Ah, the house-flipping dream. Buy a run-down home, fix it up, put it on the market—and profit, big-time! Flipping may have hit its peak in the bubble years leading up to the 2007 housing market crash, but this is one dream that definitely hasn’t died. However, just because you’ve watched a lot of HGTV doesn’t mean that you know how to flip a house.
Earlier this year, RealtyTrac reported that homes flipped in the first quarter of 2016 had yielded the highest average gross flipping profit—the difference between the purchase price and the flipped price, not counting renovation expenses—in 10 years. The magic number: $58,250.
But just how much money you make will hinge on taking the right approach—so be sure to check out these pointers on how to flip a house. For real.
How to find a worthy house to flip
“Stick with the age-old adage of buying the cheapest home in the nicest neighborhood,” says Eric Workman, senior vice president of marketing at Chicago-based Renovo Financial, a private lender specializing in the house-flipping space. But don’t pick just any old shack—look for a home with “good bones,” Workman says. Translation: one that’s structurally sound, has a decent roof, newer windows, and an HVAC system that’s less than 10 years old, as well as modern electrical and plumbing.
Next, a flip should need only cosmetic changes such as new cabinets, countertops, flooring, and paint.
“These renovations can usually be done without the delays of permits, plus the upgrade costs will be relatively fixed, helping to eliminate unforeseen expenses,” says Workman. And always look for homes in neighborhoods close to public transportation or in good school districts as they tend to sell quickly.
How much should you pay for a house you’ll flip?
Your goal should be to make a 10% to 20% return on your investment. So how do you crunch the numbers? For starters, find out what your fixer-upper will sell for once you’re done with it by looking at the sales price for similarly sized homes in the same neighborhood that are move-in ready, says broker Bobby Curtis at Living Room Realty in Portland, OR.
Let’s say, for instance, that homes in tip-top shape in the area sell for $300,000. To get a ballpark figure for a run-down house, cut that price by three-quarters (75% of $300,000 = $225,000). Then subtract the cost of repairs (if repairs cost $30,000, that would be $225,000 – $30,000 = $195,000). That’s about the most you should pay for your flipped house without cutting too much into your profits.
As for financing a flip, it isn’t that different from buying a regular home. You’ll either pay cash or take out a mortgage—just consider going for a 10- or 15-year mortgage, which will offer a lower rate. After all, odds are you won’t own this home for long anyway.
How fast should you flip?
Don’t kill yourself (or more accurately, flip yourself into an early grave) to rush the flip. But also note, you don’t want this house sitting around for long. Curtis recommends looking for a place that will take four to six weeks to renovate. A short deadline ensures you’ll buy and sell the house in that same housing market. Plus, owning a house for less than two months keeps costs like interest and taxes at a minimum.
This means that finding contractors who do quality work quickly is key to your success. For that reason, it’s crucial that you do your due diligence before you hire one: Make sure to meet with at least a few contractors, get their license number, references, and an estimate of what they think renovations will costs. Keep an eye out for red flags—e.g., contractors who ask for money upfront or in cash aren’t playing by the usual rules, and might be trying to take your money and run.
That said, you should accept the fact that the cost of repairs will almost always run over. As such, “you absolutely, positively must overbudget” so you have a financial cushion for those inevitable cost overruns, says Joseph Chiera of The Realty Cousins of Poughkeepsie, NY. Design backups will also help with budget shortcomings.
“If you’re planning to use high-end hardwood flooring priced at $5 per square foot, have a nice backup at $2 per square foot.” Here’s a list of renovations and how much they pay off at resale.