Becoming a house flipper is like starting a video game where you become an entrepreneur but putting it on “Expert” mode right out of the gate. You need to get so many things right to ensure you come out ahead on every deal that it’s no surprise many fix & flippers end up spending themselves out of the business.
But here’s the thing: while real estate investing is risky, there are ways you can mitigate the risk. I’ve put together five of the most critical aspects you need to get right on every deal to hedge your bets to increase the likelihood you’ll end up with the maximum amount of profit possible.
That probably sounds like snake oil or clickbait, but I’ve been in this industry for so long I know success comes from keeping it simple and staying the course. Real estate investing of any kind is complicated and overwhelming on its own so let’s not add more to our plate than we need, right? Right.
Here are the five steps you need to master to become successful at fix & flip real estate investing:
Step 1: Get Your Financial Ducks in a Row
Before you begin your next rehab deal, it’s important to have your finances sorted by getting your deposits ready and knowing where the rest of your funds will come from.
First, you need to invest a little money to make some money. You will need to accumulate what’s known as earnest money, which will be your skin in the game. We recommend having at least $3k – $5k saved up before starting your first deal. The reason for this is your deal may have some required cash-to-close. However, many profitable deals qualify for 100% financing, or $0 cash-to-close, in which case your saved earnest money will be there as a nice cushion to cover any unanticipated costs.
Once you have your earnest money ready to go, you’ll also need to get your applications for borrowing money started unless you’re paying with cash. Different lenders will have different requirements, so you need to consider who you’ll work with and the things you’ll need to get your loan approved.
Here are a few methods flippers use to finance their fix & flips:
- Personal savings – The lowest effort way to pay but maybe not the most prudent. Don’t use your whole retirement nest egg, always make sure you have enough to keep your family afloat should the worst-case scenario happen. Getting real estate investing right can mean incredible revenue, but getting it wrong can wreak havoc on your finances.
- Credit cards/Payday loans – For the sake of giving you the full set of options, I’m listing this since some investors do use them but would really caution you against using either of these. The interest rates are ridiculously high, and payday loans are so predatory; you’ll likely tank any potential profit just paying off your interest.
- Private lenders – Friends, family, colleagues. They’ll probably want an accrued interest on their loan after the sale and may not expect monthly payments back, though it’s really up to the deal you make. Whatever you do, get everything in writing and agreed upon before any money changes hands. Don’t wreck a relationship over real estate!
- Partnerships – Bringing someone else into the business to finance the flip. Some flippers will have partnerships that are only for one house, while others have a long partnership that spans multiple investment properties. Your partner will most likely take a cut of the profits instead of interest like a private lender would and will have more of a say in how the money is used.
- Traditional banks – Mortgages and business loans are the most popular resources investors use from a bank or credit union. Banks have the most stringent requirements (unless your private lender is a real stickler for details), so you’ll need a lot of documents that show you’re a serious business owner who can pay them back on time and in full. Your credit score should be above 700 for the most competitive rates and you’ll need to have a solid business plan with references or steady employment history.
- Hard money lenders – The best friend for a house flipper, hard money lenders were created for real estate investors like you. Hard money loans are different from mortgages in that they’re based on the After Repair Value (ARV) instead of current appraisal and have much more lenient requirements with credit reports and background checks than banks do. However, the loans have much shorter durations and use the property as collateral, so you really need to have those ducks in a row. Here are a few tips for how to navigate getting a hard money loan.
Step 2: Research “Hidden” Areas for Potential Hot Flips
This is my favorite step because mastering this makes it so easy to bypass all the bidding wars you see on the MLS. Before you start making offers, you definitely want to do some research on real estate market hot spots for fix & flips. Scouting out profitable areas will save you a lot of time in the long run.
One of the best things you can do is learn all about Driving for Dollars because it will completely change the game and drastically reduce the number of competitors you’re up against for fix & flips. Another way to source inventory is by looking through foreclosure, auction, short sale, and probate listings. Homes listed there will have higher discounts and lower competition.
Whatever you do, steer clear of the MLS! The MLS will have the highest competition for homes because you’re competing against not only other flippers but retail buyers, too.
Step 3: Follow the “100 House” Rule
The “100 house” rule states you should look at 100 houses early on before making offers. Flipping expert J. Scott says in his work, The Book on Flipping Houses, “I normally recommend that new investors look at 100 houses before they start making offers… These houses should be in all different conditions, neighborhoods, and price points.”
