Flipping Houses for Money: A How-to Beginner Guide

If the idea of flipping a house piques your interest, but the fact you have no idea how to invest in real estate is holding you back, you’re in the right place. The number of houses flipped in the U.S. hit a 15-year high in 2021 according to a report released by property data provider ATTOM Data Solutions. A number of popular house-flipping shows on TV have increased the appeal of this potentially money-making venture as well.

Although these shows boil the process down to a 30-minute segment, successfully flipping a house can take a lot of work. But if you’re wondering how to start flipping houses and you’re just starting your research, this step-by-step guide will walk you through how you too can become a house flipper.

What is house flipping?

House flipping, also called a fix-and-flip, refers to buying a property under its value — usually one that is an eyesore or needs a lot of repairs. The buyers then quickly fix it up and resell the home for a profit. In the context of flipping houses, quickly can mean anywhere from a couple months up to a year.

This type of real estate investing offers the potential for delivering strong returns. But like any other investment, you’ll be faced with risks as a house flipper. If you’re just looking to get rich quick, you could end up damaging your finances. If, however, you launch your house flipping business with knowledge and a strategy, then you’ll have the potential to do very well.

How to start flipping houses

As exciting as it is to run out and look at potential properties, there is a lot of research that needs to be done first. You need to familiarize yourself with the typical process for flipping a house. Ideally, you should find others in your area that have flipped a home or have done remodeling. They will be able to give you a better time and money estimate when it comes to repairs and renovations, as well as connect you to the right contractors. There’s often a lot of money on the line, so you don’t want to act hastily, especially if it’s your first flip. Here are nine simple steps to work through:

1. Research your local real estate market

The excitement of your first project can lead you to ignore this less-exciting part of the process. But skipping the real estate research can lead to a disastrous house-flipping experience — if you’re able to flip the house at all, that is. To be successful as a house flipper, you need to know how to pick the right property, which states are bad for flipping houses, and what the right purchase price is.

Once you start considering a house, you’ll also want to look at comparable properties to get an understanding of what’s selling and not selling in the area. Without doing market research, you won’t know whether you’re actually getting a good deal on the fixer-upper you’re buying or whether someone will want to buy it once you fix it up.

You won’t be able to identify the home’s potential value, and you won’t know how to price the house when you’re ready to list it if you aren’t familiar with the local real estate market. Keep in mind that the vision you have for your home should fit the reality of the neighborhood you’re buying in.

To turn a profit as a real estate investor, you must be sure the purchase price of the house plus the costs of repairs and any additional costs will leave you with a desirable profit margin. For example:

1. You purchase a house for $140,000. It’s not in terrible shape but needs some TLC. You believe the area is up-and-coming and that if you make the right repairs and updates, this property could sell for around $225,000.
2. You finance an additional $30,000 for renovations and get to work turning this overlooked home into an adorable property.
3. You list the house, but it sits on the market for two months. Unfortunately, you didn’t take the time to do proper research into the local real estate market. As a result, you’re forced to drop the asking price to $205,000.
4. A month later, you accept an offer for $195,500 and get your money.
5. After you subtract the $140,000 purchase price of the home, that leaves you with a gross profit of $55,500.
6. But then after you subtract the $30,000 renovation cost, the $5,000 in interest paid over four months on your loans, and $17,000 in closing costs, you’re left with just $3,500 in profit.

Is that a number that works for you for the months of time and work? Probably not, but you could improve all those numbers if you do market research and buy the right house, for the right price, in the best location.

2. Set a budget

Once you have a solid understanding of the local real estate market, it’s time to figure out how much you can afford so you can cover all the costs of flipping a house.

When determining the maximum price you should consider paying for a house, the 70% rule offers an easy guideline for new real estate investors. The 70% rule states you should pay no more than 70% of the after-repair value (ARV) of a property, minus your repair costs.

But how do you know a home’s ARV? ARV is the estimate of the value of the home after it is fully repaired. To determine the ARV, first gather information on the property you’re considering purchasing. This info can include but is not limited to:

• Neighborhood
• Lot size
• Whether the house is on a busy road
• Condition of the house
• Home size
• Build type
• Age of the house
• Finishes and features

A lot of this information can be found on the MLS (Multiple Listing Service) sheet provided by your realtor or even on Zillow. MLS is a database real estate brokers use that details property information.

Once you have as much detail as possible about your prospective property, also gather information on a comparable property. Compare the two so you can arrive at an appropriate ARV for your property. If you can determine what a similar property sold for and the types of finishes and features it had, you’ll also get an idea of the types of renovations you need to complete to make the house attractive to buyers. Once you know the types of repairs and renovations you need to make, you can determine whether this flip is within your budget.

3. Get funding for flipping

With large upfront costs and the ongoing costs of repairs, real estate investing can add up quickly. Unless you have a pile of cash laying around, you’re probably going to need funding to finance your flip. Just keep in mind that going into debt to flip a house increases your financial risk.

The largest expense in house flipping is the property acquisition cost — i.e. what it costs you to buy a house. Luckily, there’s more than one way to get funding for flipping. Your financing options could include getting traditional bank financing, opening a home equity loan or home equity line of credit, or taking out a personal loan.

If you’re having trouble securing a traditional loan, a hard money loan might be an option as well. A hard money loan is a type of real estate financing that doesn’t rely on credit score and income for approval but rather a hard asset, such as the property you want to purchase. The property is used as collateral, so defaulting on the loan can result in losing the property. Because the property is the primary means for determining your approval, hard money lenders will usually offer higher interest rates and fees.

