I’ve mentioned before in a book review that I was, at one point, very interested in flipping houses for profit. What do I mean by flipping houses? It means to purchase houses that need cosmetic (or more) work selling for well under market value, upgrade them, and sell them for profit (hopefully) in a relatively short period of time. Sounds pretty easy in theory, but flippers can get way over their head if they don’t know what they are doing.
From reading a few books on flipping, watching various flipping TV shows and speaking with local investors, it seems that one critical step is running the numbers as accurately as possible before purchasing the property to ensure that the project is financially viable. The profit on a flipping endeavor is made when you buy which perhaps makes it the most important step. That is, the lower the purchase price of the house itself, the higher your potential profit margin.
- Evaluate the House – Once you find a prospective home that needs a bit of work, find out the market value of the home when it is in top notch, fixed up, condition. A real estate agent, or internet search should help here.
- Repairs – Get a contractor to give you an estimate of the repair/materials cost and the approximate time line. Give yourself a fudge factor in this calculation as projects have a tendency to go over budget.
- Calculate other Expenses – Obtain the cost of selling (real estate agent commissions, legal fees) and calculate your holding fees (purchasing legal fees, financing costs, utilities). Figuring out the agent/legal fees should be easy enough, but financing can be a different story. As a real estate flipper, you want to buy and sell as fast as possible. Some lenders have a problem with lending money for such a short period of time, which is why the flipper may have to resort to private financing. Private financing/mortgages generally have higher interest rates, but may be worth it to complete the project.
- Add in desired profit – Like any business a profit margin needs to be included. From reading books and speaking with local flippers, the profit should always be built into the offer/purchase price.
Purchase Price = Market Value – Repair Costs – Selling Costs – Holding Fees – Profit
Here’s the example from my review of “The House Flipping Answer Book”
The author explains that the key to flipping properties for profit is that you need to include your profits into your expenses when deciding on your maximum purchase price. For example:
Market Value when fixed: $200k
- repair materials/labor cost: -$20k
- holding costs: -$5k
- agent selling fee: -$10k
- closing costs: -$1k
- profit: -$20k
- fudge factor: -$5k
Maximum purchase price: $139k
Seems like a large spread between $200k and $139k, but note that houses that are worth $200k in mint condition are typically listed for much less when they need extensive repairs.
There you have it, my big picture thoughts on the process of flipping a house for profit. Of course, my only experience in real estate investing is with rental real estate (and REITs), but the above is what I’ve come up with based on reading various books and speaking with local real estate flippers.
Personally, I don’t have the guts to do a flip (right now) as it requires a fair bit of risk and a lot of time (that I don’t really have).
Have you ever taken on a house flipping project? Any tips?