Have you ever watched a property flipping show and wondered if you should give it a try? If so, you’re not alone: 7.5% of all home sales in 2020 were flips. While reality TV shows make the home flipping process seem fun and charming, it can also be stressful and time-consuming, so it’s a good idea to know what you’re getting into before you start flipping homes. Read on to decide if house flipping is right for you!
- What Is House Flipping?
- Questions to Ask Before Flipping a Home
- Pros of House Flipping
- Cons of House Flipping
What Is House Flipping?
Photo via @sniderrealty
House flipping is when someone buys a property with the intention of enhancing and reselling it in the future. A buyer purchases a house with structural or design issues, makes capital improvements, increases square footage, and sells it for a profit.
It’s important to know that your house flipping experience most likely won’t be like the projects you see in Fixer Upper or Property Brothers. In fact, it could be a very stressful and demanding task, especially for your first fix-and-flip house. However, if you begin with realistic expectations and a well-thought-out plan, you can tackle your house flipping project with as few issues as possible.
Questions to Ask Before Flipping a Home
Photo via @sheenapratt_realtor
Where do you even start when flipping a home? Take a few minutes to consider the following questions, as they can help you understand a house flipping project and whether you have the means to see it through.
Do You Have Time?
Buying and flipping houses is not a passive real estate investment. Usually, it’s a full-time job that’s very labor-intensive and takes a lot of time, planning, knowledge, and skill. You can hire contractors to handle most of the manual labor, but you still have to make critical decisions, pay bills, and handle other stressful tasks. Even if you have the capacity, budget, and desire to take on such an endeavor, make sure you have enough time to get it done.
What’s Your Budget?
Determining your budget may be the most important step in any flip property project. First, there’s the cost of the house itself. Most buyers go by the 70% Rule, which states that the property should be bought for 70% of the After Repaired Value (ARV), minus any repairs needed. This rule helps you account for the house’s current state and necessary repairs. In addition to these costs, you’ll need to cover home insurance, utilities, property taxes, and more. Plus, there will be costs from unexpected issues like a cracked foundation, mold, bad plumbing, or asbestos. Make sure you have the financial ability to go over budget, if necessary.
Do You Need Financing?
If possible, it’s recommended that you buy and fix your flip house with cash. Doing so helps you save on transaction costs and cut down on bank involvement and paperwork. If you can’t afford the lump sum, there are also financing options and house flipping loans available. Outside of traditional bank financing, you can look into a hard money loan, home equity loan, and home equity line of credit (HELOC). Keep in mind that you’ll typically pay more to finance a flip than a primary residence because lenders see it as a risky proposition.
Can You Do This Alone?
Sweat equity is what often boosts profit margins in house flipping—the less work you have to pay someone else to do, the better. There are plenty of home improvement tasks you can tackle on your own like painting the interior, completing DIY backyard projects, replacing kitchen appliances, and taking on home remodeling ideas that will increase the house’s value.
Should You Hire Contractors?
You’ll likely need to hire electricity, plumbing, and structural professionals to help with your house flipping project. You can either hire a general contractor to handle everything and schedule all the work to be done or hire subcontractors for each specific task. Hiring subcontractors is often more time consuming, but it can also save a lot of money. When looking for reputable contractors, start by asking friends and family for recommendations. If you search on Google, pay close attention to each contractor’s ratings and reviews. Reputable contractors may be more expensive, but they’re well worth it in the long run.
Do You Have or Need a Real Estate License?
While you can hire a realtor to sell your flipped house, it may be beneficial to obtain a real estate license. Having a real estate license means you’re free from paying an agent’s commission, can legally be paid referral fees from other agents, and build trust with potential buyers. This option doesn’t make sense for everyone, however, as it requires both time and money to complete the real estate education required by your state. If you’re still figuring out how to start flipping houses, this may be an unnecessary step that could distract from the project at hand. But if you plan on flipping more houses in the future, the investment may be worth it.
Do You Know the Market?
A housing market will vary greatly by city and even down to the neighborhood. The home prices, current demand for houses, and desired amenities are important factors to understand before attempting a home flip. You need to have a firm grasp on the area, how much people are willing to pay for a home, and what landscaping and design features will help you sell the home in that area.
Do You Need an Eye for Design?
To make the home more attractive to prospective buyers, you’ll need to design it with attractive features that buyers want most. Are you up-to-date with current trends in paint colors? Do you know how to pick out tile or flooring? Offering trendy design features in a flipped home not only allows you to increase your asking price, but could also help you sell the home more quickly.
Pros of House Flipping
Photo via @jtsrealestatesolutionsllc
Property flipping can be a great way to earn additional income and could even turn into a career option. Below are some of the major benefits of flipping a home!
Potential Profit
House flips typically net around about 41% return on investment (ROI), though that number has decreased in recent years. If done right, it’s possible to create a very profitable home flipping business, and you’ll only improve with more experience.
Skill Development
As you flip houses over time, you’ll strengthen your skills of time management, organization, and communication—not to mention patience and confidence! You’ll also further your knowledge in areas like your local real estate market, home financing, negotiating, and contracting.
Professional Networking
During the house flipping process, you’ll meet contractors, lenders, attorneys, real estate agents, home inspectors, and other individuals who can help with your future real estate investments. You’ll learn which people you enjoy working with and which you can trust as you build your flipping network.
Personal Satisfaction
After months of hard work, there’s a strong feeling of accomplishment that comes from successfully fixing and flipping a house. You’ll gain confidence from tackling a large project that you’ve put effort into.
Work Independence
When you flip houses, you’re in charge. While you may also work with a team or a number of contractors, you’re in a leadership position. The success or failure of the house flip relies on your skills, organization, and attention to detail. You also have more control and greater flexibility for work hours.
Cons of House Flipping
Photo via @annie_twincitiesrealtor
Despite its many advantages, flipping a home carries a lot of financial and emotional risks as well. Keep these potential issues in mind as you decide if you should try to flip houses!
Financial Risk
As much as you can profit from fixing and flipping a home, there are also a lot of ways to lose money. The house might not sell as quickly as anticipated. Unexpected costs could arise, and taxes may increase. Sometimes, unreliable contractors fail to meet their deadlines. There could be market corrections or an economic recession. Overall, it’s hard to prepare for new costs that suddenly pop up.
Tax Consequences
There are tax rules associated with house flipping that you need to be familiar with, or they could cause headaches down the road. The IRS considers individuals who repeatedly purchase and fix homes for profit as dealers instead of investors. These properties are treated as inventory instead of capital assets, and the profits on the sale of those properties are treated as ordinary income, subject to the self-employment tax. Because of this, your taxes will be dependent on your income tax rate and which federal tax bracket you fall into.
Unforeseen Issues
Even if you have the house inspected prior to purchasing, there could be structural, electrical, plumbing, or other major issues that could significantly increase your financial burden and the amount of time it takes to flip the house. These can quickly add up and cause you to exceed your initial budget projections.
Increased Stress
No matter how much research you conduct and how you try to minimize risks, things can and most likely will go wrong during your house flip. It’s easy for a house flipping beginner to get overwhelmed with unexpected challenges, massive time commitments, and financial strains.
Holding Costs
The longer you hold the property, the more money you’ll likely lose on it. Even after renovations are complete, you have to pay the mortgage, taxes, and insurance on the house—not to mention landscape upkeep and property maintenance.
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