You see the stories on TV infomercials — make millions flipping houses! As house buyers, the very thought is both appealing and engaging — but is it even possible? The answer is yes, but as you might expect, it’s not nearly as easy as the infomercials make it seem.
Here are the major areas of flipping houses you need to know to make it work.
Know the Local Real Estate Market Thoroughly
You’ll never make money as house buyers flipping houses if you don’t have a high degree of information about the local real estate market. The only way that you will know if the said property is really a deal is if you know the market value of comparable houses in that location.
It would be best worth your time to get your real estate license so you can gain access to the local multiple listing service. That will give you two benefits: as house buyers, it will provide you access to both asking and selling prices, and makes you aware of properties as soon as they’ll be available on the market to help you find true bargains.
You Have to Buy at Well Below the Prevailing Market
To make money out of flipping homes you must buy them at extremely low discounts. This step should never be taken lightly. If you think of the ultimate selling price of the property as its retail price, the value that you are paying should be seen as the wholesale price. The difference between the two must give enough profit, plus room to cover some renovations.
When purchasing houses to flip, you should never buy based on your emotions (like, I really like this property), but instead on your house buyers instinct. Your success will rely almost entirely on the numbers, and you have to be very relentless about this.
You Should Be Able to Rent Out the Property Profitably
If you’re in the house flipping business long enough, sooner or later you’ll see yourself stuck with a hard-to-sell property. If that happens, you will almost certainly need to rent it out until interested house buyers can be found.
To do that, you need to be sure that you can rent the property out profitably. This gets back to knowing the local real estate market. In addition to prevailing property values, you should possess a thorough knowledge of what comparable properties are renting for the area.
Any house that you buy with the intention of flipping, should also be a suitable rental. The market rental of the property should be enough to cover the principal, interest, taxes and insurance on the property, and preferably a little bit extra to create a profit.
Know the Cost of Typical Repairs
It’s not always likely that you will be the only property flipper in the community. Competition can be tough, and bidding wars can make around well-priced properties. This means that when you found a good deal, you’ll have to be ready to move quickly.
For that reason, you’ll have to have a good idea of what type of repairs will be needed on the property, as well as a reasonable estimate about the repair might cost. If you do not have much experience in home remodelling and repair, you’ll need a panel of experts whose knowledge base you can tap on short notice.
No matter how good a deal is, you could lose money on it if the purchase price plus the cost of repairs exceeds the market value of the home.
You’ll Need Plenty of Cash
Mortgage lenders normally don’t lend more than 80% of the value of a non-owner occupied property. You should be fully aware that you will need to make a downpayment of at least 20% per property. 5% down at 3.5% down loans are available only for owner-occupants, not property flippers and investors.
If the property is in serious disrepair — or the lender has reason to believe that you plan to flip it in just a few months — you may not even be able to get a purchase money mortgage on the house all. In that case, you may consider a higher-priced commercial loan arrangement, or you will need to pay all cash.
You may also need to have a lot of cash for repairs. It’s unlikely that you’ll be able to get a home equity line of credit to make repairs on a non-owner-occupied property, so you need to pay the cost of repairs out of pocket. You may also need to have extra money available in case there are unknown issues that need to be repaired. That scenario is not at all normal if a property has experienced several years of deferred maintenance, which many of the best properties have.
So, yes, you can make money flipping houses. But there’s a lot more to it, and you’ll need to know it all in order to make you promised riches.