Real estate investors utilized a number of investment strategies. One strategy involves the performance of market analysis, placing offers, purchasing properties, taking care of maintenance and repairs that are called for, and turning it around to sell for a profit. This process of purchasing, rehabbing, and selling the property is called flipping a home. If you are interested in starting this type of house flipping business, we are here to teach you all about it, and how to find out if it is the right strategy for you. Get ready to discover How to flip a house.
The 10 Steps on How to flip a house
If your excellent business idea is ready to take off, you may need to register with the state and you are good to go. But there is more to getting the house-flipping business off the ground than that. We have compiled a list of 10 steps that you need to ensure that your new business is accordingly planned out, registered correctly, and legally compliant.
Step 1: Business Planning
The formulation of a clear and detailed plan is pivotal to any entrepreneurial venture. The plan is a road map that will assist in not only laying out the business’s specifics, it also helps to uncover a number of unknowns. Some vital points to consider in a business plan are:
- How much will it cost to start the business?
- How much will it cost to run the business?
- Who is the target market for its operations?
- What will the name of the business be?
- How much is reasonable to charge customers?
Those points may sound simple enough, but there is a lot of thought and preparation that goes into them. To help, we did a lot of the research and offer these pieces of advice for you to consider when setting up your business plan.
How Much Will It Cost To Start The Business?
To start a business the investor requires considerable capital, with costs that include purchasing a property, rehabbing it, compensating a broker, and other miscellaneous costs involved with the purchase and flip process. Beyond that, a number of fees need to be paid to maintain the business, with additional considerations for marketing costs to promote it.
How Much Will It Cost To Run The Business?
Those in the home-flipping business generally are responsible for paying closing costs, renovation costs, and various real estate feeds. Typically, only conventional home buyers reap the benefits of most home loans. Those looking to flip a home commonly have to pay a full interest rate amount and the capital gains on the sold property. Those homes that are held for under a year are taxed at a normal income rate, while those held longer, can incur taxes ranging from 0% to 20% of the normal income the flipper collects.
In short, the following are the typical business expenses:
- Property costs
- Renovation costs
- Broker fees
- Marketing costs
- Normal costs associated with business upkeep
Who Is The Target Market For The Business’s Operations?
An investor in the flipping industry works on both ends of the project’s spectrum. On one side is the owner of the property who the investor hopes to acquire the home from, and on the other end, the investor is looking to turn the property around to prospective buyers. The best type of seller, therefore, is one who is urgently looking to sell their property.
The urgency can stem from a number of factors including wanting to abandon a mortgage, move out expediently, and other factors related to varying financial stresses and burdens.
The investor approaches sellers, offering a mutually beneficial arrangement where there is a proposal to acquire the property from the seller to alleviate the source of the stress associated with its ownership. Once the property is rehabbed, it is then sold.
A buyer of the flipped property is generally someone looking for that particular property type for purchase. It could be another investor. The flipping investor would prefer to target well-funded buyers, as they are the likeliest to make strong purchase offers, completing the “flip.”
Many personal buyers (those looking to make the flipped property their primary place of business or residence), are the primary targets of the sale. Their personal attachment to properties makes them especially attractive to investors as they are more likely to spend more money to acquire the property they are after.
How Is Money Made With A House Flipping Business?
After purchasing the property and rehabilitating it, the investors sell it for profit. Experienced investors will select their investments based on their profitability without market appreciation being a factor. There is a formula that is used to calculate the buy-and-flip investors’ profits:
Sale Price Of Property – (Purchase Price + Rehab Costs + Auxiliary Costs) = Profit
If a property is purchased for $50,000, for instance, and it takes $30,000 to rehab it, the total cost of the property is $80,000. If the investor then sells this property for $150,000, their profit is $70,000.
Investors in this sphere operate by a few key rules, chief among them being that when a property is flipped, the money is made at the purchase point. This means that purchasing properties with the expectation of a market value and rehab will justify the investment is not a wise plan. Therefore, the ideal purchase is one which is significantly below the current market value, allowing ample return on investment after rehab, commission, marketing, and other auxiliary costs are accounted for.
How Much Should Buyers Be Charged?
Investors determine how much to charge buyers for a property based on prices consistent with the prices of other properties in the area. While those prices are certainly subject to change, the sale can be done for more if the buyer’s offer is over the asking price.
