A number of clients and friends have asked me over the years my opinion on house flipping. “Can I actually make money doing it?” they ask. The short answer is yes you can. However, the process is NOT for the faint of heart.
By the way, what is house flipping? Very simply, flipping is (usually) the process of buying then quickly selling a home to make a profit. The idea is that one day the buyer acquires the property, quickly fixes it up, then puts it right back on the market (the flip) to sell. If you’re going to consider this endeavor, consider the following:
First, it’s imperative that the house you buy to flip is either priced well below the market and/or significantly distressed. It may take you weeks or months to find the right home to do it assuming you’re checking the market daily. You or your Realtor professional should have a good eye for the right property. As with all real estate value, location is hugely important.
From an investment standpoint, it’s best that you have cash or access to cash without having to get a new loan. There are hard money loans available (high interest – short term loans) but buyer beware, this is not recommended for most borrowers and the borrowing costs will eat into your profit.
Second, you need to know the current condition of the property you’re buying which may include more than just a typical home inspection. Make sure there are no hidden physical flaws. If you’re not well versed on the cost of renovating, it’s best that you have your contractor with you to examine the house as well. Actually it’s ALWAYS a good idea to have a second set of eyes to view your property. Also, make sure you get title insurance. Good title companies can also reduce these costs if you’re an investor and then you sell within 2-5 years. But you need to ask.
Once you’ve examined the house and know what you’re getting into, you need to determine the cost of flipping it which includes not just the physical remodeling, but also your closing and carrying costs (mortgage if any, taxes, insurance, hoa fees, utilities, title insurance, escrow fees, Realtor commission, etc). All of these costs and more go against your ultimate profit. You need to figure these costs for as long as it takes to sell the house. Your time estimate for this should be conservative.
Oh, and one other cost item that is often overlooked in the final analysis are income taxes. You will pay IRS based on your gain in the home. To defer any capital gain tax, you may want to consider doing an IRC 1031 tax deferred exchange if you’re planning on reinvesting in another investment property. (Have a chat with your CPA or tax attorney in these regards)
Once the home has been rehabbed, it’s ready to put on the market. The price you set should be a price that moves it quickly, even discounted against similar comparable sales. A home that sits on the market unsold will at a minimum be a drain on your profits. A quick sale for a very fair price will get you in and out and ready to embark on the next one!