With a stabilized housing market, urban redevelopment projects happening all over the country, and Millennials adding a massive boon to the potential buyer pool, now could be a great time to get into house flipping, but only if you play your cards right.
Flipping houses can be a fun gig—and a profitable one—but succeeding isn’t a guarantee and many new flipping businesses fail almost immediately. So how do you avoid becoming a statistic? By planning ahead.
By researching the industry, getting to know your target areas, making some solid connections, and developing a business model now, you’ll have laid a solid foundation for your business to stand on for years to come. You won’t just be a blip in time.
Step One: Getting to Know the Industry
Flipping houses is a lot more involved than some home-improvement reality series would have you believe. To make flipping houses profitable, you’ll need to know your area and the professionals in it.
Learn your local laws. Some areas may require you to have a license to buy and flip properties. You may need to register a LLC to protect yourself before you start. And you may need to secure permits to get work done once you do buy your first property. Several trips to the local courthouse, zoning board commission, and neighborhood planning commission can tell you everything you need to know, but it might be easier (and more time efficient) to hire a local attorney who specializes in building affairs.
Get to know the neighborhood. The best remodeling job in the world may not turn a profit if the neighborhood isn’t hot. You know what they say about real estate, it is all location, location, location. Don’t go off rumor or gut-feeling to find the next up-and-coming neighborhood. Some neighborhoods can have all sorts of potential, but never actually develop.
To find the best spots, visit neighborhoods in person, get to know the neighbors, and pay close attention to news about new business and development in the area. You can also work with a Realtor or broker to help you zone in on real estate hot spots.
Find the right professionals. Even if you plan to do some of the work yourself, you’ll likely need a few construction and real estate professionals to help you polish off the job. Ask your Realtor or other industry pros for referrals and get estimates from people early on. It will help you factor in potential profits once you buy your first property.
Step Two: Write a Business Plan
Once you’ve got the lay of the land (no pun intended), you’ll need to create a business plan. Having a solid business plan in place will have two big benefits. One, it will help you focus and two, you’ll have something concrete to show potential lenders once you start looking for financing.
There are no set rules for how your business plan should look, however, it should address a few key points:
Mission statement: What is your overall goal in starting this business. Look beyond ‘making a profit’ and decide what you and your company will really be about.
Market analysis: Using the information you gathered in step one, where do you plan on flipping homes? What have you learned about these areas? How could you profit?
Financial projections: While business may be slow in the beginning, charting potential progress now can help you stay on track.
Company layout: If you’re planning on hiring or working with other professionals, map that out.
Step Three: Get Financing
Buying and flipping a home takes working capital. While you won’t be able to get a traditional mortgage loan to cover your upfront costs, you may qualify for a fix and flip loan, special financing designed to help flippers get started.
There are different kinds of fix and flip loans. Some are offered by traditional banks and financial institutions. You may also find financing online through lenders like LendingHome.
These loans can help you get the working capital you need to get started, but remember, you’ll have to meet the qualification limits to get approved. Plan on explaining your business model, showing a history of good credit, and having some cash on hand. In most cases, you won’t be able to borrow 100 percent of the costs.
Step Four: Preparing For Problems Now
Of course, there are some pitfalls to flipping houses. Knowing what you’re in for ahead of time can help you overcome those pitfalls later on.
Time: Flipping isn’t quick. It may take a month or two to find a good property and several more weeks to close on the deal. Once you get started, you may find yourself waiting for permits. Even bad weather could push you over your deadline.
Money: No matter how well you plan, surprise costs can (and probably will pop up). The plumbing you thought was fine may need an overall, for example. To keep things running smoothly, you should have a cushion to cover those unexpected expenses.
Mistakes: Even if you plan to do most of the work yourself, mistakes can happen. A job might not be done correctly, marketing material might go out with a misprint. It happens, but you’ll need the patience to work through it and get the job done.
Overall, flipping houses can be a good way to earn some income, but it is also risky. The more you plan ahead, the less risk you’ll have.