Flipping Houses

There are lots of ways to make money in real estate.  In today's market we've literally turned the rule upside down with a new concept termed flipping houses.  Traditionally, investors would purchase a property, fix up the home and find a renter.  While that might still be a profitable strategy, learning how to flip a house is one approach you can't afford to ignore.

Flip this House or Flip that House

In fact, the concept of flipping houses is so popular that it's now a featured TV show on both A&E - Flip this House - and the Discovery Channel - Flip that House.  And these shows are popular for very good reason.  House flipping is arguably the hottest trend in the real estate industry today.

What is House Flipping?

House flipping is a relatively simple strategy to explain - but much harder to execute as we'll discuss later on.  House flipping is the term used to describe a three step process:

1. Buying a Home
2. Renovating the Home
3. Selling the Home for a Profit

A house flip occurs when someone buys a home, fixes / remodels the home in a very short timeframe (several months) and then turns around and sells the home for a profit.  Now while all this sounds pretty simple, making money flipping real estate is not a sure thing.

The driving force behind the profitability of flipping properties has to do with inefficiency in the real estate market.  That's because the "average" person looking to buy a home cannot distinguish between cosmetic "damage" to a home and structural problems - which can be far more expensive to fix, and when corrected don't add a lot to the buyer's perceived value of the home.

How to Flip a House

If you're interested in learning how to flip a house, then you have to start thinking like a general contractor or builder.  You need to be able to look at a home and figure out how much it's going to cost to remodel the home - and doing this accurately and staying on budget takes experience.

But the rewards can be great as our example below demonstrates.  This example helps to explain the simple economics behind flipping real estate:

House Flip Example

But to make money flipping a home, each of the components in the above example need to work in your favor.  And this goes back to optimizing the three step process.

Buying a Home

The first step in flipping a house for profit is identifying a "bargain" home.  Typically, a good home to flip is one that's been ignored by previous homeowners and is in need of purely cosmetic remodeling.  This is where the inefficiency in the real estate market comes into play.

For example, the homeowner does not realize that spending a little bit of money renovating their home - such as a fresh coat of paint - will return to them many times the money spent on the paint itself.  And that's because home buyers don't realize what it really costs to renovate a home.

Renovating / Remodeling a Home

We've talked about this topic in-depth in our article on Home Inspections, but the real tip here is to find a home that is need of remodeling that a home buyer will appreciate.  That means avoiding a home where the hidden "infrastructure" systems such as plumbing, heating and electrical systems are falling apart.  Plumbing and electrical repairs can be expensive to fix and are not perceived as being valuable by home buyers when repaired.

In our example above we showed $70,000 in remodeling costs.  In this particular example the money was well spent on clearly visible improvements that home buyers appreciate such as:

• Hardwood Floor Refinishing / Carpeting - $7,000
• Wall Repairs / Painting - $5,000
• Various Fixtures (knobs, handles, lighting) - $3,000
• Miscellaneous Repairs - $5,000
• Exterior Painting / Shutters / Doors - $10,000
• Bathroom renovations - $15,000
• Kitchen renovations - $25,000

These are the types of repairs that home buyers appreciate and will reward sellers by paying a premium when they bid for a home.  That's because they give a used or older home a "like new" appearance.

Selling the Home for Profit

This final step can make or break a home flip deal.  The money spent on remodeling will hopefully be appreciated by a home buyer and will result in profitably flipping the home.  But look at the dollars we're talking about in this example - this is a lot of money.

In fact, in the television shows such as Flip that House, we see real estate professionals and general contractors spending this kind of money on homes.  These professionals know the risks involved and are willing to accept those risks in the hope of higher returns.

But investments of that magnitude can be intimidating for those with less experience such as individuals that are looking to starting out slowly flipping houses.

How to Start Flipping Homes

If you think you're up for the challenge, we've got some tips on how to slowly move into the home flipping real estate market.  That means we're going to finish up with some practical tips on how to get started in what might be the most lucrative real estate opportunity of the 21st Century - flipping houses:

1. First off, to start out slowly flipping homes it's very helpful if you're handy with a hammer, wrench and a paintbrush.  We're not talking major repair work but simple wall repairs, painting and the changing of fixtures in the bathroom.
2. You need to look for homes in an inexpensive area that are in need of the cosmetic repairs that you can do yourself.  A good choice of homes might be those that are repossessed via the HUD program.  You want to find a home that requires little or no money down.
3. Next you need to put some sweat equity into the home.  Scrubbing, cleaning, polishing, painting, new rugs or refinishing hardwood floors.  Change out the lighting fixtures and put in a new bathroom faucet or two.  While most of this work is relatively inexpensive to do, this is the key to flipping a home for profit.
4. Use the initial profits on these "starter homes" and put the money back to work by purchasing increasingly larger homes in need of more complex, and potentially more profitable, remodeling work.
5. Make friends with a local building contractor or decide if a full time general contracting job is right for you.  If your home flipping business takes off then at some point you're going to need to put in more time or find someone that can help you manage all of the crews performing the home remodeling work.
   

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