How Much Profit Can Be Generated From A House Flipping Business?
The amount of profit generated correlates directly to how many properties are sold and the return on investment these sales yield. Once established, home flippers can generate profits to the tune of hundreds of thousands annually. In fact, just 5 sales of $100,000 homes with a 20% profit, already place an investor into the six-figure range.
How To Make A House Flipping Business More Profitable?
The methodology for house flipping is simple: purchase homes at as low of a cost as possible, then “flip” them for maximum profits. The wider the gap between the expenses and revenue, the higher the profit that the investor takes home. One strategy used by investors is to hold onto rehab properties for a bit before attempting to flip them. The property can be rented, allowing the investor to collect payments for some time, allowing the flip to make even more money from the investment down the line.
What Should A House Flipping Business Be Named?
This may sound like the easiest part, but it’s actually one of the hardest. If your business doesn’t already have a solid name, or you don’t have one ready, you can visit a number of “how to name a business” guides or house-flipping business name generators online.
If your business is operated by you as a sole proprietorship, you may want to consider not naming the business after yourself. You also want to make sure that your idea for a name isn’t already in use. This can be confirmed by researching the name through state business records, trademark records with the state and on a federal level, availability of web domains with the name, and the social media presence of companies using the name. Once you know you can secure a domain name (Namecheap), it is important to do so quickly in order to lock it down.
Step 2: Set Up A Legal Entity
Assuring that your business is protected from personal liability if your business encounters lawsuits is to list it as a corporation or an LLC, though other typical business structures included partnerships and sole proprietorships.
An LLC can be started with only nominal LLC costs, or you can hire an LLC service for a higher, though still moderately low fee. It is always a good idea to secure the services of a registered agent for the LLC, though some opt to act as their own. Many LLC formation packages with registered agent services include a free year of the service.
Step 3: Get Tax Registrations In Order
Before opening a business, you need to register for an array of federal and state taxes. To do this, you will need to receive an EIN. The good news is that it’s free and simple to do. And EIN can be obtained through the IRS website, by mail, or via fax, free of charge.
Small Business Tax Considerations
Your business’s tax options will depend on which business structure you select. Some LLCs, for instance, can be taxed as an S corporation. Your business might also be subject to specific state taxes. You can find out more about it by consulting an online guide about franchise and state sales tax policies.
Step 4: Open A Bank Account And Credit Card
When you are investing in a business, you have to protect your personal assets. Therefore, personal and business assets should always be kept separate. Your vehicle, your home, and other valuables should never be reliant on your business’s success. If your business gets sued, your personal assets remain out of legal bounds. This is commonly known as corporate veil piercing.
Educating yourself about building business credit can be helpful in acquiring various financing for your business, including the acquisition of credit cards. The cards would be in the business’s name instead of yours, allowing them to be qualified for higher credit lines, better interest rates, and a host of other essential perks.
By opening a business bank account you detach your personal assets from the company’s. On top of that, it makes filing taxes and performing a host of accounting duties far simpler. One of the most popular business credit-building strategies is opening a net-30 account, a term that refers to an arrangement of business credit in which the vendor is paid by the company after 30 days of receiving the acquired goods and services. This is particularly helpful when businesses may not have cash on hand but need money quickly.
More importantly, these accounts get reported to the big credit bureaus including Experian Business, Equifax Business Credit, and Dun & Bradstreet. By setting up these essential ties, businesses begin to be able to qualify for additional lines of credit and credit cards.
In terms of credit cards, it is important to open one specifically for the business. This is another means of walling off your business expenses from your personal ones, and it helps to keep the business purchases and fees in one place. This also helps raise money for additional investments later, as it builds a business’s credit history.
Step 5: Set Up Business Accounting
It is very hard to gauge how your business is doing without keeping tight records of various expenses and income sources. These are imperative to understanding a business’s financial performance, not to mention it makes things much easier during tax season.
Step 6: Acquire All Necessary Licences And Permits
Few things are as harmful to a business more than not obtaining all of the proper licenses and permits, as failing to do so can not just result in devastating fines, it can result in the shuttering of the entire business. The operations of a house-flipping business require a number of licenses and state permits. To acquire information about the necessary qualifiers, you can check with the clerk’s office in your city, town, or county, or consult the local business resources from the US Small Business Associations directory.
