Over the years, the IRS has been cracking down on taxpayers taking advantage of the qualified business income (QBI) deduction. Because of that, some house flippers are wondering whether flipping houses can still qualify as a business.
So, let’s dive in and see what you need to know.
QBI Deduction: What Is It and Who Can Claim It?
QBI deduction is a tax break that allows business owners, freelancers, and independent contractors to write off up to 20% of their total taxable income. This effectively decreases the income tax they owe to the IRS. However, not everybody is eligible for it.
For instance, only business owners with pass-through income may take advantage of the QBI deduction. This includes the following:
Sole Proprietors: An individual, such as a freelancer or independent contractor, who runs an unincorporated business
Partnership Members: Two or more people who made a formal agreement to oversee a business together, sharing in its profits and liabilities
S-Corporation Shareholders: People who own shares in an S-Corporation and include its income and/or losses on their personal tax returns
In short, you’ll have to double-check if you qualify for the tax deduction to take advantage of it, as there are some income limits and business types that may affect your eligibility.
What Does Not Count as QBI?
Now, not all income types qualify for QBI. In fact, there are nearly 20 different income types that the IRS does not consider as QBI. Here are a few of them:
Income from out-of-country businesses
Investment items (e.g., capital gains and dividends)
Interest income not related to a business or trade
Annuities received from something unrelated to a business or trade
Of course, as a house flipper, your only concern is if income from flipping is included on the IRS list. Well, it’s not specifically mentioned by the IRS. So, are you eligible for the 20% tax write-off?
Does House Flipping Qualify as QBI Deduction?
The law says that the QBI deduction will only apply to taxpayers who are sole proprietors of a business or trade, a member of a partnership, or a shareholder in an S-Corporation. So those in the fix-and-flip business will be eligible if your operations are conducted within one of these entity structures.
However, there are still rules dictating how much you can deduct from your total taxable income:
If you’re single or unmarried and your total taxable income is less than $164,900, then you can deduct 20% of your qualified business income.
If you are married and filing jointly with your spouse and your total taxable income is less than $329,800—then you can deduct 20% of your qualified business income.
Because of W-2 wage limitations, things become more complicated when your total taxable income exceeds these thresholds. If this is your situation, then it would be better to call an accountant for advice.
Confused? Don’t sweat it—here’s a quick example to help you understand QBI deductions better:
Let’s pretend that you’re a single-house flipper whose net operating income is $100,000 and W-2 wages are $50,000. Since you fall below the $164,900 threshold, you can deduct 20% from your net operating income, amounting to $20,000.
Assuming that you belong to the 24% tax bracket, this QBI deduction will save $4,800 on your tax bill.
Yes, House Flipping Qualifies as QBI Deduction
The QBI deduction has undoubtedly benefited a lot of industries, particularly real estate, where house flippers are now seeing more profits earned from every sale they close. But if you are still confused about the calculations, then we recommend working with a certified public accountant (CPA).
Calculating your QBI deductions is a huge headache and as a busy house flipper, you simply do not have the time for that. That is why you should consider joining the Real Estate Investors Association of Oakland County—our members have access to tons of resources that help them take their house-flipping business to new levels of success.
From landing sales on your fix-and-flip projects to help you determine your tax write-off, REIA has everything you need. Interested? Check out our website to see what your next steps should b
Calculating your QBI deductions is a huge headache—which you may not have the time for. Consider reaching out to REIA and our team of experts to help you with everything. Subscribe to our newsletter as well and join as a REIA member to attend our upcoming meeting!
As the popular saying goes—” before you sell anything, you first have to sell yourself.” This statement holds true even In the house-flipping business.
Although flipping mainly deals with selling properties, don’t forget that you also have to deal with flippers, real estate agents, buyers, sellers, and other counterparts in the real estate industry. Because of this, in order to do good business and close flipping sales, you’ll first have to market yourself to establish business relations.
Why Market Yourself?
Apart from wondering how to market yourself using the SWOT analysis, you might be wondering why marketing yourself is even necessary.
To help you answer this question, we’ll ask you another question—as an investor, would you put money in an investment you’re not convinced will grow? You probably answered no. The same goes for lenders, investors, and other business prospects in the real estate industry. Before they shell out any money and do work with you, they first need to convince you’re worth the investment.
And how do you market yourself? By showing what you can bring to the table as a house flipper and why your house-flipping empire will be a success. And that is exactly what your SWOT analysis can do.
What is a SWOT Analysis?
The acronym SWOT stands for strengths, weaknesses, opportunities, and threats. The information in its subsections shows your capabilities and how you work as a house flipper in relation to competitors and your place of business.
Through your SWOT analysis, you can be accurately assessed. In effect, this will help lenders, investors, and other prospective business associates determine whether they want to work with you.
Take a look at this generic SWOT analysis to help you form an idea of how it works:
Chances are this is the first you’re hearing of a SWOT analysis since it’s not often used in real estate businesses like house flipping. However, its lack of commonplace use shouldn’t diminish its value.
Remember that house flipping is a business and the SWOT analysis plays an integral role in any business plan.
To help you grasp how you can leverage a SWOT analysis, here are three things you need to take into account: you or your company, your competition, and external factors. Think of you and your competition as the players, the external factors and the place as the stage, and house flipping as the game.
The more knowledge you have of the game, the better you can play it.
If you’re here from previous installments of the house-flipping business plan series, we’re happy to have you back for our third and final installment. If you missed the first two, be sure to check it out so you’re up to speed. In previous installations, we discuss the importance of a house flipping business plan[1] and the step-by-step process of making one[2] .
Here’s a chart that shows a SWOT analysis tailored for a house-flipping business plan:
Now that you have a general idea of the SWOT analysis’ role in a house flipping business plan, let’s dive in deeper and go through each subsection in detail. As we break down the 4 subsections, we’ll also tackle how you can leverage these to market yourself and your company.
Your Flipping Strengths
What advantage do you have going into the house-flipping business? Are you starting off with capital or partnering up with someone who already has experience? List down what you and those you work with can leverage and explain why these are valuable.
Here’s a list of questions to get started:
What is your competitive advantage (against other flippers in the area)?
What resources do you have that you can take advantage of?
What part of your flipping business is performing well above average?
For instance, starting out with capital means you don’t have to worry about securing loans or partnering with investors. Having your own finances to pull from lets you move more independently without relying on third parties for funding.
Showing your strengths is the most persuasive point of a SWOT analysis and is the main determiner of whether people want what you can provide. Your strengths also set what’s expected of you as a house flipper, so be careful not to under or over-sell yourself and highlight your strengths honestly.
Your Flipping Weaknesses
Where do you fall short in the house-flipping business? As important as it is to acknowledge your strengths, it’s equally important to acknowledge your weaknesses. If you’re partnering up or working under someone, this is where they’ll form accurate expectations of you.
