- Real Estate
Flipping houses profitably
Making money flipping houses
Making money by flipping houses is a great business enterprise for the right person. You need to really understand the area of the city that you are flipping houses in. That way you will understand the neighborhoods in which to buy homes, and the neighborhoods to leave alone.
You want to understand the school system, the parks, and the churches for your designated areas. All of these things are important to making a profit on each house flip. You also need to understand the job market for your designated area to make sure it can support the level of house flips you are doing.
There are three points that are important to the house flipping business. I have them listed below, and we will go into detail on each one throughout this article.
1. Learning to buy the houses to flip
2.Learning how to properly improve the houses
3.Learning to become part of the house flipping workforce
The next thing to understand is what counts when you are improving the house you are flipping. The things that adds to the monetary value of your house are the cosmetic upgrades you make. You may also need to put in some new mechanical systems like furnaces, air conditioning, or new electrical systems.
However these items are not what add to the monetary value of the home in most buyers eyes. They are sometimes necessary to make the home functional, however potential buyers expect these updates in a modern home. We will discuss this in more detail in a separate article.
The updates that will count with potential buyers are the cosmetic items. These are items they can see and that they consider pleasing. They include doors, windows, wall treatments, and the openness of the interior of the home
To achieve this open concept sometimes means taking down one or two interior walls. If these are load bearing walls you will need the services of a structural engineer to design the beam to carry the load of the wall. If you intend to flip houses on a regular basis you will need his services several times. Make sure you remain on a friendly basis with this person. We will now look at how to buy the houses to flip.
Finding homes to flip
Buying the houses to flip
If you have watched the house flippers on television it seems that they spend a lot of time going to auctions and hassling with each other to buy their favorite home. They then get the keys and are able to see for the first time the inside of the home they have bought.
There is a reason that the banks handle their foreclosed properties this way. If you can't see the inside damage to the house, they can generally get a better price for the house. The flippers think that they are getting better deals, but a lot of the time they spend quite a bit extra to repair damages. There are better ways.
There are two ways that we will consider to acquire properties. The first is buying properties for cash from eager home sellers. In this circumstance you control the situation because you control the money. If you don't really want the property you seriously lowball the cash offer. Then if you get the property you can afford to make the necessary repairs and sell it as a starter home for someone buying their first property.
If the home is decent you need to make up a worksheet on the spot as to the upgrades needed, tell the homeowners you will be back with a cash offer, and go home and figure what it will cost to improve the house. Then you need to do comparables for the selling price when done.
When you have a selling price you subtract your profit and the cost of the upgrades. At that point you have what you can pay for the house. It is an all cash offer the same as at the auction. The difference is that you will have a much broader selection of houses to choose from and you will get a much better look at the house to determine what your renovation costs will be.
The second way is to work with a realtor on houses that have been listed more than a certain period of time. We will use a time period of six months as your entry point. Homes that are older than this and with a large discount would be in your buying range. You pick around a dozen and make deeply discounted offers on them that are contingent on inspection by another person.
You might get acceptance of your offer by one or two of the homeowners. At that point you decide which of the homes you really want to buy, and the other person that the sale is contingent on negates the other offer.
For this buying offer to work you have to have a real estate sales person that is willing to put in all of the offers. This means to get their cooperation you will have to probably give this sales person the sales listing when the house is done. This will help make up for all the paperwork the sales person will encounter.
Having the money to flip houses
Having the money to buy houses
Since house flipping is a capital intensive business you will need large amounts of cash to be a success in the business. One way to accumulate the necessary money is through limited partnerships. You will need a business lawyer to draw up the papers necessary for this type of venture.
In this type of venture you will be the general partner and put up no money. The limited partners put up the money and get 80 percent of the profit. The general partner gets the other 20 percent. The limited partners have no say in the running of the business. They also are only liable for the amount of money that they have put up
This is a good way to raise money on a temporary basis to use in flipping houses. Your profit as the general partner will be smaller, however you don't need to put up a lot of money. You just need the expertise to flip houses right.
You will find as you do more houses the limited partners become easier to obtain. Everyone loves to invest with a successful businessman. The other good part is the investment is only temporary. When you sell the house the limited partners get their investment plus profit back. They can then decide whether they want to invest again.
After you flip fifteen to twenty houses you should have the capital to do a home by yourself. Then you get to keep all the profit for yourself, and you can keep building your capital reserves to do more homes by yourself.
This is a good way to build capital and experience when you first start in the home flipping business. As you become more adept at home flipping, and you have more capital, then you can invest more of your own accumulated capital and less of other investors capital.
You will always need other investors capital for the flip you would otherwise pass up because of insufficient capital. Limited partnerships are a good way to get needed capital. Next we will look at improving the flip you just bought.
upgrading the bathroom
The improved kitchen
Learning how to improve the house
This is probably the most important part of home flipping, because a well improved house in a decent area is usually easy to sell. However an average improved home will be much harder to sell at a good profit.
