Properties are big-ticket items. The average home value in the U.S. is $200,000. As a flipper, you need readily available funds to purchase and rehab the property.
Traditional banks and financial institutions are in the business of providing mortgage loans to homeowners for move-in-ready properties. While real estate investors who buy and hold rental properties can qualify for conventional mortgages, flippers need short-term funding to cover the purchase price. Here are 12 funding sources flippers can tap into.
When lining up flip funding, it’s important to have a reserve fund. Budgets are estimates -- things you didn't budget for will come up. I always allow at least $10,000 in my calculations for unknown repairs, and that has cost me some deals. But losing a deal that could end up costing me too much to make a profit is no loss at all.
It's also important to know the interest rates you can expect from short-term funding. A high-interest loan might not give you as much time as you'd like to complete the project before it starts encroaching on your profits.
4. Acting fast
House flipping is a fast-paced real estate investing strategy. There’s significant competition, so you need to act quickly to get the best deals under contract.
Once you close on the property, the clock starts ticking. Every day you own the property costs you money. The renovation needs to happen quickly so you can get the property on the market. Once on the market, the property needs to be competitively priced so it sells quickly.
Your agent can help you run comps, but markets are fluid and can change quickly. The ARV you estimated may change in a matter of weeks. A property that’s priced too high lingers on the market and typically sells for less than properly priced properties.
Properties that sit vacant can develop issues that go undetected, too. On my last flip, there was a delay in my buyer’s financing approval. During the postponement period, a huge storm hit the area and the otherwise dry basement leaked water. That delay extended my ownership of the property and ended up costing me an extra $6,400 for remediation and waterproofing.
Successful house flipping demands speed to reduce risk and secure your return on investment (ROI). There’s only one payday: the day of closing. That’s the finish line flippers sprint for.
5. Managing risk
There's a lot of risk in house flipping. You can run into unanticipated construction issues that turn your profit into a loss. Vacant properties are targets for squatters. Properties under construction are targets for tool thieves. The market can turn against you. That contractor you let go might slander your good name and reputation on social media.
One of the biggest mistakes is also the easiest to make: over-improving the property. You never want to be the best home on the block. The highest-priced home in the neighborhood raises the market value of other homes and the other homes drag down the market value of the highest-priced.
Every dollar you spend unwisely is a dollar you won't see in your bottom line when you sell the house. I constantly remind myself of this because it’s tempting to over-improve a property. While I don’t buy the cheapest grade carpet and discount appliances, I do find the least expensive options that deliver the quality and look needed to sell in that neighborhood. I look at the sold comps to see what renovations will deliver the highest possible return on my rehab dollars.
You can mitigate a lot of risk through careful planning. Regardless, your projected ROI needs to reflect the property and business risks of house flipping. That includes your money risk. A project that involves $350,000 should deliver more profit than a $150,000 flip.
6. Sticking to your strategy
There are different strategies involved in flipping. And being successful at your strategy demands focus. The best advice I was given early on was to choose a strategy, become an expert at that strategy, and stick with it.
I focus on single-family residences that have been fairly well maintained but need a deep cleaning and major updating to be move-in ready for a first-time homebuyer.
That strategy informs my flipping process from buying a house to selling it. I know my market and the renovations I make are very specific to what appeals to those homebuyers. I don’t put granite countertops in every flipped home, but I do make sure that the fixtures and finishes appeal to my target demographic. While those tiny tiles and movie star bulb lighting in the bathroom would need to be changed for a luxury homebuyer, it’s less of an issue for first-time homebuyers.
Put together a reliable and experienced team to help you achieve your strategy. This might include:
- an investor-focused real estate agent;
- a title attorney;
- a general contractor;
- lending partners; and
- licensed tradespeople, such as plumbers, electricians, heating and air specialists, painters, roofers, and appliance installers.
Schedules depend on other people doing what you need them to do on time. Choosing the right people and building good relationships is key.
Know what you're getting into
HGTV spurred a lot of interest in flipping and many do-it-yourselfers jumped in to buy and sell homes that they've improved. But house flipping isn't passive investing. It’s nearly impossible to do it as a part-time activity to supplement your income -- it takes too much time and money. It’s a job and it involves a lot of risk that you need to manage closely.
It can be profitable with the right mindset, skills, and team. It’s never boring, as each day and phase has unique challenges. Start with one deal at a time and learn as you go.
Who knows? You might just fall in love with it and decide to quit your "real" job.