There are a number of ways to make money in real estate. Today's marketplace has literally turned the rules upside down with a concept termed flipping houses.
Traditionally, investors would purchase a property, fix up the home, and find a renter. While that might still be a profitable strategy, learning how to flip a house is an approach no one can afford to ignore.
Flip this House or Flip that House
In fact, the concept of flipping houses was so popular that it was a featured TV show on both A&E (Flip this House), and the Discovery Channel (Flip that House). These shows were popular for a very good reason. At that time, house flipping was arguably the hottest trend in the real estate industry.
What is House Flipping?
The concept of house flipping is a relatively simple strategy to explain, but much harder to execute successfully, as we'll discuss later on. The term is used to describe a three step process:
- Buying a Home
- Renovating it
- Selling it for a Profit
While this three step process sounds simple, making-money in real estate is never a sure thing, and the stakes are high. The driving force behind profitability has to do with inefficiency in the real estate market. The "average" person looking to buy a home cannot distinguish between inexpensive cosmetic "damage" and more expensive structural problems. Ironically, fixing structural problems don't add a lot to the buyer's perceived value of the home.
How to Flip a House
Anyone interested in learning how to flip a house has to start thinking like a general contractor or builder. They need to be able to inspect a home, figure out how much it's going to cost to remodel it, and do this accurately. Staying on budget takes experience, and will ensure the deal is a profitable one.
The monetary rewards associated with house flipping can be great, as the example below demonstrates. The following table illustrates the simple economics behind this concept:
House Flip Example
To make money flipping a home, each of the components in the above example need to work in the buyer's favor, and this goes back to optimizing the three step process.
Buying a Home
The first step involves identifying a "bargain" home. Typically, a good candidate is one that's been ignored by previous homeowners, and is in need of purely cosmetic remodeling. This is where the inefficiency in the real estate market comes into play.
For example, the present homeowner does not realize that spending a little bit of money renovating their home, such as a fresh coat of paint, will return to them many times the money spent on the paint itself.
Renovating / Remodeling a Home
This topic is discussed in-depth in our article on Home Inspections, but the idea is to find a home that is in need of remodeling that a future home buyer will appreciate. That means avoiding a home where the hidden "infrastructure" systems such as plumbing, heating, and electrical are falling apart. Plumbing and electrical repairs can be expensive to fix, and are not perceived as being valuable by home buyers when repaired.
The example above showed $70,000 in remodeling costs. In this particular example, the money was well spent on clearly visible improvements that home buyers appreciate such as:
- Hardwood Floor Refinishing / Carpeting: $7,000
- Wall Repairs / Painting: $5,000
- Various Fixtures (knobs, handles, lighting): $3,000
- Miscellaneous Repairs: $5,000
- Exterior Painting / Shutters / Doors: $10,000
- Bathroom Renovations: $15,000
- Kitchen Renovations: $25,000
These are the types of repairs that home buyers appreciate, and will reward sellers by paying a premium when they bid for a home. That's because they give older homes a "like new" appearance.
Selling the Home for Profit
This final step can make or break a deal. The money spent on remodeling will hopefully be valued by a buyer, and will result in profitably flipping the home. But look at the dollars we're talking about in this example; this is a lot of money.
In fact, even in the television shows, real estate professionals and general contractors were seen spending tens of thousands of dollars on homes. These professionals know the risks involved, and are willing to accept those risks in the hope of higher returns.
But investments of that magnitude can be intimidating for those with less experience.
How to Start Flipping Homes
For anyone up for the challenge, we have some tips on how to slowly move into the home-flipping real estate market:
- It's easier to start out slowly if a buyer is handy with a hammer, wrench, and a paintbrush. We're not talking about major repair work but simple wall repairs, painting, and the changing of fixtures in the bathroom.
- Look for homes in an inexpensive area that are in need of the cosmetic repairs that are within the buyer's skillset. A good choice of homes might be those that are repossessed via the HUD program. It's important to find a home that requires little or no money down.
- Next, it's time to put some sweat equity into the home. Scrubbing, cleaning, polishing, painting, new rugs or refinishing hardwood floors. Changing out the lighting fixtures and installing a new bathroom faucet or two. While most of this work is relatively inexpensive to do, this is the key to selling a home for profit.
- Use the initial profits on these "starter homes" and put the money back to work by purchasing increasingly larger homes in need of more complex, and potentially more profitable, remodeling work.
- Make friends with a local building contractor, or decide if a full time general contracting job is the right move. If the business takes off, buyers need to put in more time, or find someone that can help manage the crews performing the home remodeling work.
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