By Guest Blogger Grant McDonald from 14th Street Capital
Having a solid house flipping business plan will make a big difference in your profit potential. Real estate investors around the globe hope to achieve the philosophy of “buying low, fixing it up, and selling high.” While investing in houses that need work can be potentially profitable, it also takes a lot of time, effort, and study.
Flipping or rehabbing homes is one of the methods for making enormous earnings in the real estate industry. But it requires a lot of effort and comes with risks, just like any investing venture. It is crucial to approach this cautiously and know as much as you can.
So how precisely can one profit from purchasing houses, remodeling them, and selling them? We’ve outlined six excellent practices for house flipping or rehabbing that will increase profitability.
1. Utilize Special Skills to Boost Profits
There are many different types of foreclosed homes available that can be bought and sold for profit. Some need a new ventilation, heating, and air conditioning (HVAC) system, and some need a whole new electrical system. Others have water or fire damage.
Any one of these problems is expensive enough to keep most standard home buyers away, and some of them are even too big for novice investors to take on. This is the ideal chance to match your unique skill set and connections to a house that requires a challenging rehab.
Over time, a risky renovation will lower a property’s value. Your chance to buy the property for a great deal will grow as the seller grows frantic to sell. You can use the skill to boost your income as long as the problem that turns away other customers matches you or your team’s strengths.
2. Increasing The Size of The House
Keep a close watch on the financial returns they will generate as you plan the renovations and enhancements you’ll make to a property. One of the most dependable ways to raise the selling price of a home is to add square feet to the usable area, provided the expansion is designed in an intelligent and cost-effective fashion.
When you or your realtor compare nearby homes to get a reasonable after repair value (ARV), the comparisons should take into account the cost per square foot. You can use this number to judge whether the new region you are planning will be profitable in the long run.
You should also look at previously sold properties through the multiple listing service (MLS) to determine whether local buyers are willing to pay more for extra bathrooms or prefer extra bedrooms. Square footage is not valued equally, and tastes might alter depending on local fashion.
A real estate professional might be well worth their weight in gold in assisting you with this choice. Additionally, be sure to highlight in your listing the extra room you’ve added that other homes in the neighborhood might not have, as this can significantly increase the appeal of your property to buyers.
3. Make Strategic Home Improvement Choices
Knowing how much it will cost to rehab a house will help you choose the finest investments for your portfolio, whether you intend to buy and hold real estate or flip houses.
If you under- or over-improve the property, you risk losing money on your rehab project. To get the most out of each investment, you need to find the sweet spot where a property sells for the most money without going over budget. This is just another reason why it’s crucial to do your research before doing any work on the property or the market.
Here are the factors you need to think about in order to plan for the most significant renovation possible:
- Cost of all expenses
- Your desired ARV for the property
- You want to maximize your return on investment (ROI)
- What repairs are required?
- value-added fixes for the neighborhood market
Comparing and evaluating similar houses in the neighborhood is the best way to find out which improvements raise the value of a house the most on the local market. For some properties, you may just need a fresh coat of paint and new carpeting. For others, a minor kitchen remodel or enhanced curb appeal may be in order.
To find out as much as you can, do a comparative market analysis (CMA) and talk to contractors and real estate brokers in the area. Decide which house improvements are most important, valuable, and within your budget, then order them in that order.
Also, you can hire a professional to manage your whole portfolio of flipping, rehabbing, and selling; they will help you out in the entire process and get you the best deal.
4. Find the Best Local Market & Neighborhood
The correct sites should be considered while determining how to make money flipping houses. A house can be fixed, but a neighborhood or the local housing market cannot. You’ll benefit from knowing the local real estate market in a number of ways.
There will be a large number of customers eager to purchase your finished product, and you will be aware of the kinds of upgrades to make and the prices that customers are prepared to pay.
In general, cities like Washington, DC, with their expanding populations, diverse economies, robust local investment, and housing stock that supports both long and short-term investment prospects, are the best places to flip or rehab a house.
The availability of easy and hassle free financing by reliable hard money lenders takes the guesswork out of the equation when it comes to securing funding for funding the house since fix and flip loans leverage the investment property as collateral. To choose the ideal neighborhood, you need to consider the following aspects:
- Average sale price of homes: If you want to compare various properties and find out how much comparable homes are selling for, think about performing a comparative market analysis (CMA). This helps you determine if you’re in the first house or move-up house market.
- Months of supply: This measures how rapidly properties are selling in a community by estimating how long it would take to sell every home currently on the market in that area. Potential buyers will flock to homes that are competitively priced in good areas, especially when there is a shortage.
