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In the past few years, there’s been a surge of people wanting to learn how to start a house flipping business, thanks to famous renovation shows and a strong seller’s market. A record 8.4% of all home sales, or 407,417 homes, were flips in 2022, according to ATTOM Data Solutions. The study goes on to say that the average investor could see a gross profit of $67,900, and a 26.9% return on investment.
It’s important to keep in mind that these numbers are just averages and don’t take into account things like the local market, the skill and experience of the person flipping the house, or the fact that the costs of building supplies and repairs are always changing.
You need more than just enthusiasm to start a house-flipping business. You also need a plan, a good understanding of the market, and a strong understanding of basic real estate principles. If you are interested in starting a successful house flipping business, this guide will provide you with the knowledge and tools you need to get started.
Although it can be quite profitable for some, house flipping comes with its own set of rewards and difficulties. By understanding these concepts, you’ll have a better sense of what to expect and whether you’re up for the challenge or if you should consider a different real estate investment strategy.
1. Potential for High ROI
One of the most compelling attractions to house flipping is the potential for a high return on investment. According to ATTOM Data Solutions, profit margins on median-priced single-family homes rose to 59% in Q3 2023. Of course, location matters. The profit margin for sellers in Buffalo, New York, increased, going from 73.9% up to 82.9%, whereas the profit margin of sellers in Nashville, Tennessee, decreased, going from 84% down to 68%.
2. Quick Returns
Unlike traditional real estate investments, which may yield returns over years or decades, house flipping can provide profits within months. This rapid turnaround time appeals to investors looking for liquid capital and financial gains.
3. Market Knowledge and Skills Development
Engaging in house flipping requires—and builds—a deep understanding of the real estate market, including pricing trends, demand dynamics, and consumer preferences. This knowledge is invaluable and can enhance an investor’s ability to make informed decisions in various aspects of real estate.
4. Personal Satisfaction
There’s a significant level of personal satisfaction that comes from transforming a distressed property into a desirable home. This aspect, though not quantifiable in financial terms, adds a unique reward to the flipping process.
1. Financial Risk
The potential for a high ROI comes with a considerable level of financial risk. Market volatility can affect property values, while unforeseen issues during renovation can lead to budget overruns. In fact, according to statistics published on Today’s Homeowner, 80% of homeowners go over their renovation budget by at least $500. When you take that into consideration, it’s no wonder that home improvement sales are expected to reach $569 billion by 2025.
2. Tax Implications
Profits from house flipping are subject to capital gains tax, which can significantly reduce net profits. For properties held for less than a year, these gains are taxed at the flipper’s ordinary income tax rate, potentially reaching up to 37% depending on the tax bracket.
3. Time and Effort
Contrary to popular belief, flipping houses is time-consuming and requires a hands-on approach, especially when managing renovations and navigating the sales process. The commitment needed can be a drawback for those who aren’t keen on sweat equity and would rather focus on assets that generate passive income.
4. Market Dependency
The success of a flipping project is heavily dependent on market conditions. A downturn in the real estate market can lead to decreased property values, making it harder to sell flipped properties without incurring losses. This was evident during the 2008 financial crisis, where many flippers faced significant financial difficulties.
5. Requires Expertise
Successful house flipping requires a range of expertise, including real estate market analysis, renovation, and negotiation skills. It can be a steep learning curve if you don’t have anyone you can turn to for expert advice.
Now that you’re aware of the pros and cons of starting a house flipping business, let’s get into the meat of this guide: how to start a house flipping business and have it be profitable!
Note: If you’d like to learn more about the different career paths in real estate, check out our in-depth guide: Real Estate Careers: Interested in Exploring a Career in Real Estate? Here’s What You Need to Know
Before you start your house-flipping business, you need to make a business plan. A well-crafted strategy not only guides you through the complexity of real estate investing, but it also serves as a road map for reaching the goals you want to achieve.
To help you build a solid foundation for your house-flipping business, here’s what you need to do:
Choosing the appropriate business entity is a critical decision for real estate investors involved in house flipping. Each type of entity offers specific benefits and challenges, especially when it comes to liability, taxation, and operational flexibility, all of which are pivotal in the flipping industry.
