Want to know how to flip a house? Flipping a house has become increasingly popular in the real estate industry, thanks to TV shows like HGTV's “Flip or Flop” and “Masters of Flip.” The goal is to buy a rundown house, renovate it with money, and put it on the real estate market for a huge profit. For real estate investors, flipping a house may have peaked during the bubble that led to the 2007 housing market crash, but it's definitely one of those dreams that hasn't gone away. Many investors are still making money out of it. However, just because you've watched a lot of HGTV shows doesn't mean you know how to flip a house for a profit.
Earlier this year, RealtyTrac reported that investors who flipped properties in the first quarter of 2016 made the highest average gross profit (the difference between the property purchase price and the resale price, excluding renovation costs) in the past decade. That magic number is $58,250.
But how much money you make depends on taking the right approach, so be sure to check out these tips on flipping houses.
How to make money reselling houses in real estate
“Follow the old adage of buying the cheapest property in the best neighborhood,” says Eric Workman, senior vice president of marketing for Chicago-based Renovo Financial, a private lender that specializes in the property-flip industry. But look for a home that has “good bones,” not just any old shack, Workman says.
Translation: Look for properties that are structurally sound and have a decent roof, newer windows, an HVAC system that's less than 10 years old, and up-to-date electrical and plumbing.
Next, an ideal remodel would only involve cosmetic changes like new cabinets, countertops, flooring, paint, etc. Any other renovations would cost more and cut into your profits on the property.
“These renovations can usually be done without permitting delays, plus the upgrades are relatively fixed costs, helping to eliminate unexpected expenses,” Workman says.
Also, always look for homes in areas close to public transportation and in good school districts, as these properties tend to sell quickly.
How much should you pay for a house to resell?
Investors should aim for a 10 to 20 percent return on their investment. So how do you calculate it? First, look at the sales prices of similarly sized, move-in ready properties in the same area to see how much your property in need of renovations could sell for once fixed up, says Bobby Curtis, broker at Living Room Realty in Portland, Oregon.
For example, let's say homes in your area in good condition are selling for $300,000. To get a rough idea of what a rundown property is worth, cut that price by three-quarters (75% of $300,000 = $225,000). Then subtract the cost of repairs (if the repairs cost $30,000, then $225,000 – $30,000 = $195,000). That's the most you'd be willing to pay to resell it without significantly reducing the money you're parting with.
When it comes to financing a resale, it's not that different from buying a regular house. You can either pay cash or take out a mortgage, but consider a 10- or 15-year mortgage with a low interest rate. If your budget is right, you probably won't own the house for long anyway.
Hard Money Loans
You can also get a hard money loan, which is a short-term loan secured by real estate.
“This is synonymous with a private investor,” says Don Hensel, president of Northcoast Financial, which specializes in hard money loans. “The lender can be an individual, a group of investors or a licensed mortgage broker using their own funds. This is different from a bank, which uses depositors' money.”
Obtaining a hard money loan is generally less hassle than a standard mortgage, and it's especially popular with home flippers who want to avoid the hassle of taking out a 15- or 30-year mortgage.
How quickly should you sell your house?
Don't kill yourself (or die prematurely, more accurately) in the rush to flip the property, but remember that you don't want to leave the house abandoned for too long.
Curtis recommends looking for properties that will take four to six weeks to renovate. A shorter deadline means you can buy and sell homes in the same housing market. Plus, owning a home for less than two months helps you minimize costs like interest and taxes.
This means finding a contractor who will do the job quickly and with quality is key to your success, which is why it's important to do plenty of research before you hire a contractor. Meet with at least a few contractors and get their license numbers, references, and estimates of the actual cost of renovating your property.
Watch out for warning signs: For example, contractors who ask for money up front or in cash may not be following the normal rules and may be trying to take your money and run.
Still, you should accept the fact that repair costs will almost always exceed your budget, so “you should absolutely overbudget and set aside funds for the inevitable overages,” says Joseph Chiera of The Realty Cousins in Poughkeepsie, N.Y. A design backup can also help with money issues.
“If you're planning on using premium hardwood flooring that costs $5 per square foot, have a reserve of $2 per square foot,” he adds.
Below is a list of renovations and how much profit they could make on resale.