Broker’s Licence
Those planning on selling the properties on their own, need to obtain a broker’s license, the requirements of which vary based on the state of operations. This typically involves the prior obtainment of a real estate agent’s license, various coursework, a set number of workplace hours, and the passing of a broker’s licensing exam. All of the information should be available in your town, city, or county’s clerk offices, as well as from the US Small Business Associations directory.
Service Contract
Customers should be required by real estate investing companies to sign service agreements before any project can get off the ground. The agreement needs to spell out what the customer expects from the project. More importantly, it clarifies the details of the business transactions including terms and conditions, expectations of service, and future property ownership.
Step 7: Obtain Business Insurance
Alongside necessary permits and licenses, a business’ lawful and safe operations require the obtainment of business insurance which serves to protect a company’s financial well-being in case of losses that the insurance covers. Every business has a different risk level, so several insurance options are typically offered for various business types. If you are not certain of your business’s risk types, you can start with General Liability Insurance.
This is a great place to start your business’s insurance as it tends to cover the common necessities of a business. Workers’ Compensation Insurance is another popular policy. This protects financial losses from an employee getting hurt in the workplace. Most states require businesses to carry this as a condition of operation.
Step 8: Defining Your Brand
In a business, your brand is everything. It is the face of who you are, and how others perceive your business, and it is one of the most pivotal points in distinguishing you from competitors. A brand is generally identified by a business logo. You can consult a beginner’s guide for helpful advice and tips in creating a logo unique to your business if you are not sure where to go with it.
Promotion And Marketing In A House Flipping Business
Some house-flipping investors elect to work with wholesalers who will find potential deals for them. But wholesalers need to know about the business to consider making purchases from it, so investors need to market their business to them. They can do so through a variety of marketing methods including networking, social media, and of course, digital and traditional print marketing.
It is important to keep in mind that a wholesaler isn’t the same as a broker, who can advertise via MLS (multiple listing service), a fantastic marketing tool for real estate ventures. Unfortunately, it isn’t available to every type of business.
Customer Retention
By establishing a reputation as a reliable house flipper, a business can more easily sell homes in the future. Once people associate the brand with quality work and longevity, the likelier it is that homes sell for the price the investor is asking.
Step 9: Building A Website For Your Business
Armed with a brand and a logo to pair it with, the next step is to create a website for the business. Many investors are intimidated by this step because they believe it to be out of their technical capabilities. However, within the last decade web building technology has come a very long way, and the significant advancements in it, have made website building a very simple process.
Some investors wonder if websites are essential. There is simply no doubt about the fact that no website is a non-starter. This is a part of the process that should in no way be put off the back burner. To put it bluntly, it is hard to be considered a legitimate business without a website in this day and age, irrespective of your business type, industry, or size. Many utilize LinkedIn or Facebook for business websites, but these social media accounts are not substitutes for business websites, they are just helpful supplements.
There is no excuse for not building a website, especially when considering that there isn’t even a need for hiring a web designer or developer to create a terrific one. Tools like Bluehost’s Website Builder, Weebly, Squarespace, Shopify, WordPress, WIX, and others make it very simple for anyone with even very basic tech experience. By observing guides for business website building, even a novice can have a powerful website in under 3 hours.
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Step 10: Set Up A Phone System For Your Business
One aspect that is far too commonly overlooked is the establishment of a business phone number. It is one of the best ways to draw a curtain between your business life and your personal life, allowing you to keep the latter private. Beyond this, it helps to automate your business, making it easier for prospective clients to find ways to contact you. Setting up phone systems can be done through a slew of different services, and entrepreneurs use them all the time.
How Do You Know If The House Flipping Business Is Right For You?
Each investment must have a good amount of time dedicated to it, so investors who are the most organized and committed to the projects tend to perform the best. For this to be the case, an investor requires a solid understanding of local real estate markets to enable good decision-making about investments.
What Is A Typical House Flipper’s Day Like?
