You see the stories on TV infomercials -- make millions flipping houses! The very thought is both enticing and exciting -- but is it even possible? The short answer is yes, but as you might expect, it isn't nearly as easy as infomercials make it seem.
Here are the major areas of flipping houses you need to be aware of to make it work.
Know the Local Real Estate Market Thoroughly
You'll never be able to make money flipping houses if you don't have a high degree of knowledge about the local real estate market. The only way that you will know if a given property is truly a deal is if you know the market value of comparable homes in the area.
It would be well worth your time to get your real estate license so that you'll have access to the local multiple listing service. That will have two benefits: it will give you access to both asking and selling prices, and make you aware of properties as soon as they come on the market to help you find real bargains.
You Have to Buy at WELL Below the Prevailing Market
To make money flipping homes you must buy them at deep discounts. This step should never be taken lightly. If you think of the ultimate selling price of the property as its retail price, the price that you are paying should be seen as the wholesale price. The difference between the two must provide a sufficient profit, plus room to cover property renovations.
When buying houses to flip, you can never buy based on emotional factors (like, I really like this property). Your success will rely almost entirely in the numbers, and you have to be absolutely relentless about this.
You Should Be Able to Rent Out the Property Profitably
If you're in the house flipping business long enough, sooner or later you'll find yourself stuck with a difficult-to-sell property. Should that happen, you will almost certainly have to rent it out until a suitable buyer can be found.
In order to do that, you need to be certain that you can rent the property out profitably. This gets back to knowing the local real estate market. In addition to prevailing property values, you should have a thorough understanding of what comparable properties are renting for the area.
Any property that you buy with the intention of flipping, should also be a suitable rental. The market rental of the property should be sufficient to cover the principal, interest, taxes and insurance on the house, and preferably a little bit extra to generate a profit.
Know the Cost of Typical Repairs
It's not at all likely that you will be the only property flipper in your community. Competition can be fierce, and bidding wars can develop around well priced properties. That means that when you find a good deal, you'll have to be prepared to move quickly.
For that reason, you'll have to have a good idea what repairs will be needed on the property, as well as a reasonable ballpark of what the repairs will cost. If you do not have much experience in home remodeling and repair, you'll have to create a panel of experts whose knowledge base you can tap on short notice.
No matter how good a deal is, you could lose money on it if the purchase price plus the cost of repairs exceeds the market value of the home.
You'll Need Plenty of Cash
Mortgage lenders typically don't lend more than 80% of the value of a non-owner occupied property. You should fully expect that you will need to make a downpayment of at least 20% per property. 5% down at 3.5% down loans are available only for owner-occupants, not property flippers and investors.
If the property is in serious disrepair -- or the lender has reason to believe that you plan to flip it in just a few months -- you may not even be able to get a purchase money mortgage on the property all. In that case, you will either have to consider a higher priced commercial loan arrangement, or you will need to pay all cash.
You'll also need to have plenty of cash for repairs. It's unlikely that you'll be able to get a home equity line of credit to make repairs on a non-owner-occupied property, so you have to pay the cost of repairs out of pocket. You also need to have extra money available in case there are unforeseen problems that need to be fixed. That scenario is not at all unusual if a property has experienced several years of deferred maintenance, which many of the best properties have.
So, yes, you can make money flipping houses. But there's a lot more to it, and you'll need to understand it all in order to make the promised riches.