You’ve probably seen those shows on TV. The ones with the beautiful people standing in front of beautiful homes talking about how easy it is to flip houses and how much money they make doing it.
Real life is often different from television. It is possible to make money flipping houses and people who are good at it can make a lot of money. But it’s not as easy as some of those shows say it is. And there is a lot about flipping houses you’ll want to understand before you decide if this business is right for you.
What does flipping a house mean?
When you flip a house, you buy a property as a short-term investment with the goal of selling it quickly for significantly more money than you paid for it. Buy it low and sell it high. Fast.
Most of the time, this involves doing what’s called a "fix and flip." That is, you buy a house and make renovations and improvements that increase its value, so you can sell it at a higher price.
House-flipping professionals try to make these improvements quickly because they want to minimize the costs of owning the home. You typically need to pay a mortgage bill, property taxes, utilities, and homeowners insurance each month that you own a house. The more months you pay these costs before you sell the house, the less money you will make on the transaction.
How do you flip a house?
To flip a house successfully, you’ll want to know several things. You’ll want to understand the prices of properties in the neighborhood where you want to buy a house to flip. You’ll want to know how much it will cost you to buy and sell the house. And you’ll want to know how much it will cost to own the house each month (that is, the mortgage, insurance, and other things we just discussed.)
You’ll also really want to know how much work the house needs, how much it will cost to do this work, and how long it will take. Flipping a house that just needs cosmetic updates and fresh paint is different than flipping a house that needs significant work on the roof, plumbing, and electrical system. A good home inspection before you buy can help you make the right decision.
Finally, it is a good idea to have a Plan B in case you can’t sell the house at the price you want or as quickly as you would like.
What is the 70% rule for house flipping?
Many house-flipping professionals use the "70% rule" when they are deciding whether to buy a house to flip. They start with an estimate of the price they think they can sell the house for after it’s renovated. Then they multiple this price by 0.70 or 70% to estimate the price at which they should buy the house now – that is, for a lot less than they plan to sell it. Then, they also subtract their estimate of the cost of the repairs from the purchase price, making this price even lower. Take a look at this sample calculation.
|Estimated sale price of renovated home||$300,000|
|70% of estimated sale price||$210,000 ($300,000 x 0.7)|
|Estimated cost of renovations||$30,000|
|Estimated purchase price of unrenovated home||$180,000 ($210,000 - $30,000)|
You can see why it is important to understand house prices and renovation costs when you want to flip a house. Paying too much for an unrenovated house, underestimating the expense of repairs, or overestimating the price at which you can sell the renovated house can cost you. Making mistakes like these might turn a big profit into a little profit or result in you losing money on the deal. Learn more about the cost of home renovations.
Real estate commissions and taxes on your profits are costs too
If you sell the house with the help of a real estate agent, you may have to pay them a 6% commission as well as other selling costs. If you sell the house for a profit, you will probably have to pay taxes on your profits. Consult with a tax professional. These costs can affect how much money you put in your pocket after flipping a house.
Why real estate agents and contractors often flip houses
You can probably see why real estate agents and contractors get into the house flipping business. Real estate agents have a strong knowledge of house prices and can lower their costs by buying and selling the house themselves. Contractors have a similar knowledge of renovation costs and can save money by doing their own improvements.
Real estate agents who understand the rental market can make good house flippers. That’s because if they are having trouble selling the house quickly at the price they want, they can turn the house into a rental property to help pay the monthly costs of owning the house and protect themselves from taking a loss.
There is a lot to understand before you decide flipping houses is right for you. Think about the pros and cons – then make your decision!
Freedom Mortgage Corporation is not a financial advisor. The ideas outlined above are for informational purposes only and are not investment or financial advice. Consult a financial advisor before making important financial decisions.
Reviewed by Freedom Mortgage Corporation, February 2022