House Flip For Profit: 7 Tips For House Flipping Success In Any Market
1. Prepare – Now that you’ve decided to start selling houses for a profit, it’s time to get your goals and expectations right. Calculate how much cash you have available for this investment. Make sure you have enough money to cover a twenty percent down payment, home remodeling, and enough cash on hand to cover the monthly mortgage payment until the property is ready. I know it sounds overwhelming, but I’m going to show you how to cut down on initial cash and remodeling funds. It always makes sense to write your plan. It doesn’t have to be anything fancy, it just has to make sense to you. It is impossible to know where you are going without a map to navigate.
2. Identify a good property to flip: Now that you have an idea of your address, it’s time to consider the type of property that would make a good flip. Find out if you want to buy a single-family home that needs work or a multi-family home where a condo conversion might be your intent. For our purposes here, we will discuss the single-family home flip. If you don’t have access to the Multiple Listing Service (MLS) in your area, find a reputable real estate agent who can provide you with MLS access. It is advisable to have a buyers agent because it does not cost you any money. The buyers agent is compensated by the listing broker’s agency. Once you have access to the MLS, you can start looking for properties. I like to search by zip code in areas that I know have desirable neighborhoods. In a down market like the one we find ourselves in right now, there are a lot of rundown homes that are in great neighborhoods. Those are the houses that will always sell first. You should focus on bank-owned, short-sale, and foreclosed homes that are on the market. Keep in mind that it doesn’t matter how much the seller is asking for the house, what matters is whether the project makes sense. I usually calculate the price I will pay for a house after calculating the amount of work that needs to be done and how much I can sell it for. Remember, the market tells you how much a house will sell for, not the price.
3. Property inspection and analysis: Before you can make an informed offer, you need to know two things. First you need to know how much it will cost to bring the house to its highest and best condition. It must appeal to the type of buyer who is most likely to buy the house. You should have a reputable contractor meet you at the house so they can give you an idea of the costs involved. Now add 20% just to account for unexpected costs. Once you know your cost, you should check with your real estate agent to determine what similar homes have sold for and look at homes you will be competing with. Now that you have a good idea of the future sales price and the cost of construction, you can now use basic math to add the cost to the purchase price and then subtract that answer from the estimated future sales price to determine if there is a margin. enough profit for this home investment to make sense to you. Tip: Don’t forget to add the sales commission to your cost if you plan to use a real estate agent.
4. If the Numbers Work, Get Financing! – Once you know there is enough profit after your acquisition cost, remodeling budget and cost of sale. Now you know the most you should pay for the house. Before you make an offer, you must get your financing in place. This is my area of expertise as I have been a mortgage broker for several years. There have been a lot of changes in the mortgage industry since mid-2006. Money is a little harder to come by, but it’s still available with a down payment and a decent credit history. The guidelines are always changing, but right now, at the end of 2008, a minimum 20% down payment is required to purchase investment property and the borrower must show income and assets to qualify. If after the 20% down payment, remodel money and cash to cover the monthly payments, you don’t have much money left, you should consider a partner for the deal. You may not be a fan of long-term partnerships, but when you’re selling a property, you’d be looking for a 4-6 month partnership, not a lifetime partnership. If that works out, you could always buy more properties to invest in the future. It also helps to divide risk and tasks. Just make sure your expectations are set correctly. If you go the partner route, I suggest opening a joint bank and financing it with 6 months of mortgage payments, including taxes and insurance. If you have any further questions about financing, I’ll be happy to answer them. I will provide my office contact information at the end of this article.
5. Remodeling/Rehab Phase: It’s time to fix this house up and get it back on the market as quickly as possible. You should now have your contractors come in to begin the construction phase. Keep in mind that cheap labor will almost always be more expensive. Make sure contractors get the proper permits. The last thing you want is a forced work stoppage because the required permit was not obtained. Also, if these workers don’t know the code or don’t rely on it, it will usually cost you twice as much to fix a code problem. By now you should have a detailed list of everything that needs to be done. Break it down by major systems such as heating, cooling, plumbing, electrical, and any other systems that need repair or service. Then go room by room and make a list of what needs to be done in each room. Joint compound and a fresh coat of paint go a long way. Just be sure to use trendy, neutral colors that aren’t offensive to anyone. Be sure to inspect the exterior of the home for repairs and touch-ups. The yard must be clean and properly landscaped. Be sure to check in with contractors daily to make sure things are on track, don’t assume everything is on schedule. Finally, take advantage of using Lowes and Home Depot credit to avoid payments and interest for six to twelve months. You should be able to purchase most materials with that credit. Just be sure to pay the balance in full when the interest-free period ends or you’ll be hit with all of the increased interest.
6. Sell Your House Fast – Now that your house is complete and ready to go on the market. You should already have an idea of how much you will list this property for, but you need to double check the value. The best way to do this is to have an appraiser or real estate agent conduct a comparable market analysis. If you don’t know an appraiser, call your mortgage broker and ask them to use your appraiser to help determine a range for you. I do it for my mortgage clients as a free value-added service, it’s just good business practice. You may want to sell your house yourself and that’s fine, but you need to have time to show it and also be able to list the property on your local multiple listing service. If you’re trying to avoid paying a full real estate commission, a local real estate agent will usually do an “entrance only” listing for a nominal fee. If you don’t have time or don’t want to deal with the hassle of listing the house yourself, hire a real estate agent to list it for you. You should have already added the sales commission rate to your figures beforehand. When calculating value, be sure to look not only at similar homes that have sold, but also at your competition. Your home should be a great deal when the average buyer compares it to others in the same price range. Lastly, if you’re not showing enough after a week or so, the price of the house may be too high, don’t be afraid to lower the price. Sometimes a little profit is better than no profit. That’s why you should buy the property you want to flip as low as possible and estimate the remodel as accurately as possible.
7. Make plans for your benefit: If you priced your newly remodeled home correctly, it will be negotiated and closing soon. If you have planned correctly, you should make some profit. It would be wise to have a solid plan regarding your benefit. Here are some options; You can simply take the profit as well as your initial investment and put it in your bank. In that case, you’ve just created a taxable event or, in other words, a long-term or short-term capital gain depending on how long you’ve owned the property. That option is better if the profit gain was minimal. If you made a significant gain and were planning to sell another property, you can defer your taxes through a 1031 exchange. Basically, a 1031 exchange is a tax code that allows you to defer capital gains tax to a later date and reinvest your profits. in another investment property within a specified period of time. There are rules that must be followed for the trade to be valid, but considering the benefit, it might be worth it. The advantages of doing a 1031 exchange include having more money available now and more purchasing power. It means paying no taxes while building your real estate investment business. You can flip your winnings, just like flipping a house. Here’s an idea, why not switch houses until you have enough down payment funds to switch to a 30-unit apartment building? Then you can turn your money into cash flow. You can defer payment of any taxes until after you sell the last property and take the money. It is always wise to speak to an accountant when making tax decisions, so always consult a professional CPA when it comes to tax law, that is money well spent.
I leave you with one last thought; Use professionals from start to finish. Licensed professionals may seem more expensive, but they will save you money by getting the job done on time and correctly.