An investor in the house-flipping business needs to learn the market value of properties, purchasing them, the process of rehabbing them, as well as the marketing and sales end of the process. Many tend to spend most of their time and effort focused on the property rehab portion, but this is far from the only area of focus a solid inverter needs. Additionally, a house-flipper needs to:
- Scour a variety of listing services and off-market properties that are available for purchase
- Secure finances for purchases by working with private, traditional, and hard money lenders
- Collect real estate wholesaler listings
- Make property offers
- Close made offers
- Build a listing of reliable contractors
- Rebab properties including in terms of structural, electrical, HVAC, and landscaping aspects
- Put the properties on the market
- Collect a list of title companies to assure that the title is insured and valid
- Establish relationships with real estate brokers to help facilitate property sales
- Conduct property sales
Where the house-flipping investors spend their time primarily depends on the state that investment is currently in, but none of these responsibilities are of lesser importance than others.
What Type Of Experience And Skills Help To Build A Profitable House-Flipping Business?
Patience and great planning skills are essential for buy and flip investors. Flipping homes is expensive and time-consuming, so it is essential to have the temperance to wait for the investment to pay off. Another key attribute is to possess a good understanding of the market in the area of house-flipping. Many buyers overpay for properties erroneously, so a good investor should be savvy enough to ensure a successful investment.
Additionally, investors who flip homes have a network of contacts, since networking is essential for finding reliable people during various stages of an investment process. These contacts include reliable lenders, brokers, electricians, contractors, and so on.
Learning about building repairs is also important. Many repairs are difficult to perform, so scheduling can be difficult to align to accommodate all of the parties involved in the rehabilitation process. If certain parts need to be done, but they require waiting, knowing how to conduct certain repairs yourself will save time and money.
How Much Growth Potential Is In The House Flipping Business?
The only limitation of a house flipping business is how many properties there are to flip. Many investors funnel many of their profits into purchasing more expensive properties, then flipping them, leading to even higher profit margins.
Taking The Next Step
There are some additional steps that an investor can take to help elevate their house-flipping business to the next level.
Acquiring A Business Mentor
Entrepreneurs have eagerness and drive, but what they often lack is experience. For that, it is very helpful to find a quality business mentor. Find a nearby business resource that can get you the help you require in areas you may not yet have sufficient experience. This also connected investors into a support network that can be a lifeline, particularly in tough times, which most business owners encounter at one point or another.
Assistance Resources For Women In Business
The house-flipping industry is always adding people to it, with many new female entrepreneurs. There are a lot of resources to help women succeed in these ventures on professional and personal levels. These include funding, events, support, and guides. Startup Savant has a great Women in Business series to check out for those looking for some great entrepreneurial guidance.
Are There Any Good Insider Tips For Starting A House Flipping Business?
One of the best tips for house-flipping investors is to flip multiple properties, though it is important to know that this opens one up to more potential personal liability. Therefore, establishing an LLC is a vital step in protecting yourself and your business. In fact, some investors form an LLC for every purchased and flipped property, creating a legal barrier and separation between different flip projects. Therefore, if a lawsuit arises for any property, it will be against one LLC, avoiding all others.
Building A Team: How And When
A team of experienced, reliable contacts is pertinent to a success of a house-flipping business. The team should include investing partners (unless the investor is self-funding the business), wholesalers to assist with gathering leads, brokers for property sale assistance, as well as general and specific niche contractors that will take part in the rehabilitation process. Not every project needs to, will, or can use the same contractors, but the larger the team, the more resources an investor has to tap into when projects come up.
Frequently asked questions:
do i need a contractors license to flip houses?
Yes, in most states, you need a contractor’s license to legally flip houses. This license ensures that you have the necessary skills and knowledge to perform the required construction work. Without a license, you may face legal penalties and fines, and your ability to obtain financing or insurance for your house flipping business may be limited.
can you flip a house with a conventional loan?
Yes, you can flip a house with a conventional loan. However, you will need to meet the lender’s requirements for approval, including a good credit score, a low debt-to-income ratio, and a significant down payment. Additionally, conventional loans may come with higher interest rates and stricter underwriting guidelines than other types of loans, so it’s important to do your research and compare your options carefully.
I’m Thomas, founder of Genie Dollars, a platform sharing proven strategies for making money online. With experience in affiliate marketing, print-on-demand, and freelance writing, I aim to inspire and guide others toward financial freedom through online entrepreneurship.
