House flipping, it’s all the rage. Much of the general public thinks house flipping is new. For the last decade, at least a dozen TV shows have been created around this theme. But flipping has been going on for a long time, by moms and pops as well as by institutional real estate investors (like funds and REITs). So if you are thinking about joining the band wagon, there are a few things you should learn about how to flip a house, and profit. For the purposes of this article we will say a flipper is one who has added value to a house and sold it within 12 months of purchasing it.
What Housing Markets Are Good For Flipping a House?
The highest profits can be found on the coasts (no big surprise). These are the highest average profits by city according to RealtyTrac:
- San Francisco, CA: $145,000
- San Jose, CA: $145,000
- New York, NY: $120,000
- Los Angeles, CA: $115,000
- Oxnard/Thousand Oaks, CA: $110,000
The highest ROI are where properties are less costly. According to RealtyTrac:
Here are four markets (according to RealyTrac) that show promise and opportunity:
- Boise, Idaho: Gross ROI 36.4% in 2015 (that is an 85% increase year over year)
- Hartford, Conn: Gross ROI 79.3% in 2015 (a 51% increase year over year)
- Ocala, FL: Gross ROI 67.1% in 2015 (a 67.1% increase year over year)
- Huntsville, Ala: Gross ROI 45.4% in 2015 (a 39% increase year over year)
Location is more than just the “Hot” markets we listed above. Knowing the best micro market within the hot market is very important as well. Often, your own back yard is the best place to start investing in real estate if you can afford it. You know the neighborhood, you have local resources and it’s convenient to work on the project and/or keep an eye on the progress.
Find me the Money
The most common question I get asked – “Where do I find the money not only to purchase the property but also rehab it?” My suggestion is that you divide and conquer. You might have enough cash to either purchase a property or fix up the property, but not both. Determine what your contribution will be and find a money source to fill the gap. Example: you have $30,000 of investment capital which you plan on using for the fix up budget. You then find a property that will fit with the metric of a hard money lender who will loan 65% of after repaired value. The biggest mistake newbies to the house flipping world make is not determining how much money they have and what money source they will use for the balance of the deal.
No part of the analyzation process is more important than determining the value of the property. We need to determine the value when we buy, and project the value when it’s fixed up and ready to put on the market – we call this after repaired value (ARV). If you have the right tools, this is very easy to calculate, but there are states such as Texas where it’s more difficult. Texas is a “non-disclosure” state, which means the amount a property is sold for is not public record. This is one of the reasons having an agent on your team is so important.
Have a Good Real Estate Team
Real Estate is not a solitary venture. In fact, a good team can make or break you. One of the hardest things for a newbie to remember is that the lowest bid is not always the best. The time value of money and moving your project along is also a very important factor.
Flipping houses can be a great way to create large chunks of money, and lose them, if you don’t have a strategic plan in place.
Diana D. Hill – firstname.lastname@example.org