How House Flipping Works

The Basics

House flipping (also known as wholesale real estate investing) is a type of real estate investment strategy in which an investor purchases a property with the intention of selling it for a profit rather than using it personally.

Investors who flip properties concentrate on the purchase and subsequent resale of one property, or a group of properties. Many investors attempt to generate a steady flow of income by engaging in frequent flips.

What Type of Property Should I Consider?

Just like many other investments, you want to buy low and sell high. However, unlike investments such as stocks where you might adopt a buy-and-hold strategy, successful house flipping requires that you complete the transaction as quickly as possible to limit the amount of time your capital is at risk. Simply put, your focus should be on speed as opposed to maximum profit. Keep in mind that each day that passes with you holding the house costs you more money in mortgage payments, insurance, property taxes, utilities, etc.

You will first need to decide where you want to buy as well as what type of property you want to purchase. Fixer-uppers make a commitment to improve the home, which takes time and money. A foreclosed property bought in an auction, or from a bank, could prove to be a bargain on a vastly underpriced house. But remember that since the previous owners could not pay the mortgage, they probably could not pay for the upkeep, either. With a foreclosed property, you might have to deal with rodent infestation, structural damage, or a leaky roof.

When flipping comes to mind, most people immediately think of fixer-uppers and foreclosures, although it is possible to flip a house without doing any work on it at all. With a strong real estate market, flippers can buy new construction homes, hold on to them for a few months, then sell them at a profit.

Eight Steps to Flipping Houses

   1. Buy the home at the lowest possible price

   2. Estimate the total return after you buy the home, fix it up, and sell it, hopefully for a profit.

   3. Estimate the amount of work, and what budget is needed, to adequately renovate and upgrade the home, while still selling the home for a profit.

   4. Build your network of trusted contractors (general contractors, carpenters, electricians, roofers, plumbers, painters, HVAC experts).

   5. Know how to handle local coding and regulatory issues. Prepare for a load of paperwork and approval headaches.

   6. Stage and resell the home at the highest possible price, no matter how the local real estate market is faring, and be prepared to keep paying the original mortgage if you cannot sell the home.

   7. Handle the tax issues linked to frequent home selling - again, that means a lot of paperwork, and likely some time spent with a professional accountant.

   8. Repeat the process, possibly juggling half-a-dozen home-flipping projects in the course of a year if you want to make serious money.

Flipping homes is a team sport. Never stop building your professional network. Learning how to flip a house and doing your first deal can be stressful. Lean on other experts. When in doubt, get a second opinion, and perhaps a third.

Most importantly, just start taking these steps! Research and preparation will help you avoid mistakes, but remember that action that will create successful results and earn you profit.

Whether you want to learn more about investing in foreclosures, bank-owned properties and short sales, New Wealth Advisors Club can teach you how to be a successful Real Estate Investor. Click here to get started.