For instance, if your network consists of young individuals, your flips will likely be within the city near office buildings. In this situation, you’re likely more familiar with flipping small houses for one or two people. A weakness here can be having no properties outside of the city or a lack of experience dealing with larger houses.
These are some questions you can ask yourself:
Where in your flipping business can you improve?
What part of your business is underperforming?
Where are you lacking in resources?
Identifying your weaknesses also lets you identify areas of improvement so you can actively work on becoming a better house flipper. Although weaknesses show your limitations, this can also work in your favor when doing business with others.
As strengths set what they can expect from you, weaknesses show what they can’t. By considering both your strengths and weaknesses you can be more accurately assessed as a house flipper.
Your Flipping Opportunities
These are external factors that work in your favor. Ask yourself: Which market can you tap into? What are people looking for? Which factors can help me close more deals?
When you identify the opportunities available in your area of business, you can gauge which house flip projects can turn a profit and increase the chances of a return on your investment.
On average, Americans start a family in their mid to late 20s.
Given these statistics, there is an opportunity for flipping houses that cater to young, new families, which is where your business is focused on.
If you’re still not sure where your opportunities are, here are some questions to get the ball rolling:
What new markets can your business explore?
What other investment routes can your business potentially consider?
What technology can you use to improve your operations?
How else can you expand your core operations?
By narrowing in on house flips with more profitability, you also increase the confidence of prospective business partners, lenders, and investors to work with you.
Your Flipping Threats
On the other hand, threats are external factors that set limits to your house flips. These external factors are often beyond your control, such as the local weather or building policies.
For example, Michigan experiences winters with temperatures as low as 18°F, so you might run into homes that require more winter-proofing, like replacing HVAC systems or adding more insulation. Threats like these can be laborious, requiring you to assess properties with more care.
These are the questions you’d want to ask yourself:
What local and state regulations threaten your operations?
In what ways are your competitors doing better than you?
What are the market shifts and trends that threaten your business?
Moreover, identifying your threats is essentially stating the factors that you can’t be held accountable for, so you can be assessed fairly.
For instance, if you’re being assessed based on a past project that experienced weather-related delays, that shouldn’t reflect badly on your work ethic as a house flipper. You can also think of your flipping threats as a kind of disclaimer.
Is the SWOT Analysis Worth it?
Challenges and growing pains are inevitable when you’re starting a house-flipping business. But remember that you have the power to make the journey easier with a SWOT analysis.
The insight you’ll get from conducting the analysis then becomes your handy cheat sheet. You can now enter the house flipping game with substantial knowledge, fully knowing how other players are doing on the stage, and exactly how you’ll give your business a leg up.
As always, remember to take your time conducting a SWOT analysis with careful consideration. It plays a major role in your house-flipping business plan, so let’s not get too hasty with it.
Be a House Flipper Worth Working With
A house-flipping business plan that comprehensively addresses all possible queries will leave no room for doubt that you will succeed as a house flipper.
This is your chance to lay down the foundation you need to build your house-flipping empire. Use the SWOT analysis as a marketing tool to show others that you’re prepared, knowledgeable, and set up for success—perfect for doing business in the long run.
This is the final installment of our 3-part house flipping business plan series. If you haven’t checked out the two previous installments, you can find these on the links above.
What other real estate business plans do you want us to discuss? Let us know in the comments below! And should you have more concerns, get in touch with us today.
If you only want to buy a single house to fix and flip as they do on TV shows, do you really need a full-blown business plan? Well, yes! You certainly need one if you want to succeed in the game.
Even if you’re just flipping one house, going in unprepared and without a plan is setting yourself up for trouble. You can go over budget, waste time due to lack of scheduling, and sabotage your house flip.
Instead, go through this Build Your Flipping Empire series to learn how to make a flipping business plan before you jump in with both feet. Doing so, you’ll complete your investment on time and on budget, making a hefty profit that you can roll over into your next project.
In other words, you’ll carve out a path that’ll lead you to long-term success in house flipping.
The executive summary is a synopsis of your entire business plan and serves as the first impression. Remember that potential lenders, financiers, and other business prospects will often only read the executive summary, so ensure that it provides a concise and comprehensive overview of your plan.
You should also include your mission statement here to show your goals and values as a house flipper. For example, if you value family-friendly, move-in-ready house flip projects, your mission statement can say, “Our mission is to grow our house flipping empire one property at a time by turning distressed properties into profitable ones for aspiring young families.”
2. Management Team
A good business plan also has your contacts in place and responsibilities assigned. From the contractors to the real estate agent, list all of them down with detailed roles, qualifications, and experience in house flipping projects.
Here’s an example of what this section will look like:
My team is composed of professionals equipped with the necessary skill sets and work experience to get the job done with quality and efficiency.
General Contractor: John Smith
For over 20 years, Smith and his team of subcontractors (plumbers, electricians, painters, roofers, etc.) have fixed homes all around the City of Detroit. Regarded for his quick and skillful work, Smith has earned the trust of two generations of Detroit residents.
Real Estate Agent: Jane Doe
Doe is an exceptional licensed real estate agent specializing in wholesale and house flipping deals. In her 17 years in the industry, she closes a whopping 4-6 deals per quarter, averaging 20 per year.
Bookkeeper: Jody Miller
Alumni of the University of Michigan, Miller graduated with a bachelor’s degree in accounting. Her financial skills can effectively expense accounted for and within budget, helping our team generate the highest flipping profits.
If you’re new to house flipping and don’t have a lot of connections yet, then take this as an opportunity to build your team. You don’t want to waste time gathering people once a flipping project starts, as having the best people around will contribute to the stability of your operations.
3. Goals & Objectives
Think about what your ultimate goal is for the house-flipping business. Do you just want to flip 1 house a year? Or do you want to build a nationwide flipping empire to quit your day job? Remember to make your goals actionable, measurable, and realistic based on your available resources.
Here’s an example:
Our goal is to be one of the leading house-flipping empires in Michigan. Starting from the City of Detroit, we’ll grow our portfolio by expanding to neighboring cities until we have projects all around the state.
One by one, we will purchase distressed properties, and flip them into quality homes, all the while turning a profit to fund future projects as we continually grow our house-flipping empire. Our ultimate objective is to flip unloved properties into family homes.
Pro tip: Break down long-term goals into short-term ones so they’re easier to achieve and clearly mark the journey towards achieving the overall business objective.
4. Market Analysis
Knowing the real estate market in detail can help you make informed decisions moving forward. The market analysis provides insights to assess whether your business plans are likely to succeed or need some tweaking, all in relation to the competition.
Additionally, your market analysis will show prospective lenders, investors, and business partners your market knowledge and how you plan to use that for your financial plans and gain.
