In real estate, flipping is the process of buying properties (usually houses) and then reselling them at a profit. With careful planning, flipping can make you a LOT of money. However, you can also lose just as much if you jump into it without knowing what you’re doing.
Here are a few helpful tips to follow if you’re planning to flip real estate.
The 70% Rule
Experienced real estate flippers will tell you to follow the so-called “70% rule” when figuring out how much to pay for the property. The 70% rule means that you shouldn’t pay beyond 70% of the ARV or after repair value of the property minus the amount you spent on the repairs. For example, if the house’s ARV is $100,000 and the repairs cost $10,000, then you should pay no more than $60,000 if you don’t want to overspend.
You may sometimes encounter some long-time flippers who may be more adventurous and break this rule. However, for beginners who want to stay on the safe side, this is a good benchmark to follow.
Work with Agents or Brokers
It doesn’t matter if you’re buying or selling. Working with a real estate agent or broker will often help you get a better deal. That’s because there are some insider facts about real estate flipping that only real estate professionals know about. They also have access to tools such as Brokerkit that helps them keep track of market trends that can then translate to better buying or selling advice.
Real estate agents or brokers can even act as your mentor with regards to flipping and all things real estate. Offer them some compensation, if you want, such as a small commission for every successful flip you make. This is an ideal arrangement if you want a long-term business relationship with them.
Network Before You Flip
One of the most crucial elements of flipping real estate is networking. Do this before you even start looking at properties to flip. This way, you’ll have an easier time looking for buyers once you’ve made an investment purchase.
Aside from building relationships with future buyers, you should also network with real estate professionals. This will help you gain insider information (see the previous tip) and get the best prices for the properties you flip. If you want to be able to handle your own deals, consider getting a realtor’s license.
When flipping real estate, you’ll likely come across a property that’s a little worse for wear. Obviously, you need to renovate or refurbish it. It’s important to not go overboard. Remember the 70% rule stated above. You don’t want the property to become so expensive that buyers hesitate to make a purchase.
A good idea is to use the neighborhood as a guide. Check the most common features and add those to the property you want to flip. You can add a few extras if you want, for the sake of differentiation, but don’t forget to practice restraint.
Improve High ROI Areas
In relation to the previous point, if you’re improving the property for flipping, concentrate on high-ROI areas. In particular, pay special attention to bathrooms and kitchens. These are some of the most important spaces for buyers, so it’s a good idea to prioritize them in your repairs budget.
For other low-cost improvements that can increase the purchase price of a property, consider giving the walls a fresh coat of paint and fixing the flooring. Simply put, pay attention to the foundations and let the buyers take care of the accessorizing.
Manage Your Expectations
At first, real estate flipping might seem like a surefire way to make huge profits. The initial investment might be big, but the earnings are quite good in return. The truth, however, is that there will be times that you’ll break even or even take a loss. After all, flipping is just like any other business. Manage your expectations, especially if you’re going into real estate flipping full-time.
Have a Plan B
Sometimes, a situation arises when you can’t flip the property you purchased. The real estate market may have tanked in your area, for example, or the repairs have taken longer than you’d like. This is why you should have a backup plan in place. If you’re flipping a house, consider renting it out first. Then, develop a timeline so that when the market recovers, you’re already properly prepared to flip.
Crisis Situations Can Increase Demand and Value
Obviously, this is not the case for every situation. However, you should also consider the possibility that there will be an increased demand for particular properties during a crisis. For example, the COVID-19 pandemic emphasized the need for physical distancing. Thus, more people are looking for homes instead of crowded apartment units to avoid or at least minimize exposure. This, in turn, can increase the value of properties that meet such requirements.
The key is to study the trends before making a move. Real estate flipping can be worrying in times of crisis, but it can actually be more profitable.
Just like any other type of business, flipping real estate has its risks. However, with a strategy backed by the right information, you stand to make a lot of money. The key is to be patient. It takes time to find the right property in the right location, and then a little more time to improve it. With these tips, you can hopefully avoid making bad investments and make real estate flipping a viable income source.