Is house flipping profitable? Find out the definitive answer in this comprehensive guide, and learn how to protect your real estate investment.
Of all real estate gigs, house flipping is one of the most lucrative. But that’s not the only reason it gathers so much attention.
Unlike other jobs, this one has a lower entry requirement since you don’t even need a license or cash saved up to get started.
Still, you do need to plan your efforts carefully and protect your investment.
Before you try your hand at house flipping, check out this guide to understand one key question: Is house flipping profitable?
House flippers buy homes that might not be so great upfront but have lots of potential.
They purchase these properties cheaply, then invest in renovation to sell them for a profit.
It seems like a relatively low-risk endeavor since renovating a construction automatically increases its value, but many things can go wrong if you don’t have a solid plan.
Your main focus is to maximize the value of the property by first repairing what’s broken but also tapping into what potential buyers might want from their future homes.
And succeeding at this takes a village. You’ll have to collaborate with several parties across multiple stages of the process, such as:
As with most other types of real estate investing, house flipping is a fantastic way to build wealth.
The average ROI for this hustle is around 22.5%, which translates to an average gross profit of roughly $56,000.
But your profits can depend on a lot of factors, from the state where the house is to the size of the property and the purchasing power of the people in the area.
For instance, if you flip houses in California, you can expect much higher potential profits than you would in a smaller city.
California is a hot spot thanks to its higher population, healthy employment rates, and even the housing market.
The caveat with these popular cities is that houses, even run-down properties, will be more expensive, and so will the cost of repairs.
This means you’ll need to gather up more money upfront to enter these markets, where you’ll also face lots of competitors.
Profit isn’t guaranteed when flipping houses, but there are some things you can do to increase your odds:
Large capital
Having the money to spend on purchasing a property and renovating it is your first priority. The more you can gather, the better your chances to sell for a profit.
If you don’t have the money on hand, you can try getting a loan to finance your first investment.
Property appraisal skills
You’ll also need to determine how much a property costs both before and after flipping.
This can be a difficult thing to know if you’re a beginner, but you can collaborate with a real estate appraiser to help.
Real estate knowledge
The best house flipper is usually a real estate agent, or at least someone who has that level of industry knowledge.
Working with one will equip you with the necessary fundamentals of reselling properties. It'll also lower your listing and transaction fees.
Understanding of construction and renovations
In addition to paying a good price on the house, you should learn how to estimate remodeling costs and identify expensive issues.
Knowledge of local building codes
Every state and area has specific building codes. Determining whether a potential fixer-upper adheres to them helps you decide if it's worth it.
There are two ways to finance your house-flipping efforts:
The default option for almost any type of real estate investment is to take the cash out of your pocket.
However, most people don't have that luxury, which leaves you with a few other options.
For starters, you could try selling items you don't need or take out a home equity loan on your residence.
With an interest rate of around 8.5%, it's one of the best ways to get cash fast for house flips.
And if you have your money tied up in a savings account, consider tapping into it.
This shouldn't be your first option unless you have large amounts of cash in it already.
If you want to get money out of your 401(k) for a house to flip, you'll have to take property taxes into account.
If you can get a generous ROI to improve your personal finance, it's worth it.
But there are better ways to raise money than tapping into your retirement plan.
Many people who enter this business don't actually use their money at all. Instead, they use OPM to finance their investments.
Whatever is left over after selling the house, paying for renovations, interest rates, and taxes is yours to keep.
Although it's a risky strategy that can result in major losses, it's worth it for skilled flippers.
You can easily make $10,000 to $20,000 per flip, more if you're a fixer who can help with renovations.
The best way to get an investment is often to partner up with a private money lender.
If you have a wealthy family member or friend you can trust, talk to them about investing with you.
You can split profits 50-50. They'll get a healthy profit by doing nothing, and you'll get a sum for yourself.
If you're having trouble finding a private money lender, then consider a hard money lender instead.
They're an excellent option if you need the money fast to close down a deal, as they have fast approval processes.
The only major downside is that they have high interest rates of around 15% or more.
Another innovative strategy is to do real estate crowdfunding.
There are several platforms that can help you get in touch with small-time investors.
This is a great option if you can't get a traditional loan.
If you're considering this lucrative career path, you should first know what the benefits and drawbacks of the gig are.
There are reasons why some house flippers are millionaires, whereas others keep losing money.
Here are some house flipping tips to help you become the former:
Develop strong real estate skills
Learn how to negotiate interest rates. Also, you must become a master at property valuation and renovation estimates.
Work closely with a real estate agent in the beginning to start developing these skills.
Follow the 70% rule
The rule dictates to limit your house payment to 70% of the after-repair value minus the renovation costs.
Never exceed this house flipping budget if you want to stay in business, even if the property looks lucrative.
Be realistic with profits
The story you might have read about someone making $100,000 from a single property is an exception, not a rule. Aim for a profit of around 15% of the house's value, if not less.
Keep enough cash in savings
You'll likely run into unexpected repair costs and possible legal fees that must be paid off before you can flip the house.
You can become a millionaire or even a multimillionaire as a house flipper, especially if you invest in more luxurious properties.
However, the real estate industry is highly competitive, so becoming ultra-rich is more difficult than it seems.
But you can become financially comfortable with the right plan.
Most house flippers take about 4 to 8 months to renovate and sell a house. Occasionally, they'll sell an unfinished house if they get a good deal on it.
Conversely, a lemon (a property that values less than what you thought) can take over a year to sell.
House flipping is one of the easier ways to get rich, but it's also one of the riskiest.
If you'd like to become a successful house flipper, it's best to first get some knowledge in the real estate business before attempting to sell a house using someone else's money.
Consider attending house flipping shows to get a better understanding.
Have you ever resold a house? How did it go? Let us know in the comments below.
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