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For real estate investors, particularly those engaged in flipping houses, the choice between these entities often boils down to balancing the need for personal liability protection against the desire for tax efficiency and operational flexibility. LLCs often emerge as the preferred choice for many investors due to their liability protection and tax flexibility, which are advantageous in the high-risk, high-reward nature of flipping houses. However, sole proprietorships may appeal to those entering the market with less capital at risk or those seeking simplicity in their operations, while corporations could be the way to go for those with ambitions to scale their flipping operations significantly and are willing to manage the additional complexity. Ultimately, consulting with financial and legal advisors to consider the specific needs and goals of your real estate investment strategy is crucial before deciding.
Although it takes time and work to create a thorough business strategy, it’s an important resource for preparing your house flipping business for success. It not only makes your goals and plan clearer, but it also makes you look more trustworthy to lenders, investors, and business partners. Above all else, it will make sure you’re ready for whatever comes your way.
Note: You can find free business plan templates on sites like Smart Sheet, Canva, and even the SBA (US Small Business Administration), to name a few.
Flipping houses is more than just buying a property, fixing it up, and selling it for a profit. As a business owner, you need to know the legal implications of running a real estate business. These legal considerations include:
Learning about the local building and zoning laws is important before buying a house to flip because they can have a major impact on what kinds of renovations are allowed. You can get more information about these laws by calling the planning office in your city or county.
Building permits are also usually needed for most renovation projects, so you’ll want to make sure that you have all the permits you need before you start working. If you don’t, you could be fined or have to wait. If you’re working with an experienced contractor, they should be able to do that for you.
Before you decide to flip a house, make sure the title is clear and there are no liens or issues with it. You can get help with this process from a title company or a real estate attorney. Title insurance and a comprehensive title search are two ways they can safeguard your investment in the property.
If you’re hiring contractors for renovations, having detailed contracts in place is vital. These agreements should outline the scope of work, timelines, payment schedules, and how to handle changes or disputes. It’s advisable to consult with a lawyer to draft or review these contracts to protect your interests.
Familiarize yourself with state and federal real estate laws, including fair housing regulations and disclosure requirements. Sellers are often required to disclose known issues with a property to potential buyers. Failure to comply with these regulations can lead to lawsuits and financial penalties.
Talking to a real estate lawyer about all of these legal issues can be helpful, especially if you are planning to grow your business.
You can’t build a successful real estate investing plan without securing funding for house flipping projects. Of all the ways you can secure financing, it’s important to know that there are different requirements, pros and cons for each option. Here are some of the most common ways to get money to flip a house, along with what you need to do to get them and any pros and cons that might come with them.
Requirements: The most straightforward method, requires sufficient personal savings to cover the purchase price, renovation costs, and any unexpected expenses.
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Requirements: Hard money lenders typically require a down payment of 10% to 30%, proof of your ability to repay the loan, and a detailed plan of what the money will be used for. They lend based on the property’s after-repair value (ARV).
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Requirements: Similar to hard money loans, but the lender is usually an individual or a small group of investors. Terms are negotiable and based on your relationship with the lender.
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Requirements: Strong credit score, stable income, and a low debt-to-income ratio. Banks may also require a down payment and proof of reserves.
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Requirements: Ownership of another property with significant equity. Lenders assess your creditworthiness and the amount of equity in your property.
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When considering financing options for your house flip, assess each method’s suitability based on your financial situation, risk tolerance, and the specific needs of the project. It’s also wise to consult with a financial advisor or a real estate investment expert to explore the best financing strategy for your house flipping business.
Note: You can learn more about all of the ways you can fund your real estate ventures in our in-depth guide: Financing Your Investment: What Are the Best Ways to Finance Your Investment Property? Learn From the Experts
If you want to make money flipping houses, you need to choose the right property. Studying neighborhoods, determining what adds value, and using real estate networks can help you find potential flips. You’ll need to do your due diligence when you’re choosing a property to ensure it will be a sound investment.