Here’s a list of questions to guide your market analysis:
Is the neighborhood gaining real estate popularity?
Is the property type you’re flipping in demand?
Is there a large pool of potential buyers?
What are the local crime rates?
How far is my prospective property from the necessary facilities?
What are my weaknesses against the competition?
What are my strengths against the competition?
Let’s use some data from 2021 to have a quick look at how a market analysis can go:
Recent statistics show a rise in flipping activity in Michigan. For example, in two Wayne County zip codes alone, 25% of all real estate sales were house flips, and Redford saw a 99.9% increase in house flipping in the first quarter of 2021—doubling the rates of the previous quarter.
Given the statistics, you can see these parts of Michigan are highly saturated and competitive. We can infer that pricing gets more competitive, with margins between buying distressed property and selling a flipped house getting smaller.
As for the whole state of Michigan, the online newsletter Michigan Chronicle reported in 2021 that house flipping is experiencing a huge resurgence providing “a lot of opportunities”. Michigan Chronicle used statistics by ATTOM data solutions and found that average Michigan flippers pocket minimum 20% of sales profits.
Although some cities in Michigan are highly competitive with advanced house flippers, there is still an abundance of opportunities state-wide for novices. Strategically, we can start in less competitive areas until we progress to more advanced markets.
The market is always shifting, however, so ensure that you constantly update your plan. After all, a great business plan is one that remains relevant and can guide you even in the later stages of your empire.
A market analysis is an opportunity for you to learn more about the house-flipping business. Another focal point of this section is getting to know the competition—how competitive is the market? What makes them competitive? Are there certain competitors to look out for?
Take note that getting into the flipping business without learning about it is one of the novice mistakes you want to avoid, so take your time with this section.
5. SWOT Analysis
“SWOT” stands for Strengths, Weaknesses, Opportunities, and Threats. Your SWOT analysis lets you gauge how you compare to the competition, identifying your relative performance in the market.
Let’s break down each letter and see what you should put within each section:
Referring to the infographic above, the guide questions show you what’s being asked for under each section. After the guide questions, the bullet points show sample information of what you input.
The SWOT analysis examines 3 factors: you, your competition, and the external factors of the area you plan to do business in. By having comprehensive knowledge of these factors, you can work smarter, and in turn, maximize your profits.
We’ve only scratched the surface of what goes in this section of a house-flipping business plan. If you want to take a deeper dive into the SWOT analysis, we’ll go into this in part 3 of the series!
6. Lead Generation & Marketing Strategies
Next, determine the best ways you can generate leads and market your business. We understand that this can be a challenge in the house flipping business, but try out these methods to get started:
Leverage Networking: Helping other real estate investors is a great way to keep your deals flowing. Pooling together resources can help you establish mutually beneficial relationships with other flippers and other real estate investors. Even if you have to split the profits, networking gives you consistent work while building your empire.
Drive for Dollars: There are many leads out there that can offer you profitable deals, and it’s just a matter of driving around and finding signs like “for rent” or “for sale.” These signs often have contact details of the assigned real estate agent or seller listed, where you can make direct calls to ask about possible deals. It’s also a great opportunity for you to build your network of agents.
Real Estate Agents: If you’re looking for a helping hand that has substantial knowledge of the real estate market, a real estate agent is your best bet. They can help you find leads, teach you the tricks of the trade, and get word of your house flips out in the market. Since these relationships are mutually beneficial, they can even become a long-term business partner.
These are just some lead generation and marketing strategies we found will be the most helpful for your house flipping projects, but you can use a mix of different strategies for more results. Remember to list down and define which ones you plan on using in your house-flipping business plan.
7. Finance Plans & Projections
You can’t do any business if your finances aren’t in order. So, will you be financing your house flip projects out of your own pocket or will you seek the aid of a lender? Because if you need funding, then it’s paramount that you earn their trust.
So, here’s what you need to include in this section:
Documents: Prepare all the necessary documents that show you’re financially able and responsible. You can include income statements, cash flow statements, and balance sheets.
Earnings: Tackle how much you expect to earn and how you will allocate your earnings. If you expect to earn $50,000 per deal? $75,000? Will you allocate 80% for future project funds? Will you keep 20% or less for yourself?
Budgeting: Although each project will come with its own set of repairs and touch-ups, it’s always good to have a standard budget as a guideline. You can list them out as percentages, so you show how you’ll stick to a budget and avoid over-improving properties to protect your profits.
Projections: Go over your business projections. Where do you see yourself months from now? What about 3 years after? Your projection should cover the next 2-5 years to give a clear picture.
Remember: One of the main reasons for making a business plan is to use it for getting approval on loans. So make it awfully clear how financially viable your flipping business is to earn others’ confidence.
8. Growth Strategy
We understand that it’s hard to think far into the future when you’re still getting your business off the ground. However, setting goals can keep you in line while showing future lenders, investors, and potential business partners that you are dedicated to building your house-flipping empire.
Here are a few examples:
Invest in Single-Family Homes: Single-family homes are a commodity that most types of buyers consider, so the pool of prospective buyers is larger. Opting for these kinds of properties increases your chances of closing a deal while lessening the effort you put out to gather leads and market the property.
Diversify your Real Estate Portfolio: Although house flipping is the main priority in building a house flipping empire, that doesn’t mean you can’t add other real estate ventures to your portfolio like wholesaling real estate, as it also starts with distressed properties.
Plus, if a flip looks like it’s going to flop, an exit strategy and an alternate venture you can consider are property rentals. In a nutshell, it’s all about diversifying the investments in your portfolio to secure growth.
Growing Your Capital Faster: Another way of looking at “growth” is looking for opportunities that can grow your financial capital quicker. By choosing and making the right investments early on, you’re on the fast lane to having more financial freedom, and in turn, the liberty to take on higher risks and higher reward projects.
There are more ways to ensure that your flipping empire grows. You can conduct more research to see what else you can do (and include in your business plan) so your vision is both short- and long-term.
9. Exit Strategy
Considering that your house flip project can flop when you’re just starting out can be discouraging, but having an exit strategy can be a lifeline to saving your investment. Rather than looking at it as a backup plan for failure, see your exit strategy as a “Plan B” for you to turn a profit—whatever happens.
So, identify alternative ways where you can get a return on your investment. Here are some you can consider for your house flipping business plan:
Slash Your Price: Lower your price if you’re pressed for time. If your flip seems like it’s going to flop, lowering your price can effectively heat up the market again. Even if it’s not as high as you expected, you can still walk away with some financial gain.
Tap a Different Market: If your house flip isn’t picking up in the buyers’ market, tapping into a different market can be a viable option. Long-term rental can present itself as another business venture and a form of passive income.
