If you have cable, you’ve probably crossed paths with a house flipping show or three. These days, it seems like every network has at least one knocking around their line-up, and it’s easy to see why.
Though there may be fewer houses being flipped, flippers are making more money off each house than they did even before the real estate bubble burst. Plus, today’s super low interest rates can be attractive to people who want to get in and out of a house with as little loss as possible.
If you’ve ever wondered what really goes into making a profit off flipping real estate, here’s a quick guide.
First, you need the funds to start
The golden rule for house-flipping may be “buy low, sell high,” but when you’re working with real estate, even low isn’t cheap. In reality, most flippers start from a place of ready cash, which allows them to invest not just in property, but in taxes, utilities, and renovation costs. You may not need hundreds of thousands (more on that later), but you need security.
That’s why good flippers also have plenty of resources squirreled away to cover emergencies—and there are a lot of potential emergencies. Maybe you uncover major problems with the foundation halfway through the remodel, or maybe a recent spike in crime has sent property values sprawling. In any case, having a safety net isn’t a bad idea, even if it’s just for your own peace of mind.
Then you pick the right property
You might not see this part on TV, but picking the right property is the key to a successful flip. How well you do all comes down to planning, research, and smart budgeting. Watching a neighborhood’s sales and listings for a while can give you a good idea of the prices at which you need to buy and sell to turn a profit—and whether the profit is really worth the effort.
For instance, foreclosures may seem like the perfect way to get in at a low price—and in some cases, they are. But they’re also notoriously needy renovation-wise, and if the neighborhood property values aren’t great to begin with, you may not make enough to justify the time and expense.
…and get financing
This step is a tricky one. Since the housing bubble burst, some lenders and banks have become wary of these kind of investments. Many big-time flippers solve this issue by keeping hundreds of thousands of dollars on hand, allowing them to cut a bank or lender out of the process entirely. But not everyone has that kind of ready cash.
The only other option? Get a mortgage. While this process can be more difficult for investment properties, it’s not impossible so long as you’re in good financial shape. Once you’re qualified, aim for a loan that works best for people who want to sell a house soon after purchase. Hybrid ARM’s (Adjustable Rate Mortgages) have small monthly payments for an initial fixed period of time, after which the interest (and your payment), increases. Also, keep in mind that the larger your down payment, the less interest you’re on the hook for.
Next, find a way to increase the value
While all the TV shows feature crews of painters and plumbers sweeping through a dump and leaving perfection in their wake, the reality is that many house flippers are also DIYers. The math on this is simple: hiring workers may speed up your timeline, but it takes a bite out of your bottom line.
What can add to it? Most professional flippers know to start with the big things—plumbing, electrical, and structural issues—and work down to the cosmetic—cabinetry, flooring, and lighting, for instance.
Despite all the action you see on TV, it’s worth it to know that you don’t always need to invest a lot (or anything) in renovations to turn a profit. Depending on where you buy and when, a house in an up-and-coming neighborhood or on in an area that’s quickly recovering from the housing bubble could net you a hefty payday, no work required. All you need is keen foresight, patience, and the funds to sit on a house for a while.
Finally, you profit
Or try to.
While selling the fixed-up house at the perfect price always looks like a done deal at the end of each episode, the truth is that selling a house in a recovering market can get hairy. Just because you’ve hit all the items on your renovation checklist—and maybe even come in under budget—doesn’t mean you won’t lose big on the house if you can’t sell it quickly.
And unless sitting on the property for a while factored into your original plan, you do need to sell quickly, before interest accrues and balloon payments come due. In a worse-case-scenario, you may even have to sell the house at a small loss to avoid a bigger one.
All that planning and research you did? This is where it really saves the day. Good flippers don’t invest in a property they don’t know for sure they can get out of.