Making Money Flipping Homes Can Exponentially Increase Your Yearly Income
If you’re trying to become or currently are a real estate agent, there’s probably a good chance you’ve stumbled upon one of the millions of home renovation shows and thought to yourself, “Heck, I can do that.” You probably have most of the skills you need to get started. While the profitability of flipping homes can be bountiful, becoming an expert in this niche takes an immense breadth of knowledge and experience.
The Profitability of Flipping Homes
Home flipping can be a highly profitable but risky business. You can increase your ROI by almost 50% when in the right market. However, you need to do your research and be patient, knowing your first home flip might be a flop. Growing from this experience is how home flippers develop their trade and make it their full-time profession. The following infographic perfectly illustrates the current state of the home flipping industry and how much you can make as a flipper.
How to Flip Homes (the Basics)
Flipping homes takes experience and investment in yourself. It’s likely you’re not going to see huge profits your first time, which is why you need to frame your first flipped homes more like investments in your education rather than a get-rich-quick scheme. While the following steps should get you moving in the right direction, only through your mistakes can you truly understand what is required to make a profit in home flipping. Learning from those small failures could mean more money down the road.
1) Research Different Real Estate Markets
In the infographic above, we cited several cities and states that see the highest profit margins for home flipping. However, every state and county has their opportunities. Two constant factors that we noticed in our research were the age of the homes in the area and the intensity of residential development. The older homes that were located further away from new developments saw higher profit margins. The top states for home flipping also happened to be located in the same relative geographic region: Kentucky, Pennsylvania, Ohio, Delaware, and Connecticut.
2) Create a Business Plan (Including Budget)
If you’re looking for a business plan to help get you started, check out our ebook Your Business Plan for Launching Your Career. This template should guide you through how to start your real estate business. Within your business, you’ll need to create a budget and incorporate the 70% Rule. The 70% Rule of Real Estate Investing dictates “that you should pay no more than 70% of the after repair value (ARV), minus repair costs.” For example, if the ARV on a listing is $200,000 and it needs $50,000 in repairs, you should pay a maximum of $90,000:
- $200,000 x 70%=$140,000
The 30% is a margin of error that almost guarantees what price you should pay in order to make profit and absorb other miscellaneous costs. You can determine the ARV by doing the following:
- Estimate the current value of the property
- Estimate what repairs are, cost to repair, and value added from repairs
- Find comparable properties
3) Get Financing
If you have money saved up or know an investor who is willing to invest in your abilities, this may not be a factor. However, if you don’t, you’ll probably want to apply for a bridge loan. This sort of leverage may feature high-interest rates. However, because you will only be making a handful of payments, they should not be a significant expense when you consider other costs associated with flipping a home. Regardless, make sure to do your research and compare loan proposals with other lenders.
4) Create Partnerships With Contractors
Networking with local contractors for renovations is crucial to your success. As an agent, you probably already have some contacts who can help you. Talk with them to try and establish a partnership that benefits both parties. Also, make sure to get multiple quotes so you confidently know you’re getting the best price.
5) Find and Purchase a Home
Once you’ve done the research, budgeting, and have the support you need to flip, go out there and purchase a home. As a real estate agent, you can save time and significant money representing yourself. And more importantly, agents like you have access to specific tools and databases that other people don’t.
6) Renovate the Home
Once you’ve accomplished the first four steps on this list, it’s time to get to work. Every second you waste is more money spent on utilities, taxes, insurance, HOA, and any other expenses associated with the property. The faster you can get the home done, the better it will be for your wallet. It’s also good to be adaptive to any wrench (pun intended) thrown your way. Yes, contractors will fail you by lagging on the job or changing their pricing halfway through. You need to accept beforehand that roadblocks will present themselves and that it will be up to you to clear a path to the sale.
7) Sell the Home
Finally, the one step you absolutely, 100%, to a tee, know how to do. We could get into the nitty-gritty of selling this property, but as a licensed real estate agent, we leave it up to you as the expert to get the job done. This is your project; the unconditional passion attached should do the selling for you.
Mistakes of Home Flippers
While it’s more likely than not your first few sales will have tribulations and failures, learning from your mistakes is crucial for pushing that profit margin needle. That being said, here is a preemptive list of common mistakes home flippers can try and avoid through research and, eventually, experience.
Inability to Create a Conservative Budget
Timing of All Aspects of Project Is Off
Skill Level Is Not Up to Speed
Weak Knowledge Base
Lack of Patience
At the end of the day, home flipping is a financially lucrative path in the real estate industry. You need to build up your resume and work through the challenges of learning on the job. By doing so, you can evolve yourself into an expert home flipper. It will take time but the profit potential is absolutely worth it.
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