If you’re wondering how to flip a house, be sure to do your research — even one small misstep can result in financial disaster. Fortunately for you, we’ve built a rock-solid guide to help you get started.
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Wondering How to Flip a House?
Many people start investing in real estate by flipping houses for a profit. This guide will show you how to flip a house from start to finish.
Flipping houses can be a lucrative way to invest in real estate, but there’s a steep learning curve. You’ll need to learn the most common mistakes to avoid and know what types of properties make the best, most profitable investments.
We’ll cover it all in this guide by outlining the entire process, explaining the calculations and formulas involved, sharing tips from experts, and highlighting the mistakes inexperienced flippers tend to make.
By the end, you’ll know how to flip a house and come away with a nice profit. But first, let’s start with the basics.
What Is House Flipping?
House flipping is a method of real estate investing that involves buying a property priced below market value and selling it for a higher price, usually after making renovations.
The unofficial house flipping motto is “Buy low, sell high.” When a real estate investor buys a house to flip, they often (but not always) choose a distressed property.
Distressed properties in need of repairs will be priced below market value. These properties are sold cheaply because the property owner doesn’t want to pay for repairs to sell the house for what it could be worth.
That might be due to financial constraints, a desire to move quickly, or to avoid the hassle of making repairs or hiring contractors.
A house flipper recognizes the profit potential of a distressed property and considers the cost of similar homes nearby along with the overall cost of repairs and renovations that will be required.
If the calculations make sense and leave room for profit, they will purchase the property and get it ready for sale. Properties in good condition are sometimes priced below market value and suitable for flipping.
These properties could be priced cheaply because:
- They failed to sell at market value
- The seller desires to sell quickly (due to an upcoming move, for example)
- The owner has a financial hardship requiring the sale of the home
Regardless of the situation, you’re the savior to the owner. They’re in a pickle, and you have cash. In the exchange, you get a deal on the property, and they get rid of a headache.
What House Flipping Is Not
Many confuse the real estate concept of wholesaling with house flipping. However, wholesaling is vastly different from house flipping.
Wholesaling refers to finding a seller with a property priced below market value and making a deal to find a buyer in exchange for an assignment fee (a percentage of the property’s sale price).
At no point is a wholesaler the actual owner or buyer of the property in question. They do not make renovations or repairs. Rather, they’re simply tasked with finding a buyer.
A wholesaler’s profit comes from collecting their assignment fee once they successfully find one. House flipping, on the other hand, involves direct ownership of the property.
The property owner pays for the repairs needed to increase a property’s value. A house flipper’s profit is made after they renovate and sell the home.
How to Flip a House: 6 Steps to Earn a Profit
Follow these steps to flip a house and earn a profit. Don’t skip any! Each one is essential to choosing the right property, staying within your budget, accurately estimating your profit potential, and making the right repairs.
1. Secure Access to Capital
First and foremost, you’ll need to secure access to capital if you plan to flip a house. You don’t want to find the perfect property and miss out because you didn’t have your financing in order yet.
You’ll need to put money down to finance the house (or enough cash to buy it outright) and money for repairs and renovations.
You’ll need to pay for all materials. You may need to pay contractors to work on the house or handle tasks you can’t, like electrical or plumbing work.
During the time you own the property before selling it, you’ll also be responsible for carrying costs like property taxes, home insurance, and utilities.
If you don’t have the money to buy a distressed property, you might look for investors to partner with. They would cover upfront costs and split the resulting profits with you.
Many beginning house flippers partner with experienced investors to get started. If you’re not able to find an investor to partner with, banks and private lenders are other options to get access to capital.
Be sure to get pre-approved for a mortgage if you’ll be working with a lender to speed the process along. Once you have a track record of success, you can take out a line of credit with a bank.
2. Search Available Properties Priced Below Market Value
You can’t flip a property that is in good condition and listed at market value. There’s no room for profit. Instead, you should look for properties that, for whatever reason, are priced below market value.
Keep your budget in mind as you look for properties. Those in need of repairs can range from relatively simple repairs to extensive renovations that require a much larger investment before the profit potential increases.
If your budget is tight, it’s important to find a house with relatively minor repairs and renovations needed. A real estate agent can help you find properties suitable for flipping, or you can seek out these properties on your own.
However, your best bet is to find properties on your own. If you’re buying on the market, you’re competing with retail buyers, which means you’ll realize a much smaller profit, or end up not making one at all.
3. Gather Comparable Property Values
Once you’ve found a property or two that fit your budget, you’ll need to determine how much they could be worth after renovations and repairs.
The last thing you want is to get stuck putting money into a property, only to find out its after repair value (ARV) is much less than expected.
You’ll need to find comps, or comparable property values, for homes similar to the one you’re considering flipping. Using real estate investor software helps with this.
Once you know what other 3-bedroom, 2-bath houses with similar square footage in the same neighborhood sell for, you’ll have a better idea of what your flipped property will be worth.
4. Calculate the ARV and Profit Potential
Next, you’ll need to calculate the ARV for any property you’re considering flipping. The ARV can be calculated by adding the purchase price and the expected increase in value from repairs and renovations.
Calculating the ARV
Purchase Price + Value of Renovations/Repairs = After Repair Value (ARV)
Let’s say you’re looking at a 3-bedroom, 2-bath home (1,500 square feet) that needs a new roof, repaired drywall in one room, and new flooring throughout.
It’s current value is $120,000 (purchase price). Similar 3-bed, 2-bath homes nearby of the same size in good condition sell for $200,000. That’s an $80,000 difference in value (value of renovations/repairs).
