House Flipping 101: 5 Essential Rules for Beginners
House flipping isn’t nearly as easy as the reality TV shows make it out to be. House Flipping School president, Mike LaCava, has 5 rules to help you succeed in this niche real estate market.
Real estate reality shows like Flip or Flop make it seem as though all you need to successfully flip houses is a little cash and a lot of guts. Well, you do need both of those things, but there’s a lot more to it.
If you’re just starting out in house flipping, here are the 5 essential rules for success:
House Flipping Success Rule #1: Assess Your Cash Situation
To flip houses, you’re going to need cash. That cash can come from you, a bank, or better yet, other people. If you have money of your own to invest, then you’re already ahead of the game. If you don’t have any cash, that’s all right too. Although most private investors want a new flipper to have a little bit of “skin in the game,” you can always borrow money from other sources to help you get started.
Although finding investors and raising money for a house flip is an art unto itself, before you even do any of that capital raising, you’ll need to assess what you already have available. When you do finally locate your first house flip, you’ll have a good idea of how much cash you’ll then need to fund the purchase.
A great way to get started flipping houses – especially if you have little money – is to form a joint venture with a partner who has money. If you don’t have the money, the joint venture partner will fund the deal while you do all the work. Although you may not get rich on your first deal, you’ll gain something even more valuable – experience.
If you have to split the profits with someone else fifty-fifty, then you still have 50% of something – and that is far better than 100% of nothing at all.
House Flipping Success Rule #2: Build Your House Flip Team
House flipping cannot be done alone – there’s just too much involved in a house flip for you to know everything about all aspects of real estate investing. This is why you’ll need to build your own team of specialists who you can rely upon for expert advice and expertise to ensure maximum profits.
Some of the members of your team should include multiple real estate agents, a real estate attorney, a CPA, a general contractor, a designer or architect, an insurance agent, a wholesaler, and a private money or hard money lender.
This team will assist you in all the little details of finding, fixing, and then ultimately selling the property – helping you to lock in profits and keeping you out of trouble at the same time.
All these specialists will work together to shorten your own personal learning curve, while helping you make money faster than you would on your own.
House Flipping Success Rule #3: Find an Undervalued Property
Finding an undervalued property in this market can be a challenge. With foreclosure rates down and bank owned property inventory drying up, there is a shortage of inventory compared to just a year ago.
But if you know where to look, this can be a huge advantage for you over your competition. On of the best ways to start finding properties is have people call you to sell their property. One of the best ways that this can be done is through the use of bandit signs. These are the signs you may see around town which prompt people to call a number to “sell their ugly property.” Other ways to find houses to flip include email marketing to property owners, direct mail marketing to absentee owners, and contacting abandoned property owners from town record data.
Your real estate agent can be a huge resource for you when finding properties. All real estate agents can assist you in finding houses that need expensive repairs – and for a house flipper, these are the ideal types of properties to buy.
Click to the next page for tips on how to do the math!
House Flipping Success Rule #4: Do the Math
There is some basic math involved in house flipping – and the good news is that you don’t need to be a rocket scientist like Math Dude to understand it!
Of all the numbers involved in house flipping, the most important is the “After Repair Value” or ARV for short. This is the price that you will ultimately sell the property for once it is renovated. Your real estate broker arrives at this number using “comps” from other recently sold properties similar to yours.
The second most important number is your “Maximum Allowable Offer,” known as MAO. This is the highest allowable price you will pay for the property.
Now here comes the math…ready?
Take your ARV and multiply it by 70%. Then deduct your cost for rehabilitation which yields the MAO.
The 70% is what’s referred to as “The 70% Rule” and it’s designed to keep your profits at a maximum and your downside risk a minimum.
So for example; if your ARV is $200,000, multiply that by 70% to get $140,000.
Then subtract your cost of repairs. Let’s say in this case, your general contractor has told you that it will cost $40,000 to do all the rehab work. Simply deduct the $40,000 from the $140,000 and you come up with your MAO of $100,000.
Therefore, the most you should pay for the property is $100,000.
That wasn’t so painful, was it?
House Flipping Success Rule #5: Speed Equals Profit
Time is of the essence in house flipping and speed is one of the biggest factors that will lead you to profit. The shorter the time you hold onto your investors’ money, the higher your profits will be.
The reason your profits diminish with time is that the longer the renovation takes to complete, soft costs such as financing payments, insurance payments, town taxes, utilities, and any and all other carrying costs start to add up. The more these add up, the more they diminish your profits. So do the job well, but do it fast.
Although it may seem counterintuitive, having a rapidly appreciating market is not a necessary ingredient for success in house flipping. The real money is made in the math and the process itself. As long as you stick to a rigorous set of rules and don’t “eraser math” your analysis, you can – and will – make profits flipping houses in rapidly appreciating markets, stagnant markets, and even in markets that are even depreciating.
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.
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