How to Flip a House for Profit – Part 1
This is the first part of our how to flip a house for profit series of articles. These are meant to be broad articles suitable as reminders for experienced house flippers but mainly as a flipping houses beginners set of articles to get you started and help you find the best ways to flip houses as we as how to find houses to flip.
The cost to flip a house is important, but one thing many beginning flippers tend to forget is that in real estate you make money when you buy the house, not when you sell it. I know this may not make sense to you at first so let me demonstrate with some numbers below.
This is going to be pretty obvious, I apologize a head of time because of how obvious this is going to be.
To start with a house in a certain area that is a certain size with certain features is going to sell for ‘X’, to some degree, no matter how much money you put into it. You cannot make a $50,000.00 in an area full of $50,000.00 houses into a $250,000.00 just because you want to sell it for that amount. Yes, you could put in enough upgrades to go over the $50,000.00 average range but will your investment be worth the return. Not only will you have to put more money in the house, you will also probably have to wait to sell it for the perfect buyer. The truth is, as a flipper we make the most money by turning our properties as fast as we can. Which means, if we can sell the property for 5% to 10% below market value and sell it fast aren’t we better off than holding it for six months (or more)?
Assuming I have convinced you that quickly selling a flip house is to your benefit and that you cannot simply pour money into a home in renovations and expect unlimited returns then we can go back to what I said before that you make money when you buy a house, not when you sell it.
Let’s say that you are in an area full of $100,000.00 houses and you have found one that after repairs. Since, I hope I have convinced you that you will need to sell this house for around $100,000.00 then the only way for you to make the most money is to purchase it for the least amount possible. That is what I mean buy making your money when you buy a house.
Let’s assume your home that should sell for around $100,000.00 needs about $20,000.00 in repairs. We will write more blogs on how to estimate repairs but for now let’s assume you have gotten three estimates from contractors you have vetted. Excluding any closing, interest and holding costs which we are not going to take into consideration today if you purchase this house for $80,000.00 then you should expect to be about breakeven.
The only way to make money is if you can purchase this house cheaper. Simply put, if you purchase the home for $70,000.00 you make $10,000.00. If you purchase it for $50,000.00 you make $30,000.00. Therefore, you make your money when you buy the house; not when you sell it. Purchasing houses at the best price is the key (along with accurate repairs) to being a successful flipper. Even in our flipping houses beginners blog articles.
Now, how do you find these houses? We have written previously about this, and you can read our blog entry How to Find Cheap Houses.
But, if you are too entranced to leave this article we will give you a very brief summary of the ways you can find a cheap house. Please read our article for more in depth instructions.
- You can use the Multiple Listing Service (MLS). Not the best option. Highly picked over by other investors.
- Wholesalers have done the work of finding cheap houses for you. They have already set up a system for finding the right property and for a fee they can help you. I highly recommend using wholesalers when you are starting out. You can find them on Craigslist or just call then number on those “We Buy Houses for Cash” numbers. Many times they will wholesale a house to you.
- Third Party Software or Search Programs. These are designed to find houses based on your criteria. CLICK HERE to see one we recommend.
- We buy houses at auctions but there is a lot you need to know. Not a good place to start unless you do all the due diligence.
- Direct Mailings. Simply put you just mail everyone in an area you like and tell them you buy houses ‘as is’. Again, not a way we use or recommend but it can be done.
- Drive, Spot and Stop (ugly houses). Similar to direct mailings but you pick and choose which houses you send a letter to our stop buy and give them your card.
- Other Investors. Assuming the investor is not a wholesaler if you join investing clubs you may find investors that will pass leads on to you.
- This could be Craigslist, newspapers, social media, etc… Unless you let people know what you do they do not know what leads to pass on to you.
- Over time you can develop relationships with certain realtors and they may pass leads on to you before they hit the MLS. You may still have to pay the realtor commission but at least you will not have to fight with other investors
- Bandit Signs. You know the ones “We Buy Houses Fast”. Long term these work fairly well but if you are just starting out then these may not be the best way to begin. Long term they can be helpful.
Again, check out our blog How to Find Houses Cheap for more information, but to summarize we think the best way to find houses as a beginning flipper is to use a wholesaler.
This is our first blog on How to Flip a House for Profit, we hope you continue to check back for the next blog entries.
If you have any questions or comments please leave them below. Also, if there is something you want us to write about, let us know. This site is dedicated to helping new real estate investors regardless of how you want to invest.