Flipping houses can provide strong returns over a short time frame. In fact, it’s one of the best short-term real estate investments! But the process requires some industry knowledge, special skills, and a sizeable upfront investment.
In this article, we’re breaking down the house-flipping process into 10 manageable steps. And we’ll show you how to make your flips more efficient and more profitable!
Step 1: Assess Your Finances and Secure Funding
Before making any investment in real estate, you need to know how much capital you can afford to invest. Review your bank accounts and investment accounts to determine how much you’re comfortable investing. You may even be able to invest in real estate through an IRA or solo 401(k). Knowing how much you can invest will direct your decision-making throughout the process.
In many cases, it’s necessary to leverage debt to finance a portion of the project. There are several ways to finance a real estate investment, including:
- Traditional mortgage loans,
- Private money lenders, and
- Seller carry-back financing.
For most investment properties, traditional lenders will finance up to 80% of the property’s value. Depending on your credit score and financial situation, you might also qualify for a construction loan to help cover the cost of the renovation.
You’ll need to have enough cash to cover the down payment, closing costs, at least some of the renovation expenses, and holding costs until the property is sold. Make sure to leave some extra room for unexpected expenses, which are quite common in house flipping. Warning: this can easily exceed $100,000 (as we saw in our article about investing in real estate on any budget).
Meet with a lender to get pre-approved for any financing needed even before starting your property search.
Step 2: Assemble Your Team
Flipping houses is a team sport! You’ll need experienced professionals to assist with the complex details of the purchase, renovation, and sale.
Your team should include:
- A local real estate agent
- Your lender
- A contractor with experience in flips and connections to specialists in electrical, plumbing, painting, etc.
- A home inspector
- An appraiser
- A tax professional
Depending on the scope of your project, you might also need an attorney, an architect, and/or a designer.
If you’re not sure where to start, ask a few local investors for a recommendation for a real estate agent. Real estate agents often have networks of professionals they can refer you to.
Step 3: Find the Right Property
Finding the right property is all about potential. You want a property that you can add value to quickly, knowing that the renovated home will be in high demand by buyers.
You (and your real estate agent) can search listings on the market, but you can also look for off-market deals, which can often be purchased at a discount. Pre-foreclosures, tax auctions, and estate sales can all potentially provide off-market leads.
As you look for properties, consider factors like:
- Location,
- Market trends,
- Apparent condition of the property,
- Purchase price, and
- Potential to increase the value.
Step 4: Conduct Thorough Due Diligence and Estimate Your ROI
When you find a property that could work for you, you can make an offer. Leverage your real estate agent’s experience to inform your decision about how much to offer and what terms to propose. Depending on market conditions and the seller’s motivation, you might be able to offer less than the asking price and/or ask the seller for financial concessions to help you cover closing costs.
With the property under contract, you can begin your due diligence in earnest. Due diligence is the process of assessing the property to make sure you understand what you’re buying. This includes:
- Having the property inspected by a licensed home inspector who can alert you to potential problems.
- Ordering an appraisal to confirm the true market value of the property in its current condition.
- Checking the chain of title to make sure the owner is legally cleared to sell the property.
- Researching details like utilities, warranties, and insurance requirements.
At this stage, you should also plan the renovation and estimate the after-repair value (ARV), which is one of the most important metrics in real estate investing. The ARV is an estimate of how much the house will sell for once completed.
And you can establish your budget, factoring in the purchase price, renovation costs, holding expenses, closing costs, and transfer fees.
Subtract the total costs from the ARV to determine the potential profit for your flip. Then divide this amount by the total costs to calculate the potential ROI.
Step 5: Purchase the Property
If the property passes your due diligence checks, and you’re as certain as can be that you’ll generate favorable returns, you can proceed with the purchase.
You’ll sign the loan docs to secure the financing and sign the remaining contracts and transfer paperwork. Then you’ll be able to get the keys, record the deed, take possession of the property, and start the renovations.
From this point on, you’re on the clock. You’ll have to pay the mortgage and other holding expenses for each month you own the property, so you and your team must work efficiently to flip the house and close the sale quickly.
Step 6: Execute Renovations
Obtaining the necessary permits and making sure all renovations comply with local building codes is crucial. Your future buyers will want to see that the renovation was done properly, and showing the appropriate permits will help put their minds at ease.
As you begin the demolition process, take care not to damage the parts of the structure you plan to keep intact.
Check in with your contractor regularly to make sure the project is proceeding on time and within budget.
Step 7: List the Property for Sale
As renovations wind down, consult with your real estate agent about the strategy for pricing, listing, and marketing the property to sell quickly and for top dollar. Your agent may recommend staging the home with furnishings and decor that can help buyers fall in love with the space.
It’s generally a good idea to have professional listing photos and videos taken to help the property show well to homebuyers who are searching online. Your agent might also recommend creating printed materials to distribute to prospective buyers.
Then it’s finally time to list the property for sale on the market. This involves having your agent listing the property on the local MLS (multiple listing service), which extends to national home search sites like Zillow, Trulia, and REALTOR.com. Your agent should spearhead the marketing, actively promoting the property to buyers directly and to other agents who represent multiple buyers.
Step 8: Accept an Offer and Close the Sale
Now you get to experience the real estate transaction from the seller’s side. You’ll work with your agent to negotiate the best possible price and terms with prospective buyers. And you’ll wait while they conduct their due diligence.
Your real estate agent and/or attorney should coordinate the transaction to make sure all legal and financial aspects of the sale are handled correctly.
When the final paperwork has been signed and the deal is closed, you get to collect your proceeds!
Step 9: Review and Learn from the Project
After the sale, compare the results against your initial projections. List things that didn’t go as you expected and things you wish you knew before starting the project.
Analyze what worked well and what could be improved for future projects.
Step 10: Repeat
Take your experience into your next project to make it even more efficient and more profitable!
Invest in Flips More Efficiently with Gatsby Investment
Flipping a house requires a lot of money, time, connections, and effort. That’s why so many investors prefer investing in house flips with Gatsby Investment.
Gatsby Investment specializes in real estate syndication. Like crowdfunding, syndication pools money from multiple investors to finance a single project. The project is then professionally managed by a real estate sponsor who handles every detail of the investment on your behalf.
Using Gatsby for your house flip investments provides several benefits:
- You can buy into a deal with as little as $10,000, rather than funding the entire project yourself.
- Gatsby’s experienced team handles every detail of your flip: scouting properties, negotiating purchases, planning and managing the renovations, and reselling the completed project.
- You can leverage Gatsby’s experience and connections to generate higher yield potential than you could hope to get on your own. Our investors have seen average annualized returns of 23% since 2016!
House Flip FAQs
How much does it cost to flip a house?
The cost of a house flip depends on several factors, including local property values, the scope of the renovation, and current market conditions. Most investors plan for a down payment of 20% of the purchase price, closing costs of 6%, plus the cost of the materials and labor for the reno. It can easily cost $100,000 or more. But with Gatsby, you can buy a share in a flip project for as little as $10,000.
How long does it take to flip a house?
The time needed to flip a house depends on how quickly you can find a property, how long it takes to get the necessary permits, the amount of time you and your contractor can invest in the renovation, and how quickly you can find a qualified buyer. Flips with Gatsby typically take 10-14 months, but less extensive flips may be completed in six months or less.
How much can you make flipping houses?
Some investors earn returns of 15% or more flipping houses. It depends on factors like market conditions, local property values, and renovation costs.