you can easily be flipping houses for a living. You can make a few hundred thousand dollars per year.

Flipping houses is one of the best real estate investment strategies for making money in the short run. But it’s also one of the most active ways to make money from real estate. As a beginner, you should weigh the pros and cons carefully before deciding whether to become a house flipper. If you are wondering where to start from, sign up for Mashvisor for access to our Property Marketplace, the best source of off market properties for sale as well as the best platform for marketing your repaired houses.

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Flipping Houses for Beginners: What You Need to Know Before Starting