Flipping a house: a beginner’s guide
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If you turn to HGTV on any given day, you’ll likely come across programs where people — sometimes professional real estate investors, but sometimes ordinary individuals — take homes that are eyesores and transform them into jaw-dropping abodes. They then sell these properties, turning a tidy profit.
Welcome to the world of house flipping. It keeps growing in popularity, encouraged of late by the pandemic-fueled rapid rise in home prices. According to real estate data firm ATTOM, nearly one in 10 homes sold in the first quarter of 2022 were flipped — the highest level since 2000. Year over year, the number of flipping transactions has doubled from Q1 2021 to the same period of 2022.
Let’s be real, though: It’s not as easy as it looks on TV. In fact, that same ATTOM first-quarter 2022 “U.S. Home Flipping Report” noted that while home sales by flippers spiked, profit margins on those sales dipped to their lowest point since 2009.
Here’s a crash course on what it takes to become a house flipper — hopefully, a successful one.
What is house flipping?
House flipping is when someone buys a property, holds onto it for a short time and then sells it (the flip part) for a higher price. Instead of buying a home to live in as a residence, you’re buying a home as a real estate investment — in effect, speculating in it as you would a stock.
Sometimes, flipping a house means you (as the new, short-term owner) takes a fixer-upper and renovates it to make it market-ready; other times, it means just holding the property until you can sell it for more than you paid for it. Either way, the goal is to buy low and sell high, earning a profit in a relatively short amount of time — usually within months or a year.
House-flipping advantages and disadvantages
Some people actually enjoy putting sweat equity into improving a residence. But there are some other rewards — along with plenty of risks — in becoming a house flipper.
- Could make a decent profit. Among all flips nationwide, the typical gross profit (the difference between the median purchase price paid by investors and the median resale price) was $67,000 in the first quarter of 2022, according to ATTOM. Matt Aitchison, real estate investor and founder of educational platform 6 Figure Flipper, 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.
- Find a new part- or even full-time job. 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, savings or their retirement fund.
- Help improve neighborhood values. Flipping homes might help turn around home values in areas where decayed 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.”
- Diversify your investments. Investing in different types of assets is generally a good way to reduce risk. As an alternative to stocks and bonds, real estate is one of the most popular long-term investments: Property values tend to move counter to the equity markets, and increase in value over time. Adding real estate to your investment portfolio can help diversify your holdings and flipping properties is a great opportunity to cash in those investments.
- Homes will likely have significant issues. Oftentimes, home flippers have to sink a good amount of money into fixing up the homes they buy — and they could be looking at much higher-than-anticipated costs if unexpected issues with the house 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 a 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, says Aitchison, who’s “seen a lot of lawsuits on both sides.” “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’ve financed it, property taxes and homeowners insurance). Don’t forget other homeownership expenses, like 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.
- Lots of pressure. 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.”
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. This agent can help you research comps and price-growth projections to find neighborhoods and homes that will give you the best ROI.
- Make an offer. With your financing in line and the right property to take on, you can make an offer. Professional flippers often calculate a home’s after-repair value (a specific equation to determine its ultimate worth) to determine how much to bid. 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 tradespeople 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.
Common house-flipping mistakes
While there might be financial opportunity in flipping houses, don’t get into it without significant capital, guidance and preparation. To be 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,” Pi 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,” Pi 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 part-time in the long term. Pi says it might be more difficult to become a house flipper if you have a regular 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.”
Final word on house-flipping
Before jumping into house-flipping, get your funds 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 also are personal loans available for home-related renovations, but compare the interest rates and terms to those of 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. That way, you still have your day-job income in case house flipping isn’t your true calling or if the real estate market turns on you.