How Does House Flipping Work?October 19, 2020
What is House Flipping?
A House Flipping is an investment strategy of acquiring lower than market-price properties, flipping it, then selling at a higher price. House flipping can also be holding the property for a few months then selling it for a profit. The catch is how to find a property that you can acquire, and there is a potential for enough margin after the process of a house flipping.
It can be a good investment strategy due to its faster investment return than investing in property rentals since house flipping can only take from few months to a year depending on the renovation and length of finding a buyer. Also, compared to the stock investment, it can be more predictable and less risky. However, house flipping needs ample cash for acquisition costs, renovation costs, and marketing costs. Higher capital gains tax will also be paid upon the selling of the property.
The Process in House Flipping
Research a Wide Range of Real Estate Markets
There are different residential real estate classes depending on its location, ranging from Class A to Class D. Class A is the most expensive and Class D to the cheapest one. Most of the house flipping investors work on Class B and Class C residentials.
Create a Business Plan
After conducting all the necessary research and data gathering needed, create a business plan to guide you before deciding to invest in a house flipping investment. It is vital to have the projected expenses and sales to anticipate any unforeseen costs and projected returns to guide you during the process.
Decide Where to Source Out the Funding
Identifying your funding sources is crucial to the success of your investment and gaining profit. If you consider borrowing funds to finance the investment, make sure to have terms and interest that you still have enough margin. Still, investing in cash is the best option since you won’t have to worry about paying high interest if it takes longer to dispose of the property.
Start Building Network of Contractors
It is essential that you already start building your network before your first buy for a house flip. Investigate as much as you can before partnering with them to assure that they have good reputations in the industry, especially with past clients.
Finding and Buying a House to Flip
You are now up to find the right deals for a house to flip. Ensure that you have enough margin from the purchase price to the selling price to cover all the expenses. Some ways to find the right deals are through realtors for on-market deals and wholesalers for off-market deals. Do not compromise deals that are not within your budget since it can jeopardize the chances to earn profit from the house flipping investment. Once the contract is signed, you can now start working on the renovations process. But first, you may consider hiring a home inspector to do the job in assessing the extent of repairs needed for you to evaluate the costs involved is. Get multiple quotes from different contractors and find one who can provide the most efficient work.
Renovate the Property
It is now time for the renovation process. Efficiency is critical for a successful house flipping. Ensure and monitor that the contractors are doing their tasks efficiently and can deliver on time. Timing in a house flipping can make all the difference. The sooner, the better the renovations are done and put in the property for sale to reduce risks due to market price fluctuations and interests paid for the loan. However, it would help if you did the timing work in your favor, as selling early at a low price for a bargain can only provide a thin margin or a break-even.
Selling the Property
Connect with a realtor who can do the selling for you. The realtor can recommend the pricing, but you are the last say about what value you put on the property after considering the costs incurred and the work you put into it. Make sure you understand the pricing concept of the house flipping investment.
House flipping can be an excellent real estate investment as long as you understand how it works and how you can maximize profit from it. If it’s your first-time doing house flipping, seek the industry professionals’ advice who can help and learn pointers from them. You can also learn from house flipping investors’ experiences on how they succeed in this investment strategy. In the end, depending on your preference, you are the only one who can decide if house flipping is suited to your investment appetite.
There are available financial model templates available online, which can help you create and assess business feasibility before diving into the flipping business. The templates by eFinancialModels are prepared by industry experts who have hands-on experience. It can save you time than preparing from scratch.