Thanks to the various house-flipping shows on TV, many people are intrigued by the thought of earning their living by improving homes.
If you’re one of them, you should be aware that starting a house flipping business requires lots of hard work. No matter how easy it might look on TV, the reality is quite different. However, that doesn’t mean you should get completely discouraged – building a successful house flipping business is still possible. You just need to be well prepared and ready to work hard.
To help you out, we’re sharing 5 essential tips to help you start a house flipping business.
Why Should You Get Involved in House Flipping?
You probably already have a general idea about what house-flipping involves but let’s go through the basics one more time.
A house flipper buys a property at a low cost, then he renovates the property and resells it at a higher price.
One of the main reasons why people decide to enter the house-flipping industry is the potential for profit. If a property is bought and updated at a low enough price and then resold at a significantly higher price, there’s a possibility to earn thousands of dollars per property.
For instance, if you buy a property for $100k and invest $20k to replace floors, countertops, cabinets, and other cosmetic repairs, you’ll be able to resell it for $140k. You’ve invested a total of $120k in the property, so you earn $20k from this flip!
5 Tips to Help You Start a House Flipping Business
Write a Business Plan
A business plan is basically a roadmap for your house flipping business: it evaluates the competition and the industry in general, outlines your business goals, includes financial projections, etc.
Having a business plan is also vital in order to obtain funding. Flipping properties requires capital that can be obtained from investors, traditional lenders, or other sources. Your business plan will demonstrate that you know exactly what you are doing, that you are well familiarized with the industry and the competition, and that your chances for success are solid, which would mean a lower risk investment for lenders.
Set Up Your House Flipping Business
At a minimum, setting up a business involves the following:
- Choosing a legal structure. As a quick summary, a legal structure for any business can take the form of sole proprietorship, partnership, corporation, or LLC.
- Registering your business name with the state in which you will operate. Depending on the chosen legal structure, additional paperwork or fees might be required.
- Setting up a business bank account in order to keep your personal and business finances separate. This account will come in very handy when tax time comes.
- Acquiring the necessary permits and licenses. For instance, if you decide to operate in an office that is outside of your home, you’ll need a general business license and business insurance. In addition, you’ll need insurance and permits for every house you flip.
Taking these four crucial steps will allow you to legally operate your house flipping business, determine how you will pay taxes, and give you credibility with investors and lenders.
Find and Secure Funding
Chances are, you probably don’t have enough cash to buy and flip your first property. This is a normal situation in any business, that is why business owners turn to investors and lenders to get the capital they need to start, run, and grow their business.
There are several funding options for house flippers. Which one you choose will depend on a number of factors, including your credit history and time in business.
Not all types of funding will be suitable for your business. For instance, if you have a low credit score, hard money loans might be a good option for you.
If you have been in business for a few months, you might need a more flexible funding option. In this case, you may qualify for a business line of credit.
It’s also possible to use traditional home loans to flip a house (for instance, if you have significant equity in another property or you have experience with successful projects in the past). In that case, consider using the services of a mortgage broker Los Angeles. Mortgage brokers manage the entire process for you by applying for loans with different lenders, looking for competitive interest rates, and negotiating the terms.
You can also consider bringing a business partner on board or even launching a crowdfunding campaign.
Once you apply for funding, ensure that you understand the interest rates, fees, and terms, associated with your financial product. Take into consideration a number of options in order to find the best offer for you.
Connect With Other Professionals in the Industry
Connecting with other professionals in your industry will help contribute to the success of your house flipping business.
For instance, you will definitely need to find a team of contractors to help with the renovation works. Besides completing the renovation works, contractors are also familiar with the required local permits and licenses, which might also be very helpful.
When choosing the right contractor, take your time to find a reputable one who has enough experience and works with your budget. If you are new to the house flipping industry, collaborating with a reputable contractor can even help you score hard money loans from investors.
Another professional that you need on your team is a real estate agent. Realtors have access to resources that will be essential for your business, like properties on the multiple listing service and prospective homeowners that might be interested in buying your renovated properties. A real estate agent can also help you market and sell the flipped properties.
Finally, you’ll also need an attorney who specializes in real estate. There are certain legal issues in house flipping that should not be overlooked because they might hinder your deal or even hurt your reputation in the industry.
Flip Your First Property
Finally, it’s time to choose a property and start the renovations. Work through your timeline and budget with your contractors and look at comparable properties when determining what kind of renovations are necessary. For instance, if recently sold houses in the same neighborhood have updated floors, add ‘changing floors’ to your renovation list.
If your budget allows it, think outside the box. For instance, see if there’s an option to convert unused areas of the house into living spaces. Depending on the property size and building code restrictions (your contractor can help you with this one), you may be able to add a dormer loft or even a second storey atop the existing structure. Just be sure to do the math properly to avoid any financial losses. For example, if you decide to add a dormer loft, think whether the cost of dormer loft conversion is worth your while.
Finally, expect the unexpected. You should be prepared for additional expenses or missed deadlines but don’t worry – it happens even to the most experienced house flippers.
Once the renovation is complete, it’s time to put the property on the market. Then, once your realtor has helped you find a buyer who is interested, work with your attorney to ensure everything goes smoothly.
If the amount of your sold property exceeds what you’ve invested – that’s pure profit.
Obviously, house flipping isn’t easy, regardless of how it looks on TV but if you are ready to work hard, it may turn out to be quite rewarding! Once you flip your first few properties and get a grip on it, you will find that everything gets easier, just like in any other business.
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