If you decide to borrow money to fund your flip, don’t be afraid to ask your lender questions about the mortgage process. Having a solid understanding of the lending process will make your flip go smoother.

4. Find a real estate agent with flipping experience

A quality real estate agent, especially one with house-flipping experience, can provide the market knowledge and guidance you need to choose a smart real estate investment property. Your agent should understand the local housing market and current market conditions, help scout properties and find the right buyers, help find good contractors, and help you time your sale and list price to maximize your profit.

Working with an agent from the get-go can help ensure your initial assessment of the property is accurate and aligned with your budget. Not being familiar with the area, the market, and how much you can sell your rehabbed home can be a very costly mistake.

Note that using a real estate agent will cut into your profits and many house flippers choose to forgo one and sell it themselves. This approach can save on commission fees, but it also requires a solid understanding of the real estate market, effective marketing strategies, and strong negotiation skills to ensure a successful sale. For your first flip, we recommend working alongside a real estate agent.

5. Purchase a property

With all your preparations complete — market research, setting a budget, deciding how you’ll finance the flip, and finding an experienced realtor — it’s time to close on the house.

During the closing process, ask whether you can enter the property so you can start the planning process. Take several general contractors with you and get multiple quotes. Get a sense of how each contractor will approach the job and then choose your contractor. This way you’ll be able to hit the ground running on day one, as time is of the essence when it comes to the renovation process.

6. Hire the right renovation team or do it yourself

If you can swing a hammer, lay carpet or flooring, hang drywall, install a kitchen sink, or even roof a house, you can save a significant amount of money throughout the renovation process. Alternatively, you could do as many renovations as you can handle personally and hire out for the more difficult tasks. Although paying a professional to rehab your house will reduce your profits, you may not be in a position to do repairs yourself either due to skill level or availability of time.

Ask your network for referrals for local contractors. Then, do your due diligence to vet them and make sure it’s a good fit. Ask for references and if you can see their work firsthand. If you’re unable to find a reputable contractor through your personal contacts, hop online and search sites such as Home Advisor and Angie’s List.

7. Source your own materials

Another way to boost your odds of making a large profit is to source your own materials. Use coupons if possible, and look at the different shopping portals to earn cash back on your purchases. Check out thrift shops and Habitat for Humanity to find discounted furniture and building materials. If you want to save money, exhaust all your options to source your own materials.

This is a great place to take advantage of rewards credit cards as well. Whether you're working to hit a minimum spend requirement for a sign-up bonus or you just want to earn rewards for your spending, a little bit of strategizing can go a long way in reducing the costs for flipping a house.

A straightforward credit card such as the Ink Business Unlimited^® Credit Card allows you to earn unlimited 1.5% cash back on every purchase. So whether you’re buying lumber at The Home Depot or decorations at HomeGoods, you’ll earn 1.5% cash back on every purchase. You can even earn $750 bonus cash back after you spend $6,000 on purchases in the first 3 months from account opening, which increases your bottom line on your house flipping project.

8. Relist and sell

Now is the time to put all of your hard work on display. Whether you choose to use a real estate agent or not, you need high-quality photos taken of the property. Staging will take extra time and money, but it is worth it for the listing photos. Most people have a hard time envisioning how an empty house can be their personal living space, so setting up the space to make it look cozy helps significantly.

Instead of buying all new furniture and decor to use to stage the home, look for local stagers or staging companies. Some real estate agents also have their own staging person.

9. Reevaluate and flip again

So you flipped your first house! Congratulations! How did your first deal go? Now is the time to look back over the entire house-flipping process and the choices you made.

Take some time to evaluate your experience. Gather all the numbers and tally the hours you put into the project. Look at your time spent and profit made. Figure out where you can cut costs. Maybe you’re not happy with the contractor you chose. Take everything you learned and see where there’s room for improvement.

Now, are you ready for your second flip?

Risks of house flipping

While house flipping can be rewarding, there are many risks you need to consider too before starting your journey. Here are just a few to think about before you dive in:

• Market fluctuations: Unfortunately, this is just one area you can’t control or always predict. Real estate markets can change rapidly due to economic conditions, interest rates, or local factors, potentially affecting property values and the ability to sell at a profit.
• Underestimating costs: This is also another area that you can’t always control. As you start to gut the house, more issues might arise. Material price and labor costs can be higher than you expected due to demand and the current state of the economy.
• Extending holding periods: If a property takes longer to sell than anticipated, holding costs such as mortgage payments, taxes, and utilities can add up, eating into profits.
• Contractor and labor issues: Finding reliable contractors and managing renovation projects effectively is crucial. Delays or poor workmanship can lead to increased costs and extended timelines.
• Running into legal issues: Navigating zoning laws, permits, and other regulatory requirements can be complex and time-consuming, potentially causing delays and additional expenses.

No two flip experiences are going to be the same. One can be a smooth transition with a high return on your investment, while another can be a drain on your time, energy, and bank account. Use these risk factors to plan wisely and be prepared.

FAQs

Bottom line

Real estate investing can be a lucrative endeavor, but there are significant risks that come with flipping a house, especially for new investors. You need to be aware of these so you have the best shot at success. Starting with the basics and familiarizing yourself with the flipping process is vital, but you’ll learn the most from actually diving in and flipping your first house. Start small and work your way up to bigger and bigger projects — soon you’ll be joining the ranks of successful home flippers.