Rent It Out: With a property flipped and ready for residency, an alternative to closing a sale can be renting it out. Apart from being an alternative way of getting a return on your investment, you can add rental properties to your portfolio. Having different avenues of income also helps with gaining the financial stability you need to grow your house flipping empire.
Your exit strategy should be the next most financially sound option that aligns with your circumstances, so evaluate your situation carefully before taking any action.
A Foolproof Plan for Flipping Success
Learning more about the business, strategizing growth plans, and planning exit strategies can provide you with the direction you need to move forward with your goals.
Apart from serving as your guide, your house-flipping business plan will also provide comprehensive information on all areas of your business for new investors, lenders, potential business partners, and other people might do business with.
Business plans aren’t just for you, but also for those who will work with you.
With all your bases covered, you are clear and confident in what you want to achieve and how you plan on achieving it. You’ll be well on your way towards creating a house-flipping business that won’t turn into an expensive, capital-depleting flop.
This is the second installment of our series on house-flipping businesses, so stay tuned for our last installment! And if you have any questions or specific topics you want to learn, let us know by dropping a comment below or getting directly in touch with our team.
Flipping real estate makes for a great reality TV show, but it can also be a lucrative investment strategy if you know what you’re doing. What they rarely show on screen, however, is the importance of having a business plan for flipping homes—one that we’ll provide for you in this article.
Read on for our house-flipping business plan template!
The Ultimate Business Plan Template: Planning for Success
The goal is to build a solid foundation that serves as your living roadmap for your house-flipping empire. Only when you have the goals and action steps in place can you put yourself toward investment success, attracting real estate investors, financial partners, and home buyers to work with your company.
Here are the 8 steps you need for a thorough house flipping business plan:
Step 1: Mission & Vision Statement
Start by creating your mission and vision statement. Change the following placeholders:
[Company Name] [what you do] [what you offer] to [who your customers are] with [your benefits, e.g., faster, more reliable, lower cost].
Here’s an example of a great house flipping business plan:
Flipping Fortunes finds, fixes, and sells fixer-upper homes to investors and homebuyers in the City of Detroit. Unlike other companies, we are Detroit locals and partners of Logical Property Management company that has been operating in the area for more than two decades.
Step 2: Products & Services
Next, list down all your company’s services and support each title with a short description. Here’s what it may look like for Flipping Fortunes, the fake house flipping business we used earlier:
Flipping Fortunes will provide these services for investors and home buyers in Metro Detroit:
Complete property restoration or renovation: Our team will scout, inspect, budget, and manage property flipping projects from start to finish. Home buyers and property investors can then purchase affordable, quality homes at a fraction of the cost of a newly built home.
Professional assistance for house flipping projects: Our team will help real estate flippers and DIY home flippers with everything they need to complete their flipping projects, including connections to professional inspectors, licensed contractors, and experienced real estate agents.
The more details you can add, the better. After all, interested real estate investors and financial partners will want to know everything your company can provide for them before engaging and signing the dotted line with you.
Step 3: Management Team
In this section, you want to explain more about the “who” of your business. Is your team composed of knowledgeable and experienced real estate experts who’ll live up to your company’s promise?
Here’s a quick example:
John Doe, CEO: Licensed real estate broker and property manager for the past two decades. Doe began as a real estate wholesaler before spending most of his career working with several agencies and property management companies. In all of his ventures, he always specialized in house flipping projects, having now flipped more than 250 projects.
Be sure to include each individual’s expertise, experience, knowledge, and everything else that can prove their capability and solidify their role. The higher you can lift your team members, the more trust you’ll gain as a company.
Step 4: Success Factors
Next up, what needs or specific niche are you addressing in the particular real estate market? These things are crucial for getting financial partners to join your venture, convincing them you have a great business idea on hand.
Here’s an example of what a success factor could be:
Flipping Fortunes addresses the growing niche within the Metro Detroit real estate market. Our team opens opportunities for valuable fix-and-flop projects, making it easy for investors and home buyers to get their slice of the confusing yet high-performing hotspots in the tri-county area.
Pro Tip: You can also conduct a SWOT analysis to get a clearer picture of your strengths and weaknesses as a company.
Step 5: Target Market
As with any business, your house flipping company’s success depends on the supply and demand, as well as the cost of labor and value appreciation of the renovations. You don’t want to offer your services to a place that doesn’t need them.
Instead, your goal is to identify where you can “sell” most of your flipping services to a large market for many years to come.
Step 6: Business Entity
To operate your business legally, choose a business entity and register for your business in the state you’ll operate in. There are many business entity types to choose from, but we recommend that go with one that has limited liability protection, like an LLC or corporation.
Liability protection is crucial for a house flipping business, as there are many things that can go wrong. For example, someone can sue your company because of a property you’ve flipped—where you’ll want to ensure that your personal assets remain protected.
Pro Tip: Consult with a business attorney to learn your options and weigh them accordingly.
Step 7: EIN, Insurance, Permits, & Licenses
It’s also important to ensure that you have the required documents to run your business. Oftentimes, banks and private investors will want to see this anyway. After registering your business, go through the following processes before officially starting operations:
Register for an employer identification number (EIN), which you’ll use for tax purposes, applying for business loans, or apply for business bank accounts and credit cards.
Look into business insurance options, especially if you’re going to hire employees. You’ll need workers’ compensation, unemployment, and disability insurance. Moreover, research about general liability and commercial property insurance to protect your assets.
Obtain the property business licenses and permits for your state and scope of work. You might need to get several permits to work in the construction business. You can also check with your local chamber and business attorney to ensure that you have the complete paperwork.
Step 8: Financial Summary
Lastly, ensure that your flipping business will generate high returns—both for you and for your investors. Here are a few ways you can get financing:
Through friends and family loans: Also called Patient Capital, this is when you fund your projects with personal loans from family members, friends, or partners. It’s low stakes and an easier route than traditional bank loans.
Tapping into your 401(k): If you don’t plan on retiring soon, you can take a loan out of your 401(k)—either from the classic 401(k) loan or a ROBS loan.
Combining financing options: You can also find success in using several financing options to purchase and renovate your properties.
Start Flipping & Start Generating Profits
As your company grows, the projects will naturally increase in complexity and number as well. That is why having a business plan is important, especially if you want to attract investors. Your investors should see that you do your due diligence before putting any money on the line.
Have any more questions? Drop them in the comment below!
By buying valuable properties at a low price point, you can set yourself up quite well. The better the deal, the better margin for your fix-and-flip projects—but there is always risk involved in the house flipping business. From carpenters dealing with heavy machinery to construction workers on ladders…
A flipping project can be a hotbed for injuries.
For example, over 30% of yearly ER visits in North America—or about 9 million visits—come from people falling off ladders. With danger constantly lurking on your worksite, you’re going to want some protection. And flippers need specific insurance that covers their type of work.
