The Top 7 Things You Must Know When First Flipping Houses 26 Comments
The following is a guest post about flipping houses. If interested in submitting a guest post, please read my guest post policy and then contact me.
It’s rare that I go a week without someone asking me to explain to them what they really need to know to get started flipping houses. If I had to pick one thing though, I would be forced to say the biggest contributor to my success in real estate investing has been networking.
And it’s at these networking events where I oftentimes get these questions from new investors looking to get into what has become a fairly popular, not to mention lucrative niche within the real estate investing space; namely house flipping.
If you are just getting started house flipping, there is much to learn – and I don’t think there’s just one thing I can point to that will lead to ultimate success. But there are a number of different things you should be aware of if you are planning on making the leap into flipping houses. Some of those are listed below.
1. Flipping Houses Takes Time to Master
If there was a way I could have inserted a big electrode into the back of your head to insert all the knowledge I have now on flipping houses when I was first getting started nearly five years ago, I would have done it in a heartbeat!
Unfortunately, that is not the case. But the first thing people should understand when they want to get into house flipping is that it takes time to master. Like Malcolm Gladwell says in his book Outliers, you need to put in your 10,000 hours in order to gain mastery of anything and house flipping is no exception. A great place to start is learning all you can about real estate investing which you can do here on Modest Money. I would also recommend a site like Bigger Pockets – which is one of the best online communities for new real estate investors.
And although I am biased bit biased, I would recommend a site called House Flipping School as well.
Learn all you can, and then start doing. That is how you get your 10,000 hours – just know when you first start. You won’t get it just right for a while.
2. You can flip house with no money
To get started flipping houses, you can use your own money. Many people I know did just that. Unfortunately, most people don’t have a few hundred thousand dollars lying around – so they need to think of other ways to raise the money to get the property to begin with.
Definitely assess your professional and financial resources and if you know how much you already have or are willing to invest, then that is very good place to start. But after that, you’ll likely need to find investors.
The good part is that although you may not know it, investors are everywhere – all around you in fact. They could be your lawyer, your dentist, your next door neighbor, even your family. Personally, I have met some of my best investors and money lenders at REIA meetings in my local town.
Many of these are hard money lenders that will lend you money at a fairly high rate, but regardless if the numbers work then use them and get you first deal under your belt. The trick is to get going and use the knowledge you gained in #1 above and apply it.
The bottom line is this: Money is everywhere, you just need to get out and find it!
3. There are plenty of houses to flip
One of the other biggest questions we get is how to actually find the flips and the buy and holds we are now working on. Right now, we have over eight properties under contract -which is a lot for us right now – but they all came from getting very aggressive in our marketing to find them in the first place.
We scour absentee owners lists in MLS, hang bandit signs around town, talk to real estate wholesalers at REIA meeting and send out hundreds of mailers a week to distressed property owners in our area.
If we just so happen to find a good house to flip from the local real estate broker, we do that too. The thing is you need to get out and market yourself – go out and get the deals, don’t wait for them to come to you.
They are out there…you just need to get out and find them.
4. Flipping is a team sport
A lot of investors want to be the “lone wolf” and go out and do it on their own like James Dean or Steve McQueen. Rubbish! Flipping is a team sport and you need a team of stars to help you achieve what you want to achieve.
A short list of team members includes, real estate agents, private money lenders, wholesalers, bankers (yes, even them), real estate attorneys, a good CPA, general contractors and insurance agents.
All these people have areas of specialty that you can tap into – in other words, you don’t need to know it all. Tap into other people’s knowledge and expertise and when you do that they can help you along to achieving your goals.
5. Analyze and Stick to the Rules
Once you find a seemingly good property, then what? It’s time for analysis using a few house flipping rules. The first of which is the 70% Rule.
Let’s say the property you’re looking at, when it’s all fixed up, can be sold for $200,000 according to your real estate agent.
Let’s say your contractor says it needs $40,000 in repairs to be able to get it to that sales price. So what can you buy the house for?
Use the 70% Rule and take the $200,000 and multiply it by 70%, which gets you $140,000. Then take out your cost of repairs which is $40,000. What you have left is $100,000.
If you can buy the house for $100,000 (not $105,000 or $110,000), then it’s a good deal. This is how we figure out whether or not we should pull the trigger on every house flip we ever do.
The 70% rule protects you from downside risk and also covers your taxes, financing, maintenance, broker’s fees and holding costs associated with the house. If you stick to this rule and never deviate, you will be successful flipping…and be able to take home a very nice profit in the process.
6. Speed Equals Profit
In house flipping, time is of the essence. Unlike on the highway, speed does not kill in house flipping. The faster you can purchase, rehab and then sell the property, the more you’ll make.
Like we said in #5 above, the 70% rule covers your holding costs and your finance costs. But if you hold onto that property too long then all of these costs start to increase and mouth up…cutting into your profits.
For most of our flips, we use a six month timeframe as the average, anything less, then its gravy, anything more and we are covered by the 70% rule, but we don’t want to push it.
This does not mean your crew should “speed through the rehab” and cut corners. Far from it. Instead, do everything you can to create value for the new homeowner and the more you do, the more your trustworthy reputation will spread and the more your business will grow.
7. Manage the Rehab Tightly
When we flip houses, we use contractors. Many new house flipper like to do the work themselves but for me, that gets it he away of Rule #6 above. Speed is very important.
Having said that, you can’t just solely rely on your contractor to handle and supervise all aspects of the job while you’re off on a tropical island sipping mai tais. No way. You need to be involved…but not so much that your contractor is actually hampered by your activity.
Let him do his work, but stay involved. Hes the one who’s overseeing the whole crew, but you need to oversee him.
Your profit on the house will be largely dependent on your purchase price and the rules in #5 above, but as long as those are all in line, the next step of the process is execution – and you need to make sure that the contractor executes on his promises and responsibilities.
The good news is that once you start working with the same guys over and over again, you’ll start to trust them more and more and do less managing. But at the outset, make sure you are involved in every aspect of the rehab because if you’re not, the rehab is where much of your profits can go up in smoke if it’s not managed tightly.
Manage but don’t over-manage, let them do the work, but double check on everything they do and most importantly make sure the entire crew sticks to the plan and stays on or even under budget.
And if you do all that, you will make a profit, then move on to the next flip, the next flip and so on and so on.
If you made it this far, please leave a comment below! What do you think? Did I miss anything here? Let me know what you think.
Author Bio: Mike LaCava is a full time real estate investor, real estate investment coach and the President of Hold Em Realty located in Wareham, MA. Mike specializes in flipping houses and acquiring buy and holds with no money and runs the website House Flipping School to teach new real estate investors to do the same. He has also authored the book “How to Flip a House In 5 Simple Steps” available for free on his website at http://www.houseflippingschool.com