What makes a house valuable in the future is not just how appealing it is right now, but also how desirable the neighborhood might become in the future. Things like new schools, infrastructure projects, and business areas can mean that the area is growing, which can make people want to buy homes there and raise their values. Don’t forget to take into account the neighborhood’s reputation and history, as these can affect how buyers view the area and how marketable the property is.
Finding out how much a house could be worth is one of the most important things to think about when starting to flip houses. It not only affects the decision to buy, but it also shapes the plan for renovations and sets a maximum threshold for the final asking price. Comparing how a property currently appears to how much it might be worth after some wise improvements will reveal its potential value. The cost of the renovations, how appealing the property is to potential buyers, and how it compares to other properties on the market have to be taken into account in this assessment so that the newly renovated house can stand out.
Investors can increase the likelihood of a profitable flip by focusing on buying properties with high potential value. To do this, you’ll need to know a lot about market trends, buyer tastes, and the property’s unique characteristics that can be refined to increase it’s value. Suffice it to say, finding and unlocking the potential value is paramount because it has a direct effect on the project’s return on investment (ROI) and helps owners make smart flips that make money.
For anyone thinking about getting into the house-flipping industry, New Western is a goldmine of information since it provides a personalized plan for acquiring properties that works for any investor. Investable off-market properties are hard to come by, but with the help of our impressive network of expert agents, it’ll be easy to find hidden treasures that suit a wide range of investment objectives.
Whether you’re a novice looking for your first project or an experienced pro wanting to build your portfolio, the agents have extensive market knowledge and a deep grasp of the complex needs of home flippers. We’re dedicated to using our unique property database and insider knowledge to give investors personalized choices that fit their needs, budget, and level of desired renovation complexity. If you want to learn how to flip houses, you’re in the right place!
Note: If you’re curious about the different ways you can invest in real estate, we highly recommend checking out our in-depth guide: A Complete Guide on the Strategies Pros Use to Invest in Real Estate
Finding houses can be done in a number of different ways, each with its own benefits. When you’re flipping houses, you need to be able to find good deals on homes before anyone else does. Here are a few methods investors use to find possible flips:
Sending personalized letters or postcards to homeowners in certain neighborhoods is a tried-and-true method that works well with direct mail efforts. Homeowners who haven’t listed their property yet but are thinking about it might get these messages if they are downsizing, having money problems, or receiving something they don’t want. You can make deals that are good for everyone and possibly get properties for less than they’re worth on the market by offering a straight, easy way to sell.
Websites like Zillow and the Multiple Listing Service (MLS) have become indispensable tools for property hunters thanks to the rise of digital technology. These sites have complete lists of foreclosures, bank-owned properties (REOs), and short sales. Foreclosures, REOs, and short sales are often good options for flips because they are usually cheaper. Smart investors keep up with new listings that meet their criteria by using advanced filters and alerts. This way, they can move quickly on possible opportunities.
You can find great deals on homes at auction, including those for foreclosures and tax lien auctions. The county or city administration typically oversees these auctions, which are both in-person and online. Potential investors should do their research before bidding because auction properties are usually given “as is,” and there may not be much time for a full inspection. Even though there’s a chance the property you bid on may need a lot of work, you could still get a great deal because these properties are sometimes priced below market value.
A real estate investor’s network is still one of their most valuable assets. If you network with other investors, realtors, builders, and lawyers, you can learn about off-market properties and possible flips. Investors might also hear about homeowners who are eager to sell their property fast but don’t want to deal with the inconvenience of selling it through word of mouth.
If you’re just starting out, you can meet more people in the industry and boost your chances of finding profitable flipping opportunities by going to real estate investment seminars, meetings, and community activities.
Many investors partner with wholesalers, who are experts in locating and negotiating deals on properties that are priced below market value. The wholesalers then pass these offers on to the investors for a fee or a markup. Instead of doing all the research themselves, investors might benefit from wholesalers’ marketing expertise for distressed sellers and their ability to negotiate attractive purchasing prices.