In this article, we will talk about the types of insurance you need when flipping houses.
What Kind of Insurance Covers House Flipping?
No one ever plans on things going wrong while flipping a house, but they do happen. That’s why it’s essential to have the right insurance in place. But regular insurance won’t cut it for house flipping, and homeowner insurance won’t cover it, either, because it’s considered a high-risk environment.
So how do you get good insurance coverage?
Well, you need to look into 3 types of insurance:
Dwelling Policy
Builder’s Risk Policy
General Liability Umbrella
Each insurance covers a specific area, which we will discuss in detail.
#1 – Dwelling Policy
A dwelling policy is an insurance that covers a vacant property under renovation from physical damage. Attached structures like garages and porches are also covered. Unlike homeowner’s insurance, a dwelling policy doesn’t include personal belongings, only the structure itself is insured.
With a dwelling policy, your property is protected against damage caused by:
Fire
Lightning strikes
Heavy winds
Hail
Explosions
Vandalism
Theft
Vehicular accidents
However, depending on your insurance plan, things like vandalism might not be covered. We will talk about the type of plans in a later section.
#2 – Builder’s Risk Policy
This type of insurance covers physical damage to the property during the construction process. Like the Dwelling policy, it will protect a home from the same sources of damage. Generally, the builder’s risk policy can be thought of as an add-on to the dwelling policy.
However, a builder’s risk policy includes additional coverage for the materials and tools needed to repair the property. With a builder’s risk policy, you can keep your building materials and tools safe from damage.
#3 – General Liability Umbrella
This insurance can cover you and your investors from liability for accidents and injuries caused during your home flipping project. For example, if a carpenter gets injured while working on your property and sues you for damages, the general liability umbrella can protect you against financial losses.
But keep in mind: The general liability umbrella only covers you, but not the workers and contractors you hired. This means that if they cause an injury while on-site, they won’t have insurance to protect them against liability.
The Different Types of Coverage
When you buy insurance, it comes in different levels of coverage to choose from. A basic package might have minimal coverage while higher levels of coverage can protect you more.
Generally, there are 2 types of coverages you need to consider:
Basic coverage – This will cost less but will exclude protection from certain factors. For example, vandalism, theft, and water damage usually aren’t covered by a basic package.
Special form coverage – This protects you from all sources of loss except for explicitly mentioned sources that are indicated in the contract.
Depending on your situation, you might need more than basic coverage. For example, if your property is in an area that experiences heavy snowfall—like Alta, UT, which experiences around 457” of snowfall annually—you should definitely get the special form coverage.
How Much Does Insurance Cost?
Unfortunately, there isn’t a clear-cut answer as insurance costs vary by region and other factors. Also, insurance prices have no direct link to property prices. Plus, the status of the location usually determines insurance. For instance, If an area is more prone to natural disasters, it will have higher insurance premiums.
Let’s take Detroit as an example. The area is susceptible to heavy rains and harsh winters, so insurance is more expensive in Detroit. The national average insurance price is $1,312 annually; meanwhile, Detroit’s averages are around $2,237 per year.
In short, depending on the location, insurance prices widely vary.
Protect Yourself From Liability While Flipping Houses
Flipping houses isn’t all sunshine and rainbows. Accidents can happen while rehabbing a property. If you’re not insured, you might be facing heavy losses due to lawsuits.
To avoid losing money—money better spent on your flipping project—to lawsuits and damages, get yourself insured. With a dwelling policy, builder’s risk policy, and general liability umbrella, you can protect yourself and your property from damage and losses.
Do you have any insurance tips for house flippers? Tell your story below!
Getting better at house flipping can be an essential tool for becoming a successful flipper. Gathering info from books and other resources helps expand your knowledge in the flipping game. Plus, learning from experienced flippers can give you a huge leg up against competing flippers.
But, you don’t have to limit yourself to books. These days, Youtube is a great learning tool. In fact, 7 in 10 Youtube users use the platform to learn. And it goes without saying, that you can gain a wealth of real estate tips from Youtube.
To help you get an upper hand in the house flipping game, we’ve collected 5 of the best Youtube channels to learn from.
5 Best House Flipping Youtubers
If you’re tired of reading books on real estate, well then Youtube is a great resource for getting the latest and greatest tricks in the house flipping business. But, you don’t want to just learn from some random Joe Schmo. You want to learn from someone with a wealth of experience.
That being the case, we’ve sifted through Youtube’s content library to find the best house flipping channels.
Joining the platform in 2008, Lex Levinrad is a veteran of the Youtube landscape. Not only that, but he’s also a veteran of the flipping game. According to Lex, he’s flipped over 1000 houses throughout his flipping career. Currently, he has 17 thousand subscribers and has a total of over 2 million channel views.
The Lex Levinrad channel will help fill gaps in your flipping know-how. For instance, his video on flipping a fire damaged property. In it, he gives tips about the pitfalls of buying a fire-damaged house and what repairs to focus on.
With the Lex Levinrad channel, there’s always something new to learn about flipping houses.
The HouseBarons channel is run by brothers Dave and Rich. They’re quite successful as Youtube creators considering their channel has garnered over 13 million views in its 10-year lifespan. Add to that, the HouseBarons gathered a healthy following of over 38 thousand subscribers.
On the HouseBarons channel, you’ll get find a large vault of very specific tips and tricks. Take, for instance, their tutorial on fixing a faulty door. After all, creaking doors that open by themselves might be something you don’t want to show potential buyers during a property tour.
All in all, the HouseBarons Youtube channel can be a great wellspring of knowledge.
If you’re just beginning your journey in the house flipping business, the Real Estate Investing Tips for Beginners Youtube channels can be a great instructor. The channel has over 720 videos that cover a wide variety of topics for investing in real estate. It has just a bit over 50 thousand subscribers and uploads regularly.
The channel has a series of videos dedicated to house flipping. There’s even a guide for how to start flipping with just $10 if you’re on a tight budget. From house flipping to wholesaling, you can learn a ton of real estate tips from this channel.
Learning from experienced flippers is a valuable experience that can’t be replaced. But some experts forget how to talk to beginners and can drown you in jargon. Thankfully, The Friendly Flipper channel makes this easy. With over 130 videos dedicated to house flipping, you’ll learn a ton and it’s all easy to digest content.
The Friendly Flipper host a range of videos from interviews with fellow flippers to flipping progress vlogs. For instance, in his latest series of videos, you can follow the entire progress of a flip over the course of just 7 days.
When you subscribe to The Friendly Flipper, you’ll get a great guideline for flipping houses.
Finally, BiggerPockets is one of the biggest channels on this list. In fact, it has nearly 900 thousand subscribers to date. And with over 2.3 thousand uploads, you’ll have a lot of content to digest.