Get out to your marked areas and check out as many homes as you can. This will help you to not only familiarize yourself with the property conditions but also practice evaluating properties. The more you can practice evaluating homes, the more you’ll know what to look for in terms of what makes a good deal. Remember: Discounted properties in need of minor repairs (no foundation or roof truss flaws) in excellent areas will fetch the biggest profit.
Tip: When you get done with your first 50, start seeing if you can notice patterns. Try to guess ahead of time what the price point tells you you’ll find during a walkthrough. Do all the homes that run in the mid-range prices for your area all seem to need new kitchens? What about those bottom-of-the-barrel-priced homes, what do they all tend to have in common? The more you start to build this “predetermination” muscle, the better your instincts will get at finding overlooked opportunities.
Step 4: Determine Repairs and Schedule out Your Rehab Plan
Once you have a property under contract and hard money funding secured, all that’s left is the easy part, right?
Not so much. Fortunately, you have expert resources on which to rely. First, look at the property evaluations to determine what repairs you need to make. Then, you should source at least two itemized estimates from different contractors so you’ll have a running list of what needs to be done and how much it will cost.
Here are some popular rehab categories and what they’ll typically run to give you an idea. However, material price fluctuations can change this at any time so double-check the numbers for your area first.
|Type of Fix||Examples||Average Cost|
|Exterior Aesthetics/Curb Appeal||Landscaping, power-washing siding and sidewalk/driveway, repainting or adding new siding, replacing windows and shutters, updating exterior light fixtures||$2,082 – $23,219 depending on the quality of new fixtures and additions|
|Interior Aesthetics||Paint, Cleaning, Repairing or replacing fixtures and cabinet hardware, new carpeting or rehabbing hardwood floors, replacing light fixtures||$1,200 – $9,000 depending on the quality and intensity of work being done|
|Kitchen Rehab – Light||Replacing outdated appliances with new energy-efficient models, replacing fixtures and cabinet hardware, adding an island, replacing sink and countertop with basic models||$26,214|
|Kitchen Rehab – Heavy||Replacing outdated cabinets and appliances with top-of-the-line commercial-grade models, replacing backsplash with glass tile or imported ceramic, installation of pot filler faucet over stove, installation of water filtration system, installation of new tile or hardwood flooring||$149,079|
|Bathroom Rehab – Light||Replacing fixtures, updating with a standard toilet, counter, sink, shower/tub options, painting, or wallpapering walls.||$24,424|
|Bathroom Rehab – Heavy||Overhauling layout, replacing fixtures and toilet, shower, sink, and counter with high-end options, adding heated floors, improving HVAC||$75,692|
Step 5: Stage and Market Your Listing Correctly
You might’ve not considered marketing to be a vital part of flipping houses. Still, when you see the difference between how fast a home sells with just a little bit of marketing effort, you’ll understand it’s just as critical in real estate as any other business.
The sooner you sell your fix & flip, the less overhead you need to pay for, which means more profits in your pocket. To become successful at fix & flips, you need to tell a story through your copy and your walkthroughs. The story is of the new buyer realizing this is the home of their dreams and wanting to move in ASAP, so you need to build around that idea to help make the story come to life.
This is where staging comes into play, but there are a few rules you need to consider when staging a house.
- Less is more, but too little is not enough – There’s a really frustrating tight rope you need to walk when staging a home that sometimes takes years to perfect. Keep your staging minimal and neutral but don’t make it look bare and cold. You need to add enough staging elements (furniture and decor) that get the story started but not so much that you write your buyer out of it.
- Stage the home for your ideal buyer – Consider who you’re targeting when you list the house and use staging elements that are tailored to them. Millennials and Gen-Z buyers might see that dining room as an office instead, while Baby Boomers are going to wonder where the family sits for Thanksgiving when there’s a desk instead of a dining room table.
- Don’t use your phone to take pics – Have you ever looked at a house listing that has blurry, dark photos? It’s incredible it ever gets any interest, right? Your most effective marketing tool is the property listing, so make an effort to get it right. Don’t hire your nephew because he has the latest iPhone; contact a professional photographer or buy a used DSLR off of eBay and take photography classes. Use natural light and take multiple shots at different angles, so you know you got it right. This is the biggest asset you’ve got to get people interested in your listing, so don’t skimp on doing it right.
Real estate investment is risky and takes a lot of grit, perseverance, and, well, money to become successful. However, there’s still a method to the madness that you can use to better increase your odds. Use these five steps as benchmarks to set your path toward becoming the newest real estate mogul in your area.