This grassroots strategy involves driving around certain parts of town in search of houses that seem rundown or abandoned, which could be signs of a potential seller. After researching the properties, investors contact the owners personally and make an offer. This approach can help find undiscovered hidden gems that aren’t yet on the market, but it takes time and effort.
Some investors also use databases and online auctions that focus solely on foreclosed homes, whereas sites like Zillow have a bit of everything. These sites have listings of foreclosed homes, bank-owned homes, and government-seized homes all over the country, so investors can choose from a wide range of possible investments. Investors who are prepared to put in the time and effort can find a treasure trove of information in these databases, thanks to their extensive search tools and precise property details.
All of these methods are different ways to find homes that could be turned around and sold for a profit. For the best deals in any market, smart real estate investors use a mix of these tactics, drawing on their knowledge, skills, and networks.
Note: For a deeper look at how to choose an investment property, you won’t want to miss our in-depth guide: Selecting Your Investment: A Guide to Finding the Best Investment Properties for Your Needs
When you’re flipping houses, renovating them requires careful planning, performance, and oversight. Here’s a full, step-by-step guide to renovating a house so you can sell it:
If you want to make the most money and sell your flipped house as quickly as possible, you need to put some thought into how you’re going to market it. The key strategies and practices for selling a flipped house successfully are as follows:
Setting the right price from the start is important for a quick sale. Find out what similar homes have sold for in the area to get an idea of how much they are worth on the market. Think about things like the location, the size, the condition, and the quality of the renovations you’ve done.
To make sure your pricing strategy attracts potential buyers without losing money, it would be in your best interest to hire a professional appraiser or talk to a real estate agent who has sold flipped homes before.
If you stage the house, it’s going to look much more inviting, and it’ll be easier for potential buyers to picture themselves living there. According to the National Association of Realtors, 40% of buyers are more willing to walk through a property they see online.
Now, staging doesn’t mean you have to spend a lot of money renting furniture. Sometimes all you have to do is clean up, rearrange your existing furniture, and add a few artistic touches to the things you already have. Be sure to keep the home tidy, address any imperfections like scuff marks on the floor or a door knob that sticks, and maybe even give it a coat of neutral paint to make it more appealing to more people.
In order to reach potential buyers, effective marketing is essential. It can make a big difference to have good pictures and an interesting listing description that show off the house’s best features and your improvements. You can use online ads, social media, real estate websites, as well as old-fashioned ways of advertising like open houses and yard signs. A real estate agent with a lot of experience can help you find the right buyers and create a strong marketing plan.
Note: For a full, in-depth look at the marketing strategies that work, be sure to check our guide: Marketing Your Investment: Step by Step Guide on Selling Your Investment Property Like the Pros
When you get offers, be ready to talk about them. Don’t let your feelings get in the way of your financial decisions. Concentrate on reaching your goals. Also, think about the buyer’s qualifications, any conditions, and the suggested closing date, along with the offer price. A good real estate agent can help you figure out which deals are worth negotiating and how to bargain for the best terms.
The closing process starts as soon as you accept an offer. The process entails a number of legal and financial processes, such as inspections, appraisals, and securing financing (for the buyer). Take the initiative during this part to make sure that any problems are dealt with quickly so the ball keeps rolling smoothly.
Also, make sure you fulfill all contractual duties and finish all required documentation by working closely with your real estate agent, lawyer, and title company. You should be ready to handle any unexpected problems that may arise throughout the sale process, such as disagreements over the appraisal or last-minute financing concerns.
Building a successful house-flipping business from the ground up requires careful planning, smart resource leveraging, and the ability to scale operations. Here are the most important things to keep in mind if you’re considering growing your house flipping business in the future:
When you think about the pros and cons of flipping houses, it’s clear that while there are plenty of opportunities to make money and feel good about yourself. But, it’s also prudent to acknowledge that there are also a lot of risks and challenges that need careful thought and planning.
The ability to take a smart, well-informed approach, together with a willingness to learn and adapt, are essential skills you need to work on when you’re learning how to start a house flipping business; and with New Western’s help, the likelihood of these hazards occurring will decrease and while improving the likelihood of your business succeeding.
Disclaimer: The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.