On the BiggerPockets Youtube channel, you’ll get the full breadth of what it takes to be successful in the real estate business. While the channel covers the entirety of the real estate market, it isn’t lacking when it comes to house flipping. For example, one of their most successful videos is a series that goes through the house flipping process from start to finish.
Between securing funding to looking for the right property, you can learn a lot from BiggerPockets.
Expand Your House Flipping Knowledge with Youtube
There are a lot of avenues to explore when it comes to learning about house flipping. From reading a book to listening to experienced flippers recount their journey, you can pick up tips from almost anywhere. With this list, you can easily turn on a video to learn a little more every day.
Follow these 5 channels, and you’ll gain enough flipping knowledge to gain an edge over other flippers.
House flipping is a highly competitive business that is only growing more cut-throat. With how much competition flippers have to deal with, how do you stand out and become successful?
The best way to gain a competitive edge is to educate yourself. You need to be constantly updated on the best house flipping practices and techniques to one-up your rivals.
Reading a book is a great way to learn the tools of the trade from professional real estate brokers. But, in this day and age, instead of learning from books or blogs, listening to a podcast is a better use of your time. You can listen to a podcast and learn the latest trends of the real estate market while working on your portfolio, cooking dinner, or driving to your next showing!
Here are some of the 5 best podcasts for some house flipping tips.
The 5 Best House Flipping Podcasts to Listen to
So, you’ve decided to look up some podcasts to expand your house flipping know-how, but do you find the best podcasts that can teach you the best practices of house flipping? To get you the latest developments in the real estate business, we made a list of the top 5 real estate podcasts that can help you become a successful house flipper.
1. 7 Figure Flipping with Bill Allen
In this podcast, Bill Allen shares how he and his team make 200 flips and wholesale deals per year. With 7 Figure Flipping, you’ll learn the tools of the trade from house flipping professionals, as the podcast regularly deals with the current trends of the real estate market.
Take, for example, in his recent episodes, “How Jesse Trujillo Flipped 60 Houses during COVID,” where Jesse divulges his experiences during the pandemic. In the episode, Jesse talked about how he had to adjust his business strategies to fit with the times and how the market is reacting to the changes in buyer spending habits.
What makes this show especially unique and appealing is its openness to bringing on beginners. For example, one recent interview was with a guest who recently completed their first successful house flip, and what they learned from the experience—perfect for beginner investors to get some valuable tips.
With the variety of topics this podcast discusses, you can expand your knowledge base of the real estate industry and can help you become a top house flipper.
Started as a conventional radio program in 1997, it’s currently one of the most downloaded podcasts on iTunes. Robert Helms and Russel Gray, cover topics like strategies to increase equity, lower property taxes and increase your cash flow.
Listeners can learn the latest and greatest real estate tips from experts who have already done it. With years of experience in their pockets, both Helms and Gray have the know-how that every flipper can learn from.
Take for instance their “COVID-19 Investing Opportunities series,” where they invite guests to discuss the current trends of the real estate market during the pandemic. With the wide variety of topics covered by The Real Estate Guys, every flipper will have something to learn from this podcast.
For people just getting into the house flipping business, this podcast is an ideal study partner.
The podcast delves into topics like how to acquire foreclosed properties and how to buy bank-owned properties. You’ll learn all the secrets to getting the best real estate deals. In interviews, you’ll get first hand stories from successful real estate investors who share their strategies for becoming a thriving real estate investor.
Lex also talks about the important topics that every real estate investor needs to know, like understanding rental property returns. The podcast also goes into more eclectic topics like why some of his real estate students succeed and why others fail.
All in all, by listening to the Investing in Real Estate podcast, you can learn some of the tricks of the trade that can assist in making you a successful house flipper.
Just getting into the house flipping business? Well, this podcast can help. Flipping Houses for Rookies will teach you some of the basics to get you started on your flipping journey.
By tuning in to Flipping Houses for Rookies, you’ll learn valuable topics like:
How to buy real estate without a loan
The necessary paperwork for flipping a property
How to find deals over the internet
Listen to this podcast for all you need to know before you get into house flipping. As the name says, Flipping Houses for Rookies is a great learning tool to get the ball rolling on your house flipping endeavors.
For those who already have some experience, Flip Talk is a great podcast seeking to help flippers grow their real estate business. The host, Don Costa, is a successful flipper who wants to impart his knowledge and teach you how to become the next real estate success story.
He interviews successful house flippers and other real estate investors about their tricks to making it in the business. For example, they recently invited 18-year-old Jacob Black, who is now the CEO of a seven-figure real estate company, to share his tips for growing his business.
If you want to hear from some of the biggest names in real estate—this show will help you level up and keep you coming back for more. Get an inside look at some of the strategies these big names used before they got where they are today.
To become a successful flipper, you need to have your thumb on the pulse of the market. That means you have to have in-depth know-how to avoid making your next flip a flop. And real estate podcasts are a great way to stay up to date and informed.
Even if you already have experience as a house flipper, you can always benefit from gaining more knowledge. With these podcasts, you can expand your grasp on the real estate industry and become a better house flipper.
Did we miss your favorite podcast? Feel free to leave a comment below!
To quote the founding father of the United States of America, Benjamin Franklin, “An investment in knowledge pays the best interest.”
When people learn more about the things they venture into, they can do it better. However, it’s also important to consider who you learn from. The better the source, the better your improvement. You want to learn from teachers with plenty of experience and successes in their careers.
But who are the “good teachers” of house flipping?
In this article, we’ll be talking about some successful flippers, their stories, and their valuable insights. With the right mix of information and inspiration, you too can follow in their footsteps. Read through the list below and find out who you should be following to step up your flipping game.
Mike Cantu
Based in Southern California, Mike Cantu runs a buy and sell operations, deals in wholesaling, and manages his own portfolio of rentals. As a successful figure in the industry, he aims to teach others through books he’s written: Don’t Get Voted Off Real Estate Island and Rental Management and Properties. Apart from books, Mike Cantu teaches through talks in Southern California’s investment clubs.
Being an established figure in the industry, Mike Cantu has reached a point in his career where he wants to help others find success. Although he’s made it now, he took over 30 years to reach where he’s at today. He has two bits of advice for people trying to find success in the business: First, always be eager and dedicated to learning. And second, believe that it’s possible.
According to Mike Cantu, by constantly showing up to learn and believing in yourself, you can find success in real estate. If you’re interested to learn more about Mike Cantu or his courses, find out more here:
A household name in the real estate community of Southern California, Nick Manfredi is the CEO of the Manfredi Group. He’s also an expert when it comes to buying and flipping, as well as a speaker teaching others about real estate.
Due to his accomplishments as an entrepreneur, he has even earned features in Fortune Magazine and Los Angeles Times. He’s well-established now, but he overcame many hurdles and challenges over the years to get there—all of which made him the experienced expert that he is today.
