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Real Estate
AD breaks down the best practices of accurately estimating the return on investment, the right upgrades to pursue, and everything in between
Cable reality television shows make it seem easy and fun, but how to flip a house can be a much trickier process than long-term real estate investing. It involves a balancing act of purchase price, personal finances, the right upgrades, accurately estimating the return on investment, the housing market, and timing. “If done correctly, you can stand to make a significant return,” says Doug Greene, owner of Signature Properties in Philadelphia. On the other hand, “you are at the mercy of the market. If things turn against you, you could stand to lose money quickly.”
And no, it’s definitely not the kind of thing that you’ll wrap up nicely in an hour minus commercial breaks—once you sign on to flip houses, you’re likely in for a wild ride in which you’ll have to stomach lots of uncertainty.
“It’s nothing like what you see on TV. Not even close,” Greene adds. “If you’re motivated to flip houses because you watched HGTV shows on it, then be prepared for a totally different experience.”
What is house flipping?
At its core, house flipping refers to the practice of buying a property, adding upgrades, and selling it relatively quickly for a profit. That’s in contrast to an investment property, which you buy and hold onto for long-term value, like taking on renters for passive income or selling it much later once the property has greatly appreciated in value.
In practice though, people in real estate often think of home flipping specifically as the idea of buying distressed properties (e.g., those in foreclosure or serious fixer-uppers), making enough renovations to make them habitable or acceptable enough for the real estate market, and then selling the fixed-up properties as quickly as possible.
This attitude of “fix-and-flip,” especially in an economy in which housing insecurity and financial instability are real issues, has cast a shadow on house flipping for many in and around the real estate industry. So don’t be too surprised if some people react negatively when you tell them about your latest real estate venture.
That said, you can get into house flipping responsibly, buying properties without being exploitative toward sellers and offering real value to your buyers—all while realizing a significant return on investment.
Pros of house flipping
- The profit margins can be significant, if done right.
- You can see the return on your investment more quickly than with investment properties.
- You could be helping to revitalize a neighborhood by breathing new life into a property in disrepair.
Cons of house flipping
- You could lose a lot of money for reasons beyond your control.
- Buying the right property at the right price isn’t easy. “Finding a good deal is challenging!” Greene says. “Everyone wants to be in real estate, so the competition is fierce. Not only that, but you need to offer so much lower than others to make the flip actually work.”
- It’s a lot of work, requiring you to coordinate the many aspects of buying, renovating, and selling a home—and doing it successfully within a short period.
- You don’t always know what you’re going to get. Stories abound of properties that look like easy fix-and-flips at first glance that turn into monthslong or yearslong slogs that eat up your personal finances, ruin credit scores, and have minimal or even negative profit margins.
- It’s generally less tax-efficient than getting into investment properties. “You’ll be paying short-term capital gains instead of long-term capital gains,” says Tresa Todd, founder of the Women’s Real Estate Investors Network.
Getting started with house flipping
If you’re thinking of becoming a home flipper, it’s likely because you’ve come across an opportunity in your real estate market or one near you. But even if you’ve found a promising candidate to flip, there are still a lot of other steps you need to be aware of before you dive in.
Step 1: Read the market
Sometimes the best way to dip your toe into house flipping is to wait to flip houses, according to Thomas McCormack, broker and senior partner at Resources Real Estate in New Jersey.
“My advice: If everybody seems to be making a lot of money doing it, the market is probably reaching or past the tipping point,” he says. “The best market forflippingcan be identified by shrinking inventory and increasing demand. As you begin to trend toward a seller’s market, that’s when you start buying, because the prices have not shot up too much.”
If the signs point to a volatile or overly speculative real estate market (often called a housing bubble), then you’re playing with a deck that’s stacked against you, leaving yourself vulnerable to sudden shifts that you have no control over.
“I would avoidflippingin an overheated market where you are likely paying too much for the subject property and you may be playing beat the clock relative to the market,” McCormack says. “Many things can play into a market shift: the world economy, the local economy, political unrest in the world, the stock market. We cannot predict when it will happen, and you don’t want to be sitting on an overpriced fixer-upper at that point.”
But if you’re experienced and motivated, you can still make a profit in any market, Greene says, though he notes that “things do tend to go quicker and faster on the resell side when interest rates are low and values are appreciating.”