So understanding what improvements will bring the best profit for money invested is very important. You also need to understand that the husband may put up the money to buy the home, however he won't buy without the complete agreement of the wife.
We now need to understand the necessities for a decent home. This includes electricity, heating and air conditioning, and water heating equipment. Two other items to look for in older homes are asbestos and lead in paint.
Asbestos in residential products was banned in 1977, and lead in paint was banned in 1978. So homes built before 1977 could have problems with one or both of these problem items. If the home was built before this time you need to reduce the price by a certain amount to possibly compensate for these problems.
You need to check the electrical panel for the size of the electric service, and also for the size of the average breaker. For homes where you are upgrading the electrical service you need to install a 200 amp service with at least 20 amp breakers.
You will need at least 5 circuits in the kitchen, and probably three in the living room. Each bedroom should have at least two circuits, and each bathroom needs a separate circuit. You also need circuits for heating hot water, for the heating and air conditioning, and also for an electric stove. Every circuit should be at least 20 amps to prevent overloads and possible electrical fires
The next thing to consider is the hot water heating for the house. When you do your home inspection, before you buy the house you look at the age of the water heater. If it is over 6 years old you subtract at least $500.00 for replacing the hot water heater.
Also if you replace the water heater do it with an electrical water heater. They are much easier to replace, because you don't have to vent them. You can also move the water heater where you want without having to reroute gas lines. This can make a basement more useful without incurring a major expense to move the water heater.
If the house heating unit is older than 15 years you should consider upgrading to a more efficient model. You will need to subtract money from the buying price to compensate for this expense. You also need to understand that these items will not improve the buying price for the home, so you need to subtract these costs from the purchase price. Next we will look at the most important upgrades to flipping a home.
The most attractive upgrades for a home
The number one room where you need to concentrate your upgrades, is in the kitchen. This room is where you can add the most value to the finished price of the home. You also want to try to create an open concept between the kitchen and the front door. When potential buyers enter the house you don't want them to feel boxed in by walls. These are the main two reasons these customers don't seem to like older homes, the kitchens are too small and they feel to confined by walls.
The next most important rooms are the bathrooms. You need to have two bathrooms in each upgraded home. Each needs a shower but the most important one is the bath for the master bedroom. This where you will use lots of tile for more appeal. When possible, you should also use a glass shower door for a better look. You want a double bowl vanity to make it the most useful for a family. Install a good toilet so there are no problems. The floor should also be tile for each bathroom. Now that you have done the kitchen and both bathrooms you are probably three quarters done. You now need hardwood or laminate flooring in the public areas of the house and nice carpet in the bedroom areas. Drywall will be hung where necessary, finished and then painted.
The front and back doors should be the insulated type and attractive. Replace the windows with energy efficient windows where necessary. The main thing is to seal well around the doors and windows to help prevent airflow between the inside of the home and the outside environment. Airflow is where a lot of the heating and cooling costs are wasted. Be careful not to seal the whole house to carefully, or else you will have a problem with carbon dioxide levels inside the home. You need to have at least one half air change per hour, or else you will have to install special air exchange equipment to increase the oxygen level and lower the carbon dioxide level.
When planning a house upgrade you need to figure out how to do the necessary house repairs cheaply enough, so that you can still do the needed upgrades and make a decent profit from the sales price. Remember it is cosmetics that increase appraisals and sell houses. You definitely need a wow factor in each house you flip.
Becoming part of the workforce
Buying houses to flip is not the major part of the house flipping business. Therefore you need to become a part of the workforce that fixes up the houses, or have a real estate license and be a major part of the selling process.
If you have a real estate license you can be a major part of both the buying and selling process. At the start you will just need a real estate sales license. This will allow you to both find good buying opportunities, and the ability to sell the upgraded homes on a steady basis. Then when you have sufficient experience and business volume you can become a broker and start your own firm.
By that time you will need to have in place ways to finance the sales of the houses when necessary You will also need contacts with banks for the purchase of their foreclosures. You will also need a rental service for renting out some of the houses until you are ready to fix up and resell them. As you upgrade houses you are also performing a valuable service for your local community.
The other side of the house flipping business are the contractors that fix the houses. In some western states you have to obtain a license to do contracting work. States like Arizona, Nevada and California all have special licensing requirements. A lot of other states just require a business license for a general contractor.
You need to choose whether you want to be involved on the realtors side or the contractors side and then concentrate your efforts in that area. If you decide on the contractors side you first need to learn the carpentry trade, and then you can learn roofing skills and how to lay tile. You may also want to learn to finish drywall and the painting trade. Once you pick up these trades you can also train workers in these trades to help in the work. This will help to keep your labor cost down and make the house flipping business more profitable.
The best way to increase profit is by adding value, and this can be done the best from the contractors side. I will continue to offer articles about house flipping to show the benefits of this business. Most of these trades on the contractors side I have had a few years experience in and will try to share these insights with you. I hope you enjoy these upcoming articles.