His advice for those starting in the business is to do business with experienced people. By doing so, you can learn the ropes as you work alongside the professionals. That said, this is your chance to “work alongside” and learn from one of the bests—check out Nick Manfredi’s pages online:
Apart from being a top house flipper, Danny Johnson is also a best-selling author. In fact, his book Flipping Houses Exposed was the number 1 best-seller on Amazon. And for those of you interested in reading it, it’s free! He also has a blog, FlippingJunkie.com, where he shares his stories and teaches people about the flipping business.
He started flipping houses in Texas and has now been doing it for over a decade. If there’s anything he wishes he could change early on in his career, it would be that he chose to flip houses he liked rather than flip the ones that investors would buy. His advice is to always consider the investor—not your personal preference.
To learn more and learn from Danny Johnson, you can click on the following links:
Husband and wife, Glen and Amber Schworm, started their flipping business in 2008. Fast forward to 2021, and they have bought, flipped, and sold over five hundred houses. On average, they flip about 38 properties a year! To teach and help others find success, they also host a podcast. On it, they talk about all the flipping business alongside other real estate investment tips.
Their top tip for those who want to make it big in the industry is resilience. As they tell all their followers, “Your mindset needs to be all about getting things done no matter what obstacle is thrown in front of you.”
If you want to keep up with Glen and Amber Schworm, you can head over here:
The last entry on this list is another unit, husband and wife Doug and Andrea Van Soest. Their story starts when they first read the book, Rich Dad, Poor Dad by Robert Kiyosaki. After being inspired, they started pursuing their passions. In 2008, they started flipping houses in Southern California, and eventually they went on to invest in rental properties as well.
Today, they have bought and flipped over 140 properties and have over 40 rental units. When they were getting started, they only had one thing in mind: Keep going. They believed that to become successful, you have to actively chase it and make it your reality.
For more about them and their podcast features, you can refer to the links below:
Before any of these people were successful, they all had to work their way up. But it’s not work alone that got them there—it’s the right mindset, perseverance, and resilience. Once you’ve mastered those key things, it’ll get easier.
By learning about some accomplished flippers and their insights, you’re already on the right path to finding your own success. You never know, one day we might be sharing your stories to inspire others as well.
Do you have another inspiring flipper in mind that you want to share? Let us know in the comments below!
As someone who flips houses, one of your objectives is to appeal to buyers so you can close a deal. To make this happen, you make improvements on the property. But, more often than not, novice flippers overdo the renovations and subsequently end up with lower profits.
They invest a lot of time and money only to have it backfire on them when they realize that they can’t sell it at a price that offsets their investment. In other words, they quickly notice that they’ve spent waytoo much. on something that the market isn’t remotely interested in.
In these cases, more isn’t always better.
Nevertheless, there is a solution to this problem. Read on to find out how you can improve your properties without falling into the common trap of over-investing in a fix-and-flip project.
5 Steps for Planning a Satisfactory Flip Project
Have you ever heard of the Goldilocks principle? The principle is based on the children’s fairy tale, The Three Bears, where Goldilocks is always looking for something that’s “just right.”
The moral of the story is to hit that sweet spot that’s not too much or too little. You can apply the same principle in a flipping project. Make just the right amount of improvements on a property so it appeals to more buyers, without spending too many unnecessary hours on it—or far more money than you should.
Here are 5 steps you can take to do this and increase your chances of success:
1. Assess the Property
Once you have a property in mind, you have to assess if it’s worth an investment. Here is a quick list you can use to get started:
Determine the After Repaired Value (ARV) based on the neighborhood
Determine the features of properties that sell quickly in that neighborhood
The property should have these main features that local buyers want
The number of repairs should be manageable, within your skill set or knowledge
Your quick evaluation budget should have at least a 10% margin of error
The ARV less repairs, less purchase price, should meet your profit criteria
If your prospective property meets the above criteria, the property you want is probably a good option for a fix-and-flip project. And it goes without saying that a comprehensive assessment of a property will help you determine the necessary improvements you’ll have to make.
2.. Study Properties in the Area
Do you have your eyes on a property already? Perhaps you’ve already purchased a property and are wondering how to make the most out of it?
Well, the next step is to conduct in-depth research to evaluate similar properties in the local area. We are referring to the properties that have similar features and price points to your home, so you’ll have a baseline to decide on what to improve in your flip project.
Scouting local properties is an opportunity to learn what buyers value. For example, here are some questions to answer as you assess properties competing for buyers:
Which rooms do they prioritize—kitchens, bathrooms, or living spaces?
What characteristics will make your property stand out from the others?
What features will make your property more valuable?
Are there building codes you need to follow?
By evaluating what’s already selling fast in the market, you won’t waste time and money on unnecessary improvements and your property will get the interest of a large pool of buyers.
3. Consult with a Professional
If you’re investing in an area that’s new to you, we suggest that you seek the help of real estate agents that have sold the most properties in that area. As local experts, they’ll be far more knowledgeable about what sells, at what price, and what to avoid.
In other words, they are your right-hand-men for insights on planning your flip project better. They’ll know what buyers are looking for and the exact things to improve to sell quickly—enabling you to make the right improvements that will make your property a hot item on the market.
Understand though, that you shouldn’t expect them to work for free – unless you want to ruin your reputation. So, you should either pay them for their time or agree to let them list the property for sale once ready.
4. Plan Your Budget
Based upon your research and feedback from area experts, you should have a renovation scope of work and now you’ll need to get bids for the corresponding pricing.
Be prepared for some unpleasant surprises! It happens. When it does, you may need to figure out where you can cut back in other areas.
Once you’ve finalized your budget, you’ll also need to stick to it. This is probably the biggest challenge! You can easily get caught up in “budget creep”, where you spend a few extra dollars here and a few more there, and don’t track these extras until completion. Then you get a nasty surprise that those dollars add up to thousands and ruin your projected profit.
Have a budget in mind of how much you can invest in your flipping project, including the acquisition cost and estimated repair costs (ERC). Only when you have these, can you find properties that fit within your budget and will give you the expected returns.
For example, you can use the industry-standard 70% rule in your budget planning. The 70% rule states that you shouldn’t spend no more than 70% of the after repair value (ARV) minus the costs of repairs on a property.
Let’s say your total budget is $100,000. You should then be on the lookout for properties that come out at around $100,000 after applying the 70% rule, which means the purchase cost shouldn’t go above $75,000 and the renovations shouldn’t cost more than $25,000.
Using the 70% rule helps you estimate the price range and renovation costs you can afford. That way, you only work within your budget for guaranteed flipping returns.
5. Do Only What’s Necessary
When you’re renovating a property to get it “just right,” you need to focus on the essentials. Keep in mind that you don’t have to go out of your way and make drastic improvements. As long as you cover what’s necessary, the property will be good to go.
