With numerous HGTV programs showing professional fix and flippers earning what appears to be easy five and six figure profits per deal, property flipping has never been so popular. Nowadays, it seems like everyone wants to get in on the red-hot US real estate market.
Since the average flip takes only six months to complete and can bring in an average profit of $66,000 along the way, the appeal is obvious. Who wouldn’t want a piece of the action?
While the TV shows make the process of buying, fixing up, and selling a property seem simple, there is a huge amount of work not shown and many potential pitfalls for beginners. Here we cover the six steps you need to take in order to have a successful property flipping business.
Make a Business Plan
This plan will be your road map to success and will include your goals, strategy, funding, competition and profitability.
Property flipping can require large amounts of capital depending on the size and scale of your projects. A business plan will give lenders confidence that you are serious, knowledgeable, and likely to succeed. Lenders want a low risk investment and it’s your job to convince them you are a worthwhile investment.
Establish Your Business
After finalizing your business plan it’s time to establish your business as a legal entity and the first step is determining which legal structure fits you best. Common legal structures include Sole Proprietorships, Partnerships, Corporations, and Limited Liability Company (LLC).
Once you have set up your legal structure it’s advisable to register your business name in the state you will be conducting business. Next on the agenda will be to obtain necessary licenses, permits, and insurance. Higher volume flippers usually opt to get their real estate license as well, helping to save on commission fees. Lastly, set up a business bank account to keep your personal and business finances apart, this will make life easier when tax season comes.
Flippers rarely use their own funds to finance deals. There are two common forms of financing used by fix and flip investors: hard money loans and home equity loans.
Hard Money Loans
Hard money loans are by far the most common funding source used by fix and flippers. Keep in mind they come with high interest rates and should only be held for a short period of time.
Most flippers rely on hard money lenders to secure rapid short-term financing for their projects, since traditional banks can take up to thirty days to provide funding and are accompanied by large prepayment penalties.
Hard money lenders can move faster than big banks since they mostly focus on the LTV (the loan to value ratio of the underlying collateral asset) rather than a borrower’s employment history or credit score.
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Home Equity Loan
Current home owners are able to use either a home equity loan or a home equity line of credit (HELOC) to fund their fix and flip project. Home equity loans and HELOCs have low interest rates and great terms for borrowers. Those with untapped equity in their homes, a low debt-to-income ratio and a strong credit score are easily able to qualify for these types of loans.
Hire an Experienced General Contractor
Tap into your network of friends, family, neighbors, and real estate brokers to help you find a competent and trustworthy general contractor. Your contractor should be knowledgeable when it comes to renovating distressed properties as well as permits and licenses.
Ask your potential contractors for references and for a portfolio of their work. Be sure to create a contract to set timeliness and a budget, this will help ensure your project is profitable.
Identify Potential Fix and Flip Properties
Strong market knowledge is a must for any flipper. Understanding where buyers are buying, prices they are paying, and what types of properties are in high demand will increase your chances for success.
Specifically, the following factors should be taken into consideration when researching whether or not a home is ripe for a flip:
- Neighborhood – a low crime rate and great public school system
- Amenities – close to parks, restaurants, and malls
- Good Bones – No structural issues, open floor plan, and lots of natural light
Purchase, Rehab and Sell Your Property
You are now ready to execute your first fix and flip property.
It’s important to anticipate the following timelines;
- 7 to 14 days to to close on your hard money loan
- 2 to 4 months to fix up the property
- 5 days to 2 months to complete the sale
Considering the average fix and flip in the USA takes a total of six months from purchase to resale, these timelines can be adjusted depending on how much work needs to be done during the renovation process.
Once the renovation is completed consider hiring a professional staging company to help show the true potential of the property to end buyers.