Step 2: Finding potential houses to flip
There are many ways to find properties that could make for good flipping opportunities. “There are a variety of ways to find motivated sellers, but a simple method is to purchase a list of local properties facing foreclosure, probate, or divorce filings,” Todd says. “These are just a few of the many different lists that real estate investors use.”
Experts we talked to, however, say they avoid auctions for various reasons. “You will find way better deals off-market, direct to seller,” Greene says. “The problem with auctions is that it is no different than being listed on the MLS (Multiple Listing Service website). Everyone knows and they all show up to bid. You can expect there to be just as much competition as a traditional MLS listing.”
“I do not recommend purchasing properties at auctions, because you do not have the opportunity to walk the property first, so you have no idea what you are getting into,” Todd says. “I have also found it is pretty difficult to get a property at the right price at an auction.”
Step 3: Ask yourself if the house is worth flipping
What makes a house good to flip? It’s not a simple question to answer, as there are many factors that go into making a house flip profitable or not.
In a nutshell, though, the more money and time you have to sink into renovating a home, the less worthwhile it is for you to flip. The ideal house-flipping home requires a minimal amount of costly upgrades.
The checklist
Anthony Carrino, cohost of HGTV’s Kitchen Cousins, construction professional, and brand partner at Trane Residential, has a mental checklist of the things he wants to see when assessing a new property for resale:
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“Good bones—you want a structurally sound home,” Carrino says. “If you have to get into footings and foundations and start underpinning or repairing cracks or water damage, you’ve got a major, major issue.”
“A solid roof. I like to find a lot of longevity left in the roof. These are not things you’re going to realize a lot of money out of [if you have to renovate a bad roof]. People like to look at kitchens and bathrooms, but to say, ‘I put a shingle roof on it’—no one’s excited about a shingle roof; they’re imagining sitting next to the pool you put in the backyard,” Carrino continues.
“The mechanical systems have got to be sound. Especially since COVID, indoor air quality has a real impact these days,” says Carrino. “You can sell the health of the family to a potential buyer. No lead water lines—you want copper lines or PEX. I stay way clear of oil homes. In the Northeast, we have a lot of old homes with buried oil tanks. If I’m trying to get out of a property in six months, it’s a potential six-figure headache with the environmental tests and soil remediation. An engaging kitchen environment. Open sight lines and full-tile backsplash speak to just about everybody.”
But don’t let perfection get in the way of a good deal, Carrino adds: “As long as you’re 70% of the way there and people can see themselves sitting in that home, you’ve done a great job—as long as you’ve done it in a timely manner.”
Location, location, location
You won’t just be selling the house—you’re selling the lifestyle associated with it, including the neighborhood, schools, local roadways and nearby public transportation options, and so on. It greatly helps to know what demographic you’ll be selling to—flipping houses can be vastly different in the Phoenix suburbs than in New York City, for example.
Time is of the essence
Always remember the cardinal rule of house-flipping: The quicker you turn a house around, the more you profit. Once you buy a house, the clock starts ticking. Until you sell the property, you’re racking up expenses, including “utilities, maintenance (lawn and possibly pool), HOA fees, insurance, property taxes, PML (private money loan), HML (hard money loan) payments” and more, Todd says.
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“We’re looking to do renovations that require no permits to very light permitting and inspections, because these are all things that slow us down—nothing slows us down more than municipalities,” Carrino says.
Keep emotions out of it
Finally, and most importantly, don’t let your feelings get in the way of your focus on the bottom line.
“You’d better know if you have to walk away before you buy it,” Carrino says. “The time to figure that out is before you close. Don’t get emotional. I ultimately will let a project go, no matter how I attached I may be to it, rather than buy an irreversible problem.”
Step 4: Financing the flip and buying the property
Once you’ve decided a property is worth bidding on, you have to know what price to offer and get the capital together to pay it.
The 70% rule
Many home flippers abide by the so-called golden rule for house flipping: the 70% rule, which says that you should pay no more than 70% of what you estimate the house’s ARV (after-repair value) to be. You generally calculate ARV as the current property value plus the added value of any renovations you do. The basic idea is that you want see at least a potential 42% gross profit from your sale for the project to be worthwhile, and that you can cover the closing costs, carrying costs, commissions and other non-renovation expenses with the difference between the purchase and ultimate sale price.
But you shouldn’t rely on a simple rule of thumb for a major financial decision like getting into house flipping, Greene says, especially when the housing market has changed so much and regional markets can vary so widely. Instead, think about the profit you’d be content with and the risk you’re willing to undertake instead of relying on an arbitrary figure some unknown person dictated decades ago.