$120,000 (Purchase Price) + $80,000 (Value of Renovations/Repairs) = $200,000 (ARV)
Now, to find out how much profit you could make by flipping this house, you have an inspector check out the home to find any hidden issues you weren’t aware of.
In this example, the inspector finds no additional repairs are needed beyond what you’ve identified. If you’re wondering what repairs will cost, platforms like PropStream or Realeflow have built-in repair estimators.
These features reference the same cost databases that insurance companies use and then present the information based on your inputs. They are very accurate, albeit a bit clunky to use.
Regardless, say you estimate the cost of repairs as follows:
- Roof replacement: $6,500
- New drywall in one room: $1,600
- New flooring: $4,500
- Add 20% to account for unexpected repair costs: $2,520
- Total estimated cost of repairs: $15,120
An additional 20% factored in will account for any unexpected repairs that may be needed. In this case, the total would come to $15,120.
Using the 70% Rule
You’ll use the estimated repair cost to make sure the property fits into the 70% rule. The 70% rule states that a real estate investment should not cost more than 70% of the ARV minus the estimated repair costs.
This rule allows for a 30% return on investment (ROI). Using our example, here’s how the 70% works out.
($200,000 ARV x 0.70) – $15,120 (Estimated Repairs) = $124,880 (Max Purchase Price)
Using the 70% rule, buying this house for $120,000 and spending $15,120 on repairs to increase the ARV to $200,000 would leave room for an ROI of more than 30%. It would be a great investment.
Assuming you find the right property to flip and purchase it, you’ll move to the next step: Making the repairs.
5. Make or Supervise Repairs and Renovations
After buying the property you want to flip, you’ll develop a plan for the repairs and renovations. This is another piece you’ll need to manage carefully. Blowing the budget could put your returns in the red.
Before you get started, be sure to know:
- Who will handle each repair? Will you complete any yourself?
- If hiring contractors, how much do they charge per hour or per project?
- How long will each repair take?
- How will you manage the repair/renovation process?
- What’s the total cost of materials? Do your contractors know your budget?
- Where will you source the materials?
- Which repairs need to be made first (for example, roof before drywall)?
If you carefully track every aspect of the repairs and renovations, you can ensure your project doesn’t go over-budget and reduce or squander your overall profit.
6. Sell the Property
Once you’ve made the needed repairs and renovations, you’re almost ready to sell the property. First, you’ll need to have the home inspected to ensure the repairs comply with local codes, rules, and regulations.
After the inspection, have an appraiser come out and reassess the property’s value after repairs. Their appraisal should be close to your earlier ARV estimates if you calculated correctly.
With the new, higher appraisal price, you’re ready to list the property for sale if you don’t already have a buyer lined up. Partner with a real estate agent or opt to sell it yourself (FSBO) to retain more profit.
Remember, real estate agents take their commission out of the sale price of the home. To speed up the sale process, you’ll want to market your listing as widely as possible.
Post it online, put up flyers, tell friends and family about it, and hold open houses. Do whatever you can spread the word about the listing. Once you receive an acceptable offer, you’ll go through the closing process over about 30 days.
You’ll receive payment for the house, transfer the deed, and hand the keys over to the new owner. You’ve successfully flipped your first house!
Where to Find Flip-Worthy Houses
Houses suitable for flipping can be found just about anywhere. Some investors look for properties already on the market that are priced well below market value.
Others look for off-market distressed properties and contact the owner to see if they’d sell. Some hear about unlisted properties from other investors.
Others prefer to source properties from auctions, foreclosures, or short sales. It’s all about your preference and how much time you want to invest in finding flip-worthy houses.
In any case, building relationships with other real estate investors in your area will help you come across more flippable properties.
When an investor passes on an unlisted property they don’t want, decides to get out of the business and sell properties in need of rehabbing, or doesn’t have time to complete a rehab project they started, you can benefit majorly.
You can also use these contacts to share info on a below-market property you don’t want to buy or sell rental properties you’ve fixed up. To learn more about this, read our guide on how to find real estate investors.
How to Flip a House: Quick Overview
Flipping a house may seem like a monumental task, but the steps involved are relatively simple.
- Make sure you have access to the money you’ll need to purchase the property. Don’t forget the money you’ll need to make the needed repairs and cover additional costs when you own the property. There are often unexpected expenses, so ensure you’ll have more than enough, not just enough.
- View properties with an investor’s eye, not a buyer’s eye, to pick the best investments. If the carpets are ugly and outdated, but the price is right, it’s not a deal-breaker. You can replace the flooring. But if the roof is leaky, the floors are sagging, and there’s evidence of foundational issues, the repair cost will probably outweigh your profit.
- Arm yourself with research and calculations to make sure you stand to profit from the property you buy. How much do comparable homes sell for in the area? How much are the needed repairs going to cost – and did an inspector confirm those are the only repairs needed? Does the property fit within the 70% rule?
- Stay involved with the repairs and renovations if you’re hiring contractors to do them. Be clear about your budget and the scope of the work you want to be done. Follow a timeline to ensure you stay on track.
- Before you sell the house, have it inspected and appraised. As long as you’ve followed each step and accurately calculated the ARV and cost of repairs, the appraisal should confirm your estimates.
If you enjoy flipping your first house, the profits you earn from selling can finance your next investment. And the more houses you flip, the better you’ll get at identifying good investment opportunities and estimating repairs and home values.
Investing in real estate can start as your side hustle and grow into a full-time career if you commit yourself to learning more, doing research, and connecting with other experienced investors.