Flipping houses has been making recent headlines as the current gold-standard of real estate profit-generating techniques.
The recent rise in popularity is likely attributed to a very-welcomed (if unexpected) historically low-rate environment. These defensive rate reductions were set in motion to fight the predicted, and alarming economic/medical/political predicted potential consequences of an emerging pandemic.
As a real estate technique, flipping works best when the real estate market is in the Expansion Phase – or the robust part of a seller’s market. The current market has been residing in Stage 2 for some time.
Phase 2’s dovetails with real estate flipping as a viable investment strategy. Its characteristics sum up the major features of the current and recent markets.
- Increasing prices driven by low inventory that cannot meet current buyer demand.
- Decreasing overall vacancies, scarcity pushes prices higher in both rental and sales markets.
- Moderate to quick absorption of homes, well below industry averages over time.
A typical timeline of the real estate four-phase cycle varies (9 to 20 years) because there are so many variables to improve (or damage) current/future economic activity.
What is House Flipping?
Conceptually, flipping is simply a glorified version of sweat equity. Certainly not new to any talented craftsmen or seasoned investors. But note, despite the influx of new flippers, it is essential to understand that flipping, as an investment strategy, only resembles the slickly produced and finely edited TV programs that glorify the process.
These polished presentations show the potential to profit by finding houses to flip, performing rehab (typically due to its poor condition), and then selling (i.e., flipping) for a profit. But, as only TV can, these programs carefully omit the difficulties created by managing the many moving parts of a flip –
What is the Best Way to Learn How to Flip Houses?
The most effective way to learn how to flip houses for a profit begins by understanding what kind of student you are – or, in other words, which of the many learning methods works best?
These are the primary steps to flipping; how you learn depends on your preferred learning style -
- Research the real estate market–understand how finding houses to flip – especially in up-and-coming neighborhoods is an excellent way to find potential profit.
Many flippers choose to become real estate licensees to help build networks of lenders, a clientele, and market knowledge.
Learn and follow the 70% Rule–meaning an investor should, as a rule, only consider those properties where the current purchase price is 70% of the After-Repair-Value (ARV) minus the costs required to renovate the home before resale.
Many online and in-person programs help beginners establish base knowledge, although some offer better quality and outcomes than others. Many flippers begin working with a mentor, who teaches them one-on-one.
- Secure Funding Channels–while cash offers the path of least resistance, some properties (and the cost to repair & renovate) may require the help of financing.
- Many non-traditional (aka hard money) lenders offer quick-closing funds, albeit these funds are typically priced well-above market due to the nature and risk. In fact, in 2020, more than 58% of flips in the nation were bought for cash, up from 57.7% in 2019.
- Some investors pool funds with friends and family or even use crowdfunding sites.
- Other financing methods include refinancing or taking out a HELOC on a current property – although this does incur ongoing debt.
There are a variety of training programs that help beginners understand funding sources.
- Only make well-thought-out Investments – before signing, an investor should know what they are getting into. This includes –
- Real estate market knowledge AND the ability to accurately estimate repair costs.
- Know when you are in over your head and consult with an expert
- Learn to budget both time and money.
Don’t overlook expenses, like ongoing taxes and insurance on the subject until sold.
- Find, Buy & Renovate Property–the investment metrics should be calculated and known before making an offer, but note a closing may take a few days or months, depending on the deal.
Note -The quicker your rehabilitation is completed, the faster the property can be sold.
- Sell For A Profit – the flip’s profit is determined by -
- Original Price
- Cost to Rehab
- Financing/closing fees
- The Resale Value
Licensed agents are highly trained in marketing a home. Despite the fees, flipping through a real estate professional is often helpful.
Recent Flipping Profit Metrics
The year 2020 was an incredible time for the real estate market in general. The median home flip national price in 2020 was $230,000 representing a gross flipping profit of $66,300 above the median price. Return on Investment (ROI) data varies by home price, as follows -
The Bottom LineProfitably flipping houses results from what an investor knows. The quicker the house is ready, the faster the profit can be made.