Figuring out how to flip a house today is a much easier process than in the past. After all, buyers are back in many markets and prices are either stable or, in many places, increasing. However, with prices going up and debt still hard to source, the market is not without challenges. Here is a process that can help you figure out not only how to flip a house but also choose which one to flip.
- Identify markets that are attractive to first time homebuyers but are occupied by older homeowners. These neighborhoods frequently have low prices and properties that are fundamentally sound but in need of cosmetic upgrades.
- Calculate the cost to buy an existing home in need of upgrades. Add in the cost of making the upgrades and of sourcing private mortgage financing. Since banks are still not active in most investment property markets, private money may be your only choice. Given that private lenders will sometimes lend on an as-improved value and can also execute very quickly, they are frequently also the best deal out there even if you can find bank financing.
- Project what your net proceeds after flipping the property to a homebuyer. To be safe, subtract 5 to 10 percent from your expected net proceeds, just in case something goes wrong.
- Subtract all of your costs from your adjusted projected net proceeds to see if the project can be profitable.
- Move forward with the transaction if you can meet your profit expectations. When you calculate your profit, don't look at the total purchase price and the total sales price. Look at the cash that you will put into the deal and the cash that you will take out after a successful flip.
Given the new found stability in the market, doubling or tripling your down payment is probably unlikely today. However, returns in the neighborhood of 30 to 60 percent are possible. A healthy return like this can help you build your equity account so that you can return to the market with a different problem -- figuring out how to flip a house in two or three different neighborhoods at once.