House flipping is with us for a long time. But it recently gained popularity among the masses. The simple idea of house flipping is upgrading your house to sell it for a profit.
What is House Flipping?
House flipping is when an investor acquires a house to sell it for a profit after making adequate repairs and upgrades. Such a property is not intended for self-residence. So, it becomes an investment.
Some experts have suggested that a house flipping is when an investor buys a property and sells it for a profit, just by expecting a surge in its market value. Irrelevant to the definition, both are real estate investments.
Is Flipping a House a Good Investment?
While it may sound like a straightforward investment returning high profits, it could turn into a disaster if done wrong. The idea to do it right requires a plan, similar to a business plan. And here, we have curated one easy plan just for house flippers.
How to Flip a House in 5 Steps?
Step#1 – Finance the House Flip with Cash
Why cash? It’s because you remain uncertain when you could sell your flipped property. The longer it stays in the market, the higher the interest payment if you had financed the house from a bank.
Consider these financing factors when buying a flipping property:
- Interest fee: if financing from a lending institute, you would be paying interest. The longer the project goes, the higher the interstate amount would be. On the other hand, if you buy from your savings, you wouldn’t worry about paying interest.
- The urgency to sell: when you use debt to finance a flipping house, you would be in a rush to sell it as quickly as possible to avoid paying extra interest payments. This may lead to selling the home for less, giving you lower profits. Whereas, if you use cash to finance the house, you wouldn’t worry about paying the interest and could stay longer in a slow market.
- Debt to invest, not a good idea: it goes without saying that house flipping is already a risk, and if you use debt to finance the project, you put yourself in a way big trouble. Investments like this should always go through cash.
Let’s understand this better with an example. Imagine you financed a bungalow in Oakville for $800,000 (CAD) at an annual interest rate of 0.25%. Then you withdrew another 5,000 for fixes and repairs and $30,000 for renovations. You set a selling price range of $900,000 to $915,000, based on an idea from bungalows for sale in Oakville.
You were expecting that the project would be completed in the next four months and be solved within 2 months. However, it didn’t go as planned. The renovations took around six months and incurred another $5,000, and you didn’t expect the sale to occur for another three to four months. Moreover, when you listed the house, the maximum offer you received was no more than $870,000.
When calculating the profits, you had something like this:
|Ten months interest||($1,750)|
A profit of $3,250 is no bad, provided if it was for a month. Not only this, you could’ve made $1,750 more if you had financed every expense from your savings. And then, you were also under the threat that if you hold the house for more, you could have to pay more interest.
Step#2 – Understanding the Market
Knowing the real estate market is imperative since you are doing a business. Every month local real estate boards share relevant data with a detailed overview. These boards also share their insights on future trends.
Just understanding how you would flip a house is not enough. You need to incorporate a thorough understanding of the housing market as well to score better. You don’t have to overburden yourself. Just focus on the region and type of house you’re dealing with. If you are based in Oakville, you need to have great insights into the housing market. Similarly, you need to have good knowledge about the type of houses you’re dealing with. Like if you’re flipping single-family homes only, you need to make sure you need every related thing about the housing market before you search for houses for sale in Oakville.
Then you should also learn buyers’ perspectives. When are they buying, what they prefer now and what could they choose when your project is completed? What is affordable for your targeted buyers?
Keep a close eye on your local real estate board and read related reports.
Make a Budget for Your House Flip
Budgeting for home repairs, renovations, and fixes should be tackled before acquiring a flipping house. If you’re just starting your very first project, you may not have as good insight as you would have later at some point. For this, you at least should have a basic idea of the cost related to painting a house, fixing doors, cabinets, windows, etc., and upgrading items like faucets, chandeliers, and other things.
Moreover, when acquiring a house, you would also required services from home inspection companies. They would go to every nook and corner to find all the hidden truth about the place and give a detailed report highlighting the work needed and the expected cost or repair or fixing.
Invest in Smart Renovations
Redoing everything will definitely uplift the house’s value. But would it ensure a quick and profitable sale? When planning renovations, it’s imperative to prioritize what actually should be updated. Like gleaming hardwood floors and on-trend light fixtures may appeal to eyes. But it may become your selling point.
On the other hand, refinishing what already is added would do a better job. Take an example of dull cabinets or doors. A fresh coat of paint would be enough than replacing the entire cabinet or the door.
Remember, the idea is to renovate the house, so it’s ready to sell in no time, promising a good return on your investment.
Get Guidance from Your Local Real Estate Expert
Getting guidance from a local realtor is similar to knowing the real estate market. The local real estate expert may not be as good with sharing local insights as the local board would be, but these experts are closer to buyers and sellers and understand their emotions, far better than the real estate boards.
Talking to the real estate market will help in several ways, including listing your home for sale, bringing potential clients to your flipped property, closing deals, and more. They would also be quite helpful before you even buy a flipping property. They could share insights into what buyers are buying and when is the best time for you to buy a house, and the time to sell it when it’s ready.
The Bottom Line
Like said earlier, house flipping is quite exciting. But at the same time, it could be intimidating if you don’t know what you’re up to. Whatever type of house you take on to flip, just make sure you have a solid business plan incorporating all these guidelines.
Muhamad Bilal is a freelance content writer and blogger. He writes on topics related to real estate, finance and investment, and technology.
House flipping is an exciting way to learn new skills along with an idea of generating profits. To do it right, you need a solid business plan. Else, the project may end up with a disaster.