It is fairly often we hear from people, either friends on Instagram or randomly in our inbox, asking foundational questions about flipping houses. I’ve avoided writing on this topic thus far because there are so many resources out there! However, each individual investor has views, experiences, strategies, and systems that are unique to them and hold their own value. So, after flipping over 100 houses in the Triangle area, it felt like a good idea to weigh in and write a beginners guide for how to flip a house.
In today’s post, we answer a majority of frequently asked questions, share parts of our journey, and offer advice on how to get started so you can eventually flip your first house! From initial steps to analyzing potential deals to the structure of funding: this post is here for your reference whenever you need or want to share it!
A Beginner’s Guide to How to Flip a House: Answering your Top Questions
Step 1: Networking & Education
I want to start flipping houses. How do I get started?
You can always dig a little deeper into how to start flipping houses, but the most basic initial step is simple: read the right books and network with like-minded people. Locate your nearest real estate investment association (REIA) or community and get plugged in! This way, you become familiar with common real estate lingo, can listen to individual stories, and hear about opportunities in the pipeline!
Two real estate investing communities have been particularly valuable on our journey: Bigger Pockets and InvestHER. The Bigger Pockets platform is a wealth of knowledge for newbies and experienced investors alike – and where we learned most of what we know today! If you are a female real estate investor, I suggest becoming a part of The Real Estate InvestHER Community. There is a podcast, facebook community and local meetups (both virtual and in-person) where women can find the support they need to gain financial freedom through real estate.
Get Connected! Two minds are better than one…
And be sure to reach out to us on Instagram! I would love to connect with and be a support to you!
For Book Recommendations on how to flip a house, start here:
Here’s an Idea: Invest in your education using your valuable time. Consider volunteering your time with an experienced investor and work for free in exchange for mentorship. You could offer to drive for dollars, clean up job sites, move materials on a job site, paint a house, etc. Get creative and write down all the things that you are good at. If they agree, while you are offering the value of your time and skills, they provide value through education and it is an equitable exchange. Plus, you now have your foot in the door for a potential partner on your first or second deal.
Step 2: Secure Funding
I’ve heard that you can flip houses with no money, but how can that be true?
IT’S TRUE, BUT NOT THE WHOLE TRUTH.
Let’s be clear friends, the keys to financial freedom are not free. Don’t let overly idealistic concepts the ‘gurus’ sell fool you, nor the ads that “flipping houses with no money” imply. Don’t get me wrong, nothing wrong with online courses or even OPM (using other people’s money). Rest assured, flipping houses takes a personal investment.
How OPM works
Nevertheless, this is how the concept works (well, one of the ways). Say you find a house, analyze the deal and it the numbers work. Now you need to fund it. In this case, because you are new to REI, you locate a hard money lender to fund the majority or all of the purchase price, but still need the remainder in order to add value to the property. You locate an experienced investor who is willing to loan you the money. In exchange, both lenders receive an agreed-to interest rate. The person bringing the majority of funds to the project is called the first position lender and receives the most secure position on the loan. Other lenders are second position and so on. In the event of foreclosure, first position lenders are paid out first.
Hard money lenders usually mean expensive money, including points and high interest rate. But, there is a time and place for it, such as when you are first starting out. Most lenders want to see that you do have your own “skin” AKA ” funds” in the game, especially on your first deal. This is why hard money lenders compensate for high-risk new investors – by offering less favorable terms.
Yes, we currently flip houses without using our own capital, but it didn’t start that way.
Each investor has a unique beginning, a different story. Here is ours:
First, we proved to ourselves that we were capable of this work. Our first primary residence was a fixer-upper which we sold for a profit of $45,000.
Second, we networked with others, educated ourselves, studied rehab costs, and practiced analyzing deals.
Next, we used a combination of hard money lenders, our money, and a second position private lender to fund a smaller portion of our second, third, and fourth deals. In this structure, we paid high-interest rates, points, and had ‘skin’ in the game. Our profit margins were not as good then, but we were paying for our education and earning credibility for future lending partners.
We believe before taking on the responsibility of accepting someone else’s hard-earned cash, it is your ethical obligation to prove to yourself before you prove to others that you are skilled and capable to be a good steward of those funds.
Currently, this is one of the ways we fund our deals:
Private money funds the majority of our flip projects, and usually indicates no points and better interest rates. We hold the honor to work with a handful of private investors with whom we have an established relationship, a long-standing proven track record, and maintain excellent, transparent communication. Some private lenders have $500k +, some have $25k to lend. But each investor agrees to an acceptable interest rate, one that aligns with their personal goals. Annualized interest rates accrue during the life of the project, paid upon closing, and secured using a promissory note and deed of trust. On any given project, we hold a maximum of two lenders.
Step 3: Practice Analyzing Deals
How Much Does It Cost to Flip a House?
The answer to this one is highly dependent on the house’s condition and, therefore, the project’s scope of work. This is where education comes in. You will want to have a good grasp of how much certain line items cost. J. Scott wrote a good book on Estimating Rehab Costs that will serve you well.
It is worth noting, many costs associated with flipping a house fall outside of the renovation budget. See: Hidden Costs of Flipping Houses.
You will also want to account for these factors when analyzing the cost of a potential house flip deal:
- Selling Costs (Commissions, Cleaning, Staging, Photography)
- Management costs (General Contractor or Construction Manager)
- Accrued Interest
- A Contingency or “Uh-Oh” Fund (15-20% of rehab budget for an inexperienced rehabber)
Account for all of these costs, taking into consideration the anticipated hold time. However, calculating all of these items is only one step in analyzing a potential deal.
But how do I know how much to pay for the house?
To know how much you should pay for a house, you have to establish three major things:
- Rehab costs
- Holding Costs
- ARV (after repair value)
Materials, location, and labor determine rehab costs. Holding costs are all utilities, accruing interest, insurances, etc. ARV is the price the market supports after all repairs are complete.
ARV – (Rehab Costs + Holding Costs) = Profit
Don’t forget to brush up on your real estate lingo!
Try building a calculator in Excel or Google Sheets! Uriah built a calculator that helps us analyze properties prior to purchase. Within this tool, we insert the ARV (after repair value), estimated holding time, selling costs, among other things. This foundational tool helps us know what to offer a seller.
Step 4: Marketing
How do you find the houses to flip?
Just like Home Depot, Wegmans, and Pottery Barn are marketing to you, we market to find our ideal clients: homeowners who want to sell. Marketing strategies vary from investor to investor and market to market. We’ve invested in multiple courses in order to build and establish our own strategy.
Some options for marketing are:
- Driving for $$
- Direct mail letters or postcards
- Email marketing
- Facebook Ads
- Google Ads
In our personal journey direct mail, SEO, and Google Ads have been the most effective. Full disclosure, here: acquisition costs can be HIGH in this business! But, you can’t flip houses without a house and you can’t find houses unless you show sellers you are there. Our monthly marketing budget ranges from $4-6k per month.
*Does that number make you want to pass out? Direct mail letters are a solid, cost-effective place to start – plus, we’ve noticed a higher conversion rate than postcards.
Now you know how to flip a house – are you Ready?
Actually, there’s still a good bit left to learn like hiring contractors, managing the budget, etc. But, it’s not too early to read, network, look for houses and start talking to lenders. We have lots of ideas on this blog to help you. Join our email list and become an Inspiring Investor! See the form below
Until Next Time…
Do you have any other questions on how to flip a house? Let us know in a comment below!