- Real estate market trends and statistics: Take into account the neighborhood’s growth potential as well as how the real estate market is predicted to alter over the coming years. Understand the trends within asset types, such as single-family homes vs. condos and apartments.
- Crime rates: A high crime rate in a neighborhood usually means that the area is in bad shape, which could make it hard for you to sell your home for the most money. Look not to just online statistics but social media and local research to get the full picture.
When looking for houses for rehab or flipping, you should think about things like taxes, schools, employment rates, potential as rental properties, and how convenient they are. These aspects are important to end buyers. Look for homes in a good community that are significantly more affordable than comparable, beautiful homes in the region.
5. Consider Larger Homes to Boost Profits
While it’s a good idea for new real estate investors to stick to smaller projects that appeal to first-time home buyers, intermediate and experienced investors can look to larger homes to boost profits. Unlike beginners, they can invest in larger, more luxurious residences. When compared to smaller homes, properties with a higher overall value let you make a bigger profit after upgrades. You’ll get a bigger lump sum when the property sells, even if you maintain the same overall percentage gain.
The secret to a successful house flipping business plan is to buy low and sell high. You can make four times as much money by making an aggressively low offer on a bigger home. Since the difference is a smaller part of the overall value of the property, sellers are more likely to be flexible about the price. High-end, distressed foreclosure properties can be a jackpot for investors since home buyers at higher price points are more likely to expect a home to be in immaculate shape.
Naturally, a larger property has greater danger and more potential for disaster, so it’s a good idea to only attempt them after you’ve completed a few flips. Reduce your risk by gaining experience prior to entering the major leagues.
6. Choose the Right Type of Financing
There are several ways to finance investment homes in a house flipping business plan, but for beginners, they might be complicated. Many traditional lenders will not make loans on properties in poor shape or to borrowers without solid, independent income, experience doing repairs and flipping properties, or significant net worth. Financing options do exist, though, to help firms that renovate and flip houses.
Hard money loans and rehab loans are the two most popular types of fix-and-flip loans. Pay close attention to the following factors to select the best lender and loan:
- Charges and interest rates
- How long they extend a loan
- How soon you can use the funds
- A bridge loan rate estimation
Consider getting a bridge loan or hard money loan from a private lender to start rehabbing, flipping, and selling homes, for instance, in Washington, DC. Bridge loans can cover up to 90% of the purchase price and have flexible terms. You could potentially close in just ten days.
7. Master Project Management to Boost Profits
Real estate investing in a house flipping business plan has a large upfront cost. Most investors, including experienced and intermediate flippers, use private lenders to get the money they need to buy and fix up properties. It makes sense to borrow money from a private lender who is dedicated to fix-and-flip loans so you can benefit from their market expertise.
In exchange for a higher rate of interest than a traditional bank would charge for a conventional mortgage, private lenders are willing to assume the risk of betting on the potential of a fixer upper project. This implies that from the time you borrow money from them until the time you repay them at closing, you are paying a sizable sum of interest for each and every day.
Smart investors know how to schedule a flip project and sell their homes quickly. This involves timing contractors well, getting permits and supplies ahead of time, and pricing and marketing their homes aggressively. Every day that is saved translates into less interest paid to your lender. If you are good at managing projects, you can save a lot of money by not spending as much overall. These financial savings go straight to your earnings.
8. Study and Examine Market Data
To find out if a listing is the right property, you should consider all of your available investment property possibilities carefully. Do your market research, compile all the pertinent information, and draw wise conclusions. Analyze the risks and rewards. Recognize the costs of renovation to avoid costly mistakes and surprises down the road. To make the most money, invest in homes that only require minor repairs.
Your House Flipping Business Plan
How do house flippers earn money from rehabbing and flipping houses is a question that needs a solution. Just keep in mind that it’s not as easy as it seems on TV to flip a house or rehab a house. It necessitates extensive research, learning, and decision-making. However, you can convert homes and make money if you take into account and apply the aforementioned advice on house flipping.
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Alicia Persson is the real estate content writer for Marketplace Homes. She has several years of experience working in real estate teams that specialized in investments and property management. Before she joined MH, she was a freelance writer for 7 years, providing real estate and home living content for boutique digital marketing agencies.
She is a proud University of Virginia master’s graduate and enjoyed her undergraduate years at the University of Mary Washington. When she is not writing, she plays keytar and does female lead vocals in a local 90’s band or spends time with her amazing family.