“The problem with the 70% rule is that it doesn’t work anymore!” Greene says. “Values have gone up so much in the last 5 to 10 years that 70% is no longer the right fixed metric to use. It still works in markets where home values are less than $200,000 on average, but everywhere else, it tends to price you out by making your offer to the seller way too low.”
Remember that you shouldn’t just be looking at your gross profit—you need to consider renovation costs, operating expenses, interest on loans, taxes, and so on, to get a clearer sense of your actual return on investment.
When predicting what you can get for a house, you should also take into consideration what the real estate market is telling you.
“No funny math or tricky analysis required,” Greene says. “Look at recent comparable sales and take an average of that. Or better yet, ask your realtor to ‘run comps’ for you on finished properties. That will get you the same outcome.”
Finding the money
If you’ve decided that a house-flipping project is good to go, profit-wise, you need to raise the capital to buy it.
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Though you don’t necessarily need to dip into your personal finances to get into house flipping, having liquid capital on hand definitely helps, McCormack says.
“The most successful flippers, in my experience, have access to cash,” he says. “Financing costs can greatly impact the viability of a project, because carrying costs directly eat into profit. This is especially true in a high-tax state. Factoring in property taxes, finance expenses, materials, and labor…it adds up. Some flippers will take the equity out of an existing property—especially handy if they had taken a HELOC (home equity line of credit) when rates were low.”
Before you access your savings or go to a bank for a loan, you should have a solid idea of the budget you’d need to finish the project.
Carefully consider the kind of financing you arrange, as there are ups and downs to each. For example, bridge loans can offer a quick infusion of much-needed capital, but they mean you’d be doubly racing against the clock to seal the deal before the interest rates on your loan jump up significantly—it’s a highly stressful situation that not everyone thrives in. Some prefer working in low-interest real estate environments funded with cash and construction loans, a form of specialty financing distinct from a mortgage. These can be easier to deal with but typically come with higher interest rates and stricter qualifying requirements, and you need to start making payments almost immediately.
Most flippers get loans based on the idea that they’ll be able to sell the house quickly. If that doesn’t end up being the case, you may have to look at how you could refinance the project.
“Whenflippingahouse, you usually don’t need to refinance because it’s aflip,” says Tarek El Moussa, cohost of HGTV’s Flip or Flop and author of the book Flip Your Life: How to Find Opportunity in Distress—in Real Estate, Business, and Life, out in February 2024. “Typically when you get a hard money loan, it’s a short, one-year term—but in the worst case, if thefliptakes longer than one year, then you would have to refinance this type of loan.”
You need more than 100%
Never ever underestimate the budget you’d need to finish the project.
“On a smaller residential project, I like to have a 15 to 20% contingency,” Carrino says. “If it’s a $100,000 budget, you want $120,000 [with the extra $20,000] ready to go for problems.”
No matter which way you’re thinking of going, it’s a good idea to speak frankly with your financial adviser before going to lenders and taking such a big plunge.
Step 5: Home renovation
A quick-to-market DIY home renovation isn’t for the faint-hearted. Experts agreed that, unless the home’s truly almost ready to put right back on the market, or you have extensive residential construction experience, you should hire contractors to take care of everything from repairs to mandated home inspections.
“I always recommend hiring contractors,” Todd says. “Hiring an expert will save you time and ensure the job is done correctly. While a contractor isflippingyour property, you can be finding your next investment.”
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“You would need a general contractor who deals with all of the subcontractors,” El Moussa says. “But if you prefer to run the project yourself, you have to find, hire, and manage all of the subcontractors like plumbers, electricians, painters, roofers, etc.”
There’s also another benefit to hiring contractors, Greene says—if you think house flipping could be a lifelong pursuit.
“If you plan to be in this business for the long haul, hire out everything from the start. You will only get better at it and build stronger relationships as your business grows,” he says.
Finding the right contractor
Carrino offers this tip on finding a good contractor: “I always ask to see a job site. It doesn’t matter if you don’t know what you’re looking at. A neat worksite shows the contractor cares what they’re doing and tells you a lot about how they’re going to work on your job. The fact you’re willing to go out to a job site and are willing to see them where they are tells them a lot too.”
Step 6: Resale
Once the renovations are complete, it’s time to get the house back on the real estate market. Though you don’t necessarily need a real estate agent for a house flip, experts recommend it.
