Flip This House (IMDB screenshot)
Flipping houses is becoming more and more popular. Homes flipped by investors in 2022 represented 8.4 percent of all U.S. home sales—up from 5.9 percent in 2021. Hard money lenders have been at the heart of this trend, financing distressed property loans that conventional mortgage lenders won’t touch.
That 8.4 percent—from a report by Attom—is the highest since the data was first tracked in 2005. That’s the same year A&E premiered Flip This House, the show that ushered in the era of house flipping reality shows. Other current shows include Flipping Virgins, Masters of Flip, Flip It Like Disick, Fix My Flip, and 24 Hour Flip.
Home flipping is an amazing investment opportunity. But popular TV shows don’t show all the research, planning, and hard work required to be a successful flipper.
What is house flipping?
Flipping involves buying a house (often in poor condition), repairing and restoring it to market value, then quickly selling the refurbished house for a profit.
Milwaukee the top “fixer-upper” market
A 2022 report by StorageCafe finds Milwaukee is the best big city in the U.S. for getting a fixer-upper.
“As a pre-industrial Midwestern city,” the report says, “ ‘Miltown’ enjoys a generous inventory of homes that need some work before becoming a real ‘home sweet home.’ ” Other findings include:
- Fixer-uppers in Milwaukee represent 12% of existing homes for sale—double the overall average for the 50 cities studied.
- The asking price for a Milwaukee fixer-upper—$80,000 on average—is 59% lower than for non-fixer-upper homes ($195,000).
How to start flipping houses step by step
Commit to it
House flipping isn’t a part-time hobby like restoring a vintage sports car in your garage. It’s a business that requires a lot of hard work.
To successfully sell a house for profit, you must set and adhere to a strict schedule and budget. You have to be all-in—prepared to navigate unexpected obstacles and make difficult decisions.
Educate yourself
There is a lot to learn about the business of house flipping. See Millennial Money’s Best Books on Flipping Houses.
Research The Market
You need to learn about the neighborhood you’re interested in. Enlisting a real estate agent or Realtor can help you understand market conditions and identify repairs and upgrades appropriate for the area. An agent can also help with properly timing the sale.
Many professional house flippers are licensed real estate agents, which makes sense. Successful full-time house flippers know the ins and outs of real estate. And they’re comfortable with the process of buying and selling a home—and the juggling it requires.
Know the ranking system
It’s also important to become familiar with the class ranking system that real estate investors use for neighborhoods, from Class A to Class D:
- Class A neighborhoods are at the top of the market, with the highest real estate prices.
- Class B and Class C neighborhoods are middle- and working-class neighborhoods.
- Class D neighborhoods are the poorest areas.
For beginning flippers, Class B and Class C neighborhoods are preferable. They’re more affordable and move faster than the high-end, Class A homes. And they’re generally free of the potential problems in Class D homes.
Working with a real estate agent who knows the area can help you pinpoint neighborhoods with potential. You might learn a Class C neighborhood is about to get a big investment from the city. Or maybe a major employer or a university is growing nearby. Getting this kind of inside knowledge ahead of time can help create opportunities for profit.
Find a house
After you’ve researched the market and are confident you’re going to make a smart investment, it’s time to find a house. See our guide to Finding a Distressed Property. Make sure to schedule a walkthrough with a contractor.
Secure your finances
Conventional mortgage lenders generally do not deal in distressed properties. So contacting a hard money lender is a great option for real estate investments like house flipping.
Veterans in the construction industry and experienced in hard money lending, Black Brook Capital is your perfect partner to turn your vision into reality.
70 percent rule
You must estimate and account for a lot of factors when looking for a house to flip. Experienced house flippers abide by a 70% rule to determine if a house is a good investment. To calculate the 70% rule, follow these four steps:
- Estimate the house’s after-repair value (ARV). Determine what you could sell the house for after repairing and renovating it. See our explanation of ARV.
- Estimate the cost of the necessary repairs. Does the home need a roof? Is the kitchen cabinetry outdated or damaged? When you evaluate the home, be aware of everything that will needs repairs or renovations, and make an accurate cost estimate.
- Take 70% of the ARV and subtract the cost of repairs. For example, say a house’s ARV is $200,000. Multiply it by 0.7 to get 70%, or $140,000. Now take that $140,000 and subtract the cost of repairs. For this example, we’ll say total repairs and renovation cost $30,000.
- Use the result to determine the maximum you should pay for a house. If 70% of your ARV is $140,000 and it costs $30,000 to complete the repairs, you shouldn’t pay more than $110,000 for the house.
Make smart investments
It’s a good idea to network with other real estate investors and talk shop. Consult your real estate agent on connections to experienced contractors and reliable inspectors. Decide what upgrades you can take on yourself and carefully budget for contractors to make the repairs you can’t.
For a list of reputable local contractors, see the winners of the Shepherd Express Best of Milwaukee 2022 in the Home Improvement categories.
Along with budgeting money, you need to budget time—especially if you’re taking out a loan to buy the home. Every day you don’t sell the home costs more money in interest, insurance, and taxes.
Be prepared in case something goes wrong or takes longer than planned. The ripple effect of delays on your schedule and your contractors’ or home inspector’s schedules can cost serious money.
Sell for a profit
Once the repairs and remodeling are done, it’s time to sell the house and reap the benefits of all your hard work.
Price your house competitively. Hire a real estate agent who knows the market and how to sell your home. Make note of comparable house sales in the area, and what makes your house different.
Be aware of how long similar houses typically stay on the market before sale. Forecasting the timing and cost of the flip is what’s going to determine your profit.
How long does it take to flip a house?
In 2022, it took an average 5.5 months to flip a house, according to the aforementioned report by Attom. But factors specific to your market and your particular situation will determine your timeframe.
The bottom line
If you have the commitment, the skill, the knowledge, and the ability to make a plan and stick to it, you can make money flipping houses. It’s easier said than done, but house flipping is becoming more and more popular, and for good reason.
If you have found a distressed property that has good flip potential, contact us at Black Brook Capital. Experienced in hard money lending and veterans in the construction industry, we are your perfect partner to turn your vision into reality.
