Flipping houses has never had so much popularity. Thanks to home improvement shows and YouTube tutorials, investors and DIY-ers are turning to house flipping for a reliable — and fun — source of additional income.
But if you’ve never flipped a house before, the process might seem overwhelming. Take a deep breath. We’re here to help you figure it all out with 5 easy steps to flipping a house.
1. Research the Market
Not every market lends itself to flipping houses. You’ll have to spend some time looking into the local market and specific neighborhoods before proceeding.
You probably want to stay away from the higher-end neighborhoods. Even an investment property here will probably be more than you want to spend. And luxury buyers are very particular about what they want. You will have to pay extra for top-grade materials and finishings such as the molding, fixtures, and so on.
2. Figure out Your Financing
Before you even begin looking at properties, you should get your financing in order, with cash or a pre-approved loan.
Established investors often use the profit from one home flip to purchase the next home. However, if you are just starting out, paying cash is probably not an option. In that case, you can apply for an investment loan.
An investment property loan is similar to a mortgage, but there are some differences. And, qualifications are usually stricter.
- 620+ credit score
- 20% down payment,
- 6 months of reserves for mortgage payments
- Strong work history, typically two years of W-2s
If you meet these financial requirements, you will probably qualify for a traditional home loan. If not, talk to your lender and see what else you can do to qualify for an investment mortgage. If you can scrape together the funds yourself then you can have the negotiating power that comes with being a cash house buyer. Even if you don’t have the cash sitting around but have equity in another property you could refinance that property and use the cash to buy this one.
Regardless of your loan approval amount, decide on your budget. Make sure it is an amount you can reasonably pay each month, not just what the lender thinks you can pay.
3. Find and Buy a House
Once your financing has been approved, you and your Realtor can begin looking at homes.
The Realtor you choose should have experience with investment properties. They should know the local market well enough to suggest neighborhoods with better returns on investments. And your real estate agent should be able to help you assess whether a specific property is a good match for you and your goals.
Because investment properties tend to be in disrepair, your home inspection is crucial. You need to have extensive knowledge of everything that needs to be replaced or repaired. This will help you decide whether the property fits in your budget.
Have a general contractor walk through the house with you. They can give you a rough estimate of the costs involved in the renovation. Keep in mind, your final budget may change when you start choosing specific materials such as cabinets or flooring.
4. Repair and Renovate
Here comes the fun part! If you’ve been watching HGTV, you are no doubt familiar with the concept of “demo day.” But of course, the actual renovation will be much more complicated.
First, figure out exactly what needs to be done. You should have a good idea of the basics and what needs to be repaired from the home inspection prior to purchase.
You should be prepared to fix anything that is:
- Broken or not working, such as showers that don’t drain quickly
- Outdated and dangerous, such as wiring that isn’t up to code
- Missing, such as kitchen faucets
In addition, you may want to do additional renovations for aesthetic purposes. Beyond just painting, which is a given in most house flips, you might want to replace flooring, change out cabinets, add crown molding, and so on.
Before you get started on anything, decide which of the projects you can do yourself — the so-called “sweat equity.” Even if you aren’t an avid DIYer, you can probably paint, pull up carpeting, and other tasks that require more manual labor than skilled knowledge.
Once you’ve decided what you can do, it’s time to talk to your general contractor. They can give you an estimate for the rest of the repairs. If the numbers they give you go past your budget, you will have to prioritize or bump up your budget.
One classic house flipping trap to avoid: don’t over-renovate. Keep in mind the size of the home, its location, and the homes around it. You might not get your money back if you install top-of-the-line materials in a starter home in a modest neighborhood. Those buyers simply aren’t willing to pay that much more.
Likewise, installing cheap laminate flooring in an upscale area will make the home more difficult to sell, since those buyers have very specific requirements.
5. Sell for a Profit
Once you have completed your renovations and passed any necessary inspections, it’s time to put the house back on the market.
Once again, you should work with a Realtor with experience in investment properties. They will know how to properly market your home to highlight the work you’ve done and any new features that you may have added.
A Realtor can also help you set a price that will reward you for your work. You want to ensure that all of the costs of the renovation are included in your final asking price. When you are doing your calculations, don’t forget to include:
- Money paid to contractors
- Money spent on materials and material delivery fees
- Your time and effort spent working in the home
- Realtor commissions – as the seller, you are responsible for paying commissions, typically between 5% and 6% of the home price
You also want to make sure that you recoup the money you paid each month for the mortgage, including the interest rate.
Whether it’s a side hustle or your primary job, these 5 easy-to-follow steps will help you start flipping houses in no time!