House flipping has become a buzzword these days as more and more people are becoming interested in this avenue of real estate. It can be an exciting opportunity for enterprising investors who are ready to work hard and those who are looking to start a new business in real estate. What exactly is house flipping? Essentially, it is the process of a real estate investor buying a home and then selling it for profit. The two main strategies here are either buying low and selling high, or buying the home and then renovating it and selling it at a higher price. While this may sound simple enough at face value, there are some risks associated with house flipping. Which begs the question, is house flipping a good business model? Here are some essential tips for making a house flipping business successful, along with a few mistakes that you can learn from.
Create A Business Plan
The first step on your house flipping business journey should unquestionably be to create a solid business plan. Not only will this help you keep your business on track, but it will also help you to understand everything involved with house flipping. It should start, as most business plans do, with a summary of what you’d like to achieve with your house flipping business, which includes your mission and vision. Your business plan should include an estimate of what kind of profits you could make and what the demand is. Many small businesses aren’t successful due to a lack of demand, so this section is extremely important. When it comes to house flipping, your business plan should indicate the amount of funds you have available, what you’ll need for house flipping, and what you expect to make in profit. If you’re looking at financial solutions like short term loans, make sure to include the hard money interest rates in your plan. Essentially, the business plan should answer any questions potential investors could have about why they should invest in your business.
Choose The Right Business Structure
In order to flip houses, you’ll need to register a business in the state where you’ll be operating. There are a host of business entities to choose from, but it’s a good idea to choose an entity where you can get limited liability protection. This means that if your business incurs legal liabilities, your personal assets will be protected. An LLC (Limited Liability Company) or a corporation both offer limited liability protection, so these are good options for a house flipping business where there are many variables and things can go awry. However, it’s best to consult with an attorney to make sure that you’re registered as the entity that best suits your needs.
Select the right team
Once you’ve made it legal, your next step is to network. You’ll need various different people to help you flip houses, so the more resources you can get, the better. Selecting the right combination of contractors and suppliers can make or break your projects, so picking the right people is essential. Make sure that your team all have portfolios of work that you can see, with positive references and feedback from projects that they’ve done before. Your team also includes business partners, investors and even project managers, if you don’t want to manage each project yourself. Also, don’t forget to include legal counsel in your team, this may come in handy when you’re making major investments. Assembling a good team can help you grow your house flipping business quicker, because you’ll have people on hand that you can rely on for future projects.
Remember the 70% rule
The idea with house flipping is to maximize the return potential on an investment, while minimizing your financial risk. A common way to do this is by using the 70% rule. This rule states that investors should not pay more than 70% of the ARV (After Repair Value) of the property minus the costs of any renovations or repairs that need to be done. This rule will help you determine the maximum amount that you should be paying for an investment property, and therefore minimize your financial risk and maximize your profit. Bear in mind, this requires that you correctly assess the property’s ARV and cost of repairs or renovations.
Ensure Legal Paperwork And Compliance
Flipping houses legally involves some technical legal procedures. Aside from registering your real estate flipping business, you also need to ensure obtaining the necessary legal paperwork and compliance with real estate business laws.
While many states don’t require business permits when flipping houses, having them provides house flippers a competitive edge. The same is true for contractor’s licenses. So, it pays off to seek a business permit from the state where house flippers plan to conduct their business. By doing so, they can quickly gain the trust of potential buyers.
House flipping investors should also obtain an employer identification number (EIN) for loans and tax purposes. EIN is a legal requirement that can help you quickly get approved for a funding option you choose. Moreover, if you plan to hire employees, you must get commercial property and general liability insurance. By doing so, you can protect your real estate business and assets from liabilities when something goes wrong during your flipping project.
In addition, the transfer of title must follow a legal process too. Interested buyers can take advantage of conveyancing services to ensure the proper preparation of all legal documents for property transfer. A conveyancing firm can help process the property’s transfer of legal title to the new owner. In that way, investors can quickly flip houses and increase their revenues.
Dos and don’ts…
Do your homework before you set foot into the house flipping arena, not only is it important to have a good understanding of the real estate market in the area that you’re entering, but it’s also a good idea to know the ins and outs of property buying and selling. Flipping houses isn’t as easy as improving the curb appeal of a home and making a profit, so patience and knowledge are important in this type of business. Make sure that you don’t make rash decisions without enough knowledge, as these are most likely to land you in hot water. Take your time with decisions, renovating and flipping houses takes months, so if you’re not prepared to wait, then this may not be the business for you. One of the biggest mistakes that people in the house flipping business make is not doing enough research. To be successful, you’ll need to know how to pick the right properties, what the right price should be and where they should be located.
We hope that we’ve managed to give you a little more insight into the house flipping segment of real estate, so that you can make up your mind and answer the question for yourself… is house flipping a good business model?