“You will get the most for your finished property by listing it on the MLS, which is typically handled by an agent,” Greene says. “So while it is not required, a real estate agent can help bring retail buyers to your finished project.”
Be sure to pick an agent who knows the neighborhood, Todd says.
“I always choose a real estate agent with a great reputation, who has a lot of experience marketing and listinghousesand knows the area well,” she says.
Common mistakes when house flipping
There are several avoidable pitfalls that beginners to house flipping often stumble into. These are some of the most common.
Not preparing for unexpected issues that will take more time and money: “The biggest mistake I see beginners make is underestimating renovation costs. You never know what is behind that one wall,” Greene says. “So many projects have ballooned in cost because we discovered larger problems with properties that needed to be fixed. It’s one of those things that you can’t appreciate until you do your first deal and realize just how low your estimates were.”
Not planning ahead for everything: “People get so excited they start smacking hammers into walls before they have a plan in place,” Carrino says. “Get the plans. Get the approvals. File the waivers to get started applying for permits. Know the lead time for applications. Cross the t’s and dot the i’s and be ready to mobilize contractors from closing day.”
Carrino uses the online managing platform materio.co to keep up to date with everything that has to be done and when.
“It makes 60 to-do lists down to one to-do list,” he says. “To me, that is the number one thing.”
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Not considering adding square footage: “Hint: This can help bring the final home value up significantly,” Todd says.
Ignoring the local factor: The laid-back, small-town pace of doing business in a rural township will grate on some flippers, while others may be put off by the red tape and brusque bureaucracy that stand between them and a big-city construction permit. Either way, you’re going to have to deal with it and factor it into your estimate of how long it’d take to flip the house you’re considering.
“I definitely suggest that folks understand what the cadence of their municipality is before they buy there,” Carrino says.
Overimproving the property: Always keep in mind that you’re gussying up a house-flip property for a buyer you probably haven’t met yet—not for yourself.
“Many [have] made the mistake of renovating thehometo their own personal taste,” McCormack says.
Getting into house flipping if you can’t handle the stress: “If you have a lot of anxiety, I’d run in the other direction from this business,” Carrino says. “You’ve got to be able to get uncomfortable physically and mentally. You’re going to be thinking hard about solving lots of different kinds of problems—and picking up the phone and googling for answers until the keyboard doesn’t work anymore. You just never know what you’re going to come across.”
FAQs:
What is the 70% rule in house flipping?
The 70% rule is the idea that you shouldn’t pay more than 70% of what the value of a property would be after you renovate it. Not all house flippers follow this rule anymore.
What is the ARV in house flipping?
The ARV of a property is its after-repair value—what the house would be worth after you do upgrades and renovations to it.
Is flipping houses profitable?
Flipping houses can be quite profitable and quickly bring you a lot of profit.
It can also expose you to a lot of financial risk, however, and generally becomes less profitable the more time it takes you to improve the property and resell it. You should also expect to pay more in taxes on a short-term sale than you would on a long-term investment property.
What are the best houses to flip?
“The best houses to flip are the ones that have the least amount of risk,” says Doug Greene, owner of Signature Properties in Philadelphia. “If you can get a property to fix up that only needs cosmetic finishes but the owner is willing to sell at a discount, then that is the best house to flip.”
What are the worst houses to flip?
“I stay away fromhomesthat have been burned, that are in a flood zone or may be difficult to resell for various reasons,” says Tresa Todd, founder of the Women’s Real Estate Investors Network.
Is house flipping wrong?
It can depend on how you look at it and how you do it.
“I often advise our students and aspiring investors to seek out the most distressed property in a neighborhood,” says Tresa Todd. “Thesehomesare like hidden gems, bursting with untapped potential. Embracing the challenge of renovating and revitalizing these neglectedhomesallows you to elevate them to the standards of comparable properties in the area. It’s a rewarding journey of transformation that not only enhances thehomebut also contributes positively to the entire neighborhood.”
What are the pros and cons of buying a house to flip in pre-foreclosure?
Properties facing foreclosure can be great opportunities for house flippers, but the window to take advantage of opportunities like that are exceedingly short.
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“The upside is that, many times when purchasing a property facing foreclosure, you are helping a distressed homeowner that is facing losing theirhomeand any equity they have earned. At the end of the day, it’s about creating a win-win situation for them and yourself,” says Todd. “The downside to purchasing ahomeon the pre-foreclosure list is you have to move quickly to get the deal done before the property goes to auction.”
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