If you turn to HGTV on any given day, you’ll likely come across shows where real estate investors take homes that are eyesores and turn them into jaw-dropping abodes. They also manage to turn a profit after major renovations.
Welcome to the world of house flipping. Let’s be real, though: It’s not as easy as it looks on TV. Here’s a crash course on what it takes to become a house flipper.
What is house flipping?
House flipping is when someone buys a property and holds onto it for a short time and then sells it (the flip part) in the hopes of making a profit. Instead of buying a home to live in, you’re buying a home as a real estate investment.
Sometimes, flipping a house means the temporary owner has to make a lot of repairs or renovations, and other times it’s owning the property until you can sell it for more than you paid for it, plus whatever you put in to fix it up. The goal is to buy low and sell high, invest your own sweat equity to cut costs and earn a profit in a relatively short amount of time — usually within months or a year.
Pros and cons of flipping a house
Matt Aitchison makes enough money from flipping houses that he now makes money showing other people how to do it, too. Alongside a few other ventures, Aitchison runs 6 Figure Flipper, an educational platform that teaches people how to flip houses. The money you earn can be significant, but he says there are some other rewards — and risks — in becoming a house flipper.
- Could make a decent profit in certain markets. In the second quarter of 2019, a typical house-flipping profit was $62,700, according to a report from ATTOM Data Solutions. Aitchison says he’ll pocket $40,000 to $50,000, on average, per flip. The most he’s earned from a house flip was $453,000, but that’s an extreme outlier. A real estate agent can help you research price-growth projections to find neighborhoods and homes that will give you the best ROI.
- Side hustle or new full-time job. You can earn as much or as little as you’d like, depending on how many flips you take on. While the more time you put into it can equate to more earnings, you don’t need to work more than you want to. Some people start house-flipping and eventually move into it full-time, while others use it as a secondary income to earn more money towards vacations, extra savings or their retirement fund. If you do it on the side, though, don’t take on more projects than you can reasonably handle.
- Help improve neighborhood values. Flipping homes might help turn around home values in areas where distressed properties are eyesores and dragging down prices. “Most of the houses I buy are in a distressed condition or coming from a distressed seller,” Aitchison says. “The ability to truly solve someone’s problem while making a significant profit that can be used to build wealth is an amazing thing that I love about flipping.”
- Financial risk. The uncertainty involved in house flipping can lead to potential financial loss, as well as a toll on your well-being. “It can be financially draining,” Aitchison says. “Emotionally, it can be draining if you don’t have the right team, mindset, and discipline in place.”
- Homes will likely have significant issues. Oftentimes, home flippers have to sink a good amount of money into fixing up the homes they buy so they can flip them later for a profit. Plus, you could be looking at a much higher-cost renovation if unexpected issues arise. “What if you open things up and you find asbestos? Mold? Termites? Those are just a few,” says Amanda Pi, who runs Pi Home Solutions, a design concierge service in Ridgewood, New Jersey. “There are tons of different things you could find when you do renovations.”
- Potential for legal issues. If you buy a home that doesn’t have clear title, or sell it and it has issues you didn’t fix or address appropriately, there’s always the potential for lawsuits. That’s why having a solid team looking out for your interests is so important, Aitchison says. “(I’ve) seen a lot of lawsuits on both sides,” he says. “Having a great real estate attorney is part of having the right team members in place.”
- The home might not sell quickly. If the property you’re trying to flip sits on the market, you’re responsible for paying all of its costs (including the mortgage payment, if you’re using financing, property taxes and homeowners insurance). Don’t forget, too, the maintenance and potential homeowners association dues, too. For this reason, it’s important that you have some capital set aside in case the flip is a flop.
How to get started with house flipping
Since flipping homes isn’t something you can get into overnight, you’ll want to make sure you have your finances in order and the right properties in mind first.
- Set a budget. A big financial drain is not having enough money to finance your project. Don’t go in conservatively; Pi suggests multiplying your current budget by five times. Whatever you think is enough, probably isn’t. Especially if this is your first time.
- Find the right property. If you don’t have a massive budget, look for properties that best fit your current finances. Browse through foreclosures, auctions and short sales to see which ones best match up with your budget and renovation ability. Don’t hesitate to seek the guidance of a real estate agent who has experience working with house flippers.
- Make an offer. With your financing in line and the right property to take on, you can make an offer. Work with an agent can help you stay in line with your budget. It’s OK if an offer falls through; you can have multiple properties in mind if one doesn’t work out.
- Set a timeline. Not all property renovations require the same amount of money, which means they don’t require the same amount of time, either. Whether it’s one month or six, give yourself enough time to make the appropriate repairs and upgrades, and factor in time for building inspections (if needed).
- Hire trusted contractors. Unless you’ve got the chops to handle repairs and renovations yourself, you’ll want to hire reputable people to do the necessary work. Some contractors have full teams to work on all areas of the home, but not all. Check licenses and references for contractors you want to hire, and also make sure their quotes are in line with your budget and they can meet your timeline.
- Sell your property. After the updates have been made, it’s time to put your property up for sale. While you could sell it yourself, a real estate agent can help you market the home to the right buyers and widen your reach. Remember, your agent knows the market and the property’s potential profit, so they can be invaluable during the selling process, too.
Common house-flipping mistakes
While there might be financial opportunity in flipping houses, Pi doesn’t recommend getting into it without significant capital, guidance and preparation. To become profitable, here are some common mistakes house flippers should avoid.
- Not having enough money. Your project will determine your budget, and not every home is a reality show-style renovation. There are full renovations, properties you can simply clean up and sell as-is, or homes that need basic repairs which you can then put on the market for the next investor. “Whatever your original budget is, double it and then double it again, then add your original budget on top of that,” she says. “Everything adds up quickly when you don’t know what you’re doing, and contractors take advantage if you’re a novice.”
- Thinking it’s easy. While you don’t need a license to flip homes, it’s not a fly-by-night business, and no one should take their cue from friends or TV shows. “It takes time and money and (you) shouldn’t go in blindfolded,” she says. “There are lots of amateurs. They see it on TV. They get burned and lose a lot of money.”
- Not setting up the right team. You have to work with experienced, reputable people, Pi says. Your team can include an experienced house flipping mentor, a real estate agent, construction/remodeling company, home inspector, a real estate attorney and an accountant to help you prepare your taxes, especially if you plan to turn house flipping into a business.
- Trying to do it as a side hustle in the long term. Pi says it might be more difficult to become a house flipper if you still work a full-time job. “If you’re working full-time and issues come up on-site, someone needs to be there,” she says. “It’s not a good side-hustle. If you’re going to do it, do it full time.”
Next steps, including financing
Before jumping into house-flipping, get your finances in order. There are plenty of home loans you can look into for financing investment properties, like home equity loans, a home equity line of credit or even construction loans. There are personal loans available for home-related updates, but compare the interest rates and loan terms to different home loans first.
Remember that there’s a huge potential for loss: in time, energy and money. Save your future self by keeping a solid emergency savings in case you lose money. While Pi says house-flipping wouldn’t be a good side-hustle, you may want to start out that way before jumping into the deep end. That way, you still have your day-job income in case house flipping isn’t your true calling or if the market turns on you.
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