The process of flipping a house is highly popular right now, and somewhat of a spectator sport. You only have to turn on a TV home improvement channel to see the process. Investors purchase shabby or downright distressed properties with the intent of renovating them and selling them at a profit. The end result is happiness and a brand-new-looking house.
Flipping houses also attracts people looking for a sound way to earn money. Rising real estate prices can result in conditions that can result in a handsome return on flippers’ investment. Estimates of the average gross profit realized on a flipped house range from $30,000 to $58,000. That’s a nice chunk of change.
Many people, however, don’t make money on house flipping. It’s estimated around 12 percent of flippers either break even or lose money.
So if you’re interested in flipping houses for profit, or to live in, focus on the cost to flip a house. After all, if you buy a $125,000 house expecting to sell it for $185,000, you won’t make much money if the renovation required costs you $50,000. In fact, once you add in property taxes, fees and monthly carrying costs, you may end up in the red.
Here are some factors to consider in flipping a house.
The ideal scenario for successful house flipping is to buy low and sell high, just like any other investment. So you need to consider the effect of location on your ability to do that.
For buying low, you need two scenarios. First, you need a real estate market on the move upward, so your selling price can be high. For example, an area in the Midwest whose property values have fallen in the past but are on the upswing may allow you to buy relatively low and sell high.
Second, you need relatively low valuations on the property. In an area already boasting sky-high real estate prices, like San Francisco or New York City, it will be difficult to buy low, because other investors will have scooped up almost all the properties.
You’ll need to look in a lower-priced area for properties that might have been owned for many years and fallen into neglect, or homes that have gone out of style, but can be rehabbed. Low valuations on a property can stem from, again, a once-undesirable real estate market that looks poised for a future upward move.
You need to think long and hard about whether you can make a profit by buying a property, repairing and renovating it and then selling it.
You can make a profit on a gut renovation — the term used for an extensive renovation of the inside — as long as your purchasing cost is not too high and your renovation costs don’t eat up all the profit.
A general rule of thumb, many contractors estimate they will need to be able to price the renovation at 30 percent plus the cost of repairs to make a profit. So if you are purchasing a house for $110,000 and repairs will cost $40,000, you’ll need to be able to sell the house for roughly $200,000.
Repairs, of course, aren’t the only costs involved in flipping a house. You will also need to think about property taxes, any mortgage costs and carrying costs. It can take six months or more to renovate and flip a house, so you need to be prepared to carry the house for that long.
It’s always wise to forecast scenarios in costs related to renovating a house. One scenario should be the average price and cost of renovation, and you should cover the eventualities if it takes longer or costs more than expected. What will you do if the inspector discovers termites have compromised the foundation, for example? Make sure you have enough money to cover the worst-case scenarios.
Some lenders charge a higher interest rate for houses being renovated, of up to 12 to 14 percent.
If you are planning to renovate a series of houses, you may check into getting private funding to help with carrying costs.
Research the home size that’s most popular in the area. You need to be able to sell the home relatively quickly. If you don’t, the carrying costs will eat into the flipping profits.
Is the area one of average family size and average income? Are most homes in the neighborhood two to three bedrooms? If so, your best bet is two- to three-bedroom family homes.
Or, does the area support many larger homes on larger lots? If so, this is the area you should focus on in purchase and renovation.
Many contractors feel smaller condos are not good choices for flipping. This is because one-bedroom condos will not always support a significantly higher price if most residents of an area are families. A significantly higher future price possibility is a key ingredient if you want to flip.
The profits available for flipping can be very attractive. Be sure to research your ability to buy low and sell higher in the location, how much repair costs will be and how much other costs will run. Finally, research what size houses will do best with the area’s population.