These are what you to focus on when flipping a house:
Ensure that electrical wiring and plumbing systems are functional
Confirm that foundational factors such as walls, floors, and ceilings are in good condition
Make the house look presentable by conducting a deep cleaning and adding a fresh coat of paint
Also, take note to invest in good quality items that are reasonably priced. Splurging and overdoing these things is extra work you don’t need to do, but you do still have to show potential buyers that the house has durable, functional items inside of it.
Moreover, doing too many improvements can elevate the price of the property beyond the buyers’ budget. For example, having a glorious fountain with a group of goldfish in the backyard will only jack up the cost without adding any value for the buyer.
So, just like Goldilocks, you need to make sure the property is just right.
Conclusion
Going above and beyond won’t pay off in the flipping industry. Instead, focus on making the right level of improvements to increase your chances of a successful project that will give you the highest profits. As a real estate investor, financial viability will always be top priority.
Bonus
We recommend developing the knowledge to have a rough idea of renovation costs before offering on a property. You should find some example properties and develop a budget to renovate 2-3 sizes/styles of kitchens and baths. You should know about how much it costs to replace a window, exterior and interior doors, the cost of painting per floor plan square foot, what roofing costs per “square”. If you don’t know what something will cost, you should either have a contractor you can quickly contact for pricing or pass on houses that need that type of work until you can develop estimated pricing for that issue.
Did we miss anything? Let us know in the comments below!
Flipping a perfect house is a feeling like no other. After hours of fixing it up and giving the property a facelift, you can sell it knowing you’ll get back all your hard work. And you’ve given an old property a new chance to become a well-loved home again.
Then, you get to walk away with a sizable return on your investment, and get started on your next flipping project.
Flipping has been a real estate strategy for decades, but is gaining serious popularity with the success of shows like Flip or Flop. But, of course, these fixer upper shows only feature the ideal scenarios, enchanting the audience with all the benefits of house flipping.
But the reality is that flips are sometimes flops. It’s not always easy to sell the home at a good price, which defeats the whole purpose of house flipping for a profit. In fact, profit margins from house flipping fell by 3.2% in 2019 due to increased competition.
Nevertheless, the wind has shifted and we’re now seeing a huge increase in flipping profits. Home flippers are now garnering a massive average of 44.4% return on investment.
If you want to join in the fun and earn the highest flipping profits that you possibly can, read on to learn how you can price your home correctly and exit your investments with significant gains.
What to do After You’ve Finished Renovating Your Flipped House
So, you’ve gone through the process of renovating the house. You found a great property to work with, and all the renovations are complete. The next step is putting the property on the market and waiting for offers. But how, exactly, can you land on the perfect price?
Let’s take a look at some tips to price your flipped home according to its value.
Calculate the After Repair Value (ARV)
The after repair value—as the name implies—is the estimated value of a property after all the renovations are complete. For a house flip to be successful, you want this value to be higher than your total costs. You don’t want to have spent 80k for the house and 40k for repairs and renovations, only to have the property only valued at 100k. You need to have a good idea of your ARV in order to properly budget out your flipping project.
Having said that, there are two main methods to determine a property’s value.
The Comp Method: This method is the most common way to determine the value of your property. This method is preferred due to how simple it is to compute your ARV.
You can also have an appraiser evaluate comparable properties that have recently sold in the neighborhood and set a fair market value for your flipped home. Alternatively, you can also use Realtor.com or Zillow to get ballpark figures on comps.
2. The Income Capitalization Method: This method of determining a property’s value is only suitable for large properties such as shopping centers and apartment buildings.
Simply divide your net operating income (NOI) by the capitalization rate (cap rate) to land on the property value. The NOI is what you expect to earn from the property, while the cap rate is the sales value of similar properties sold recently
Unless you’re flipping a large property, you’ll most likely use the comp method to determine your ARV. Only large properties have to take into consideration an NOI. Such as when the building rented-out is at 100% capacity. For smaller properties, the simpler comp method is preferred.
What Makes a Property Comparable
Now that you know how to calculate your after repair value, let’s discuss the details of running comps. When comparing properties, they need to be of similar status. For example, comparing a 3-bedroom house to a 12-story apartment complex would be useless. A comparison needs to fall under certain standards.
The basic criteria you see below are the most important:
Property Size: Compare your flipped home to a property of a similar land and property area. The rule of thumb is to consider only the properties that fit within the range of 400 square feet smaller or larger than your property, and forget the rest.
Property Age: Examine recent sales of properties that are similar in age to your flip to get a good estimate on price.
Property Condition: Use recently remodeled or renovated houses that have similar conditions to your flip as a reference. Comparing your flipped home to another fixer-upper or a brand new, Class A home will only confuse your numbers—even if all other factors are the same.
Other Properties Sold: It’s important to know the value of real estate sold recently. The real estate market is closely linked with the economy and interest rates. Prices fluctuate so sales from more than half a year. If the market is volatile, keep the date of sale in mind when looking for comparisons.
Ensure that you stay true to the criteria you’ll determine, so you compare your property to only the ones that will help you determine the best selling price.
Disregard Outliers
When comparing recent sales, you’re sure to find some extreme or stand-out sales. It goes without saying that these outliers could have extenuating circumstances that altered their sales price.
For example, a large property could be sold for cheap if there were unusual circumstances that occurred on the property, like a crime happening on the premises. In contrast, a small house can sell for above market value because it comes with a lot of amenities, like a huge backyard, an indoor sauna or a pool.
When you are looking for sales to base your property’s price on, you need to eliminate these extremes. Only when you get the real average on sales of similar properties will you land on the best estimate of your flipped home’s price.
Here’s a sample list of what you may have after running comps:
House 1: Sold for $100,000 at 1000 square feet
House 2: Sold for $150,000 at 1000 square feet
House 3: Sold for $110,000 at 1100 square feet
House 4: Sold for $105,000 at 995 square feet
House 5: Sold for $70,000 at 1200 square feet
House 6: Sold for $120,000 at 1180 square feet
Both houses 2 and 5 are outliers in this comparison and should be disregarded when scouting for a comparative price. We may not know why they’re priced so differently, but we still don’t want them to have an impact on our end result.
Conclusion
House flipping is one of the most lucrative and resource intensive projects in the real estate industry. If you’re not well-versed with the investment strategy, you can end up with a huge money sink that’s burning a hole in your pocket instead of walking away with the promised, coveted gains.
Nevertheless, there is a solution to flipping with confidence. And that’s to master the art of pricing your flips correctly—earning you high flipping profits with minimal risks in the process.
If you need any additional tips in flipping a house, feel free to drop us a message! Our team of expert property managers are more than happy to help house flippers price their fix-and-flip projects.
