Beginners Guide to House Flipping

With all the hoopla over flipping, it would seem as if anyone can make a good living by buying, renovating, and flipping houses. In reality, this is only partially true. There are a number of different factors you need to take into consideration before you consider pursuing house flipping as an investment option.

What Is House Flipping?

But before we even discuss how to get into house flipping, we should clarify what the term actually means. “House flipping” is used to describe the process of buying distressed properties at a deep discount, then gutting and renovating them, and selling that vastly improved property to a new homeowner as fast as possible to lock in maximum profits. 

The way house flipping is done today is far more responsible, far more lucrative, and far more personally rewarding than in the past. When you buy ugly, run down properties, beautifully renovate them, and sell them responsibly, you’re not only adding real value to the community, but you’re also reaping more lucrative profits at the same time. 

House Flipping 101

Before you dive headfirst into renovation-style house flipping, you should first follow these steps to determine whether or not this kind of real estate investing is right for you:

Step #1: Assess Your Risk Tolerance

It’s important to note that when you flip houses, you can lose money. The more houses your flip and the more systems you put into place, the greater your profits and the lower your risks. But when you’re first starting out, you need to be aware that there is the potential for loss of capital. 

With this in mind, you need to assess your own capacity for risk. Some questions you may want to ask yourself are:

• If I invested my own money in a house flip, what are the potential downsides?
• How comfortable do I feel putting large amonts of money on the line? How would I handle the loss of that money?
• When I invest right now, do I pick large-cap mutual funds and index funds or do I go for sector funds that may have a higher return but greater risk?

If your answers are more conservative and risk-averse, then house flipping may not be for you.

However, if you’re drawn to fast-paced, risky, dynamic environments, then house flipping may be a good style of real estate investing for you. The question is, how to start?

Step #2: How Comfortable Are You Networking?

One of the largest contributing factors to my personal success in real estate investing is networking.

The process of networking within my circle as well as attending networking events – such as local REIA, Chamber of Commerce, and other meet-ups – is the best forum for finding new deals, partnerships, and private investors. 

If the thought of walking into a room filled with complete strangers is completely paralyzing for you, then real estate investing in general may not be a good fit.

Having said that, you don’t need to be the life of the party in order to be successful in house flipping. To be a moderately successful networker, all you need is the ability to make pleasant conversation, be curious about other people’s interests, and not feel the need to talk incessantly about yourself. Check out Modern Manners Guy’s networking tips for more.

Step #3: Can You Handle Other People’s Money?

Although traditional loans are an option for real estate investing, borrowing from private money lenders, hard money lenders, or any individuals looking for an investment opportunity tends to be the way many house flippers operate. So if you do use non-traditional lending (aka, other people’s money), you need to develop the ability to speak to people about your investment goals.

One of the best ways to do this is to not necessarily ask for money, but instead talk about the opportunities your house flipping projects can offer. Most of the investors in my real estate ventures are just average people simply looking for a better return on their money.

For example, I just began working with a new investor this past week who is going to invest $120,000 with us in a Rollover IRA. We’ll use his money to fund our investment for just 6 months and we’ll pay him 8-10% interest while we use it. His money will be fully backed by the investment itself – so the downside is very small. We are simply helping him with his investment goals while achieving our goals at the same time. It’s a win-win.

Step #4: Don’t Be Afraid of Partnering

One great way to get started flipping houses is to form a partnership with another person. This could be another investor, a contractor, or anyone you know who’s interested in investing. 

If you don’t have the money to do everything on your own, you can form a joint venture with one of these individuals where you do all the work and they invest all the money. Typically profits are split 50-50.

Some may argue that this is shortchanging yourself, since you have to give up 50% of your profits for doing all the work. Although that’s technically true, you would not be able to start this venture without the partner’s stake. So in that sense, a partnership is a great way to start investing in real estate. You get your first deal under your belt and at the same time create some forward momentum – momentum you can carry over into your next investment which you can do all on your own.

The Bottom Line: There is certainly money to be made in flipping houses, but oftentimes the biggest obstacle to making things happen is our own fear. Even if you’re not the greatest networker, the greatest salesperson, the greatest financial person, or have never picked up a hammer in your life, you can still be successful at this highly lucrative niche of real estate investing. The only question is: Is it right for you?

Mike LaCava is the President of Hold Em Realty and of House Flipping School, both located in southeastern Massachusetts. Mike is a full time real estate investor and a house flipping coach. To learn more about Mike LaCava, visit houseflippingschool.com. Connect with Mike on Facebook, Pinterest, and YouTube.