Congratulations on your decision to begin flipping houses.
For this post, when we speak of flipping houses, we are talking about buying a property at a discount, adding value and reselling for a profit.
If you have done any reading on this topic, you know that different flippers have different strategies.
Some guys like to buy a house, live in it and flip it in order to avoid capital gains tax.
Some guys like to buy a house, make the repairs themselves and sell it.
Others like to buy a house and outsource the labor to turn these properties over faster.
No matter what strategy you decide to use, these tips will lead you to a nice profit, whether it is your first flip or your 100th.
We have all seen these house flipping TV shows, where these flippers make a ton of mistakes, come across a tremendous amount of unknown issues and still some how churn a large profit. This makes for nice TV, but it is not part of any reality that I have ever dealt with.
When you first start out flipping houses, you have to understand that any profit that you make is a win. What you are gaining throughout your first couple flips is invaluable experience. The more houses you flip, the better understanding you will have of how you need to plan, the tools you need and the relationships you need to build in order to begin earning larger profits on your next couple projects.
As with any business, there is a right way to do things and a wrong way to do things. Here are the tips we recommend to make your house flipping business a success.
1) Marketing & Prospecting
No matter what business you are running, your ability to market and find high quality leads will determine that business's success. This business is no different. This is said to be the most difficult part of house flipping. Your ability to find properties at a deep discount that involve repairs that you or your contractor are comfortable doing will have a big impact on the success of your business.
If this is your first time flipping houses and you are unfamiliar with the industry, we recommend partnering up with someone who has done a couple successful flips.
There are several different ways to market and prospect. This is the part of the business where you need to get creative and test strategies that your competition may not be doing. Here are some ways to begin prospecting and marketing:
Inbound / Digital Marketing
Direct Mail
Flyers
Bandit Signs
Radio
Commercials
Social Media Advertising
Craigslist
Driving For Dollars
MLS
Word of Mouth
Networking
Brochures
Door Knocking
Cold Calling
Find out what strategies fit your personality. Test these strategies and iterate off of them. It will take time to find out what works within your specific market.
2) Nurturing & Customer Service
The reason that we market and prospect is to get our phone ringing. Once we accomplish that feat, our job is to make these potential leads comfortable to work with us. As we all know, the business of real estate investing has a bad stigma around it. Several potential leads that you work with will think that you are a scam artist.
Each piece of marketing that you send out will result in a potential lead entering your sales funnel. The marketing piece that these potential leads called from, will determine where in the sales funnel they currently stand. This will tell you how to nurture this lead and what information you need to get into their hands to move them through the sales funnel.
Customer Service is a high priority in this business. You need to be upfront and transparent from your first touch point with the client all the way through to closing. Walk each of your customers through the process and tell them exactly how it is going to play out. Always be proactive and be there to answer any questions they may have. Be very responsive and have a good understanding of your customer.
3) Understanding The Numbers
One of the most important aspects to ensure a profit on all of your flips is understanding the numbers prior to taking on the project. Before you start a project, you should have a good understanding of:
Labor Costs
Material Costs
Holding Costs
By understanding these numbers, you can determine if this specific project will meet your minimum profit requirements. There are several rules of thumb that investors like to work off of. One of those rules of thumb is the 70% rule. How the 70% rule works is:
You take 70% of the ARV.
Ex) $150,000 x .70 = $105,000
You then take your repair estimate and subtract that number from your new total ($105,000).
So if your repairs are $40,000 for this project, you will offer ($105,000 - $40,000) = $65,000.
Remember this is just a rule of thumb.
For a more accurate depiction of the numbers, you can use this formula:
ARV - Repair Costs - Holding Costs - Closing Costs - Profit = Offer Price
4) Accurately Determining Repair Costs
This is where the majority of house flippers lose their money. Failing to understand the true repair costs on a project will cost you. If you have never been through a big box store such as Lowe's or Home Depot, you are probably not privy as to how much material costs. If you have never done a flip before you're also probably not familiar with how much labor costs. When you do not understand these costs, you will underestimate.
So how do you accurately determine the repair costs? Well, if you are unfamiliar with construction, you will need to build a relationship with a general contractor to walk through these homes with you. They will be able to give basic estimates of what it is going to cost you to get the property in the condition that you want.
Later in this post, we will touch on different tools and systems you can use to help with this procedure.
5) Creating A Schedule
Another way investors lose is by underestimating the amount of time it will take to turn over a property. The reason this can chip away at your profits is because for every month that you hold a property you will be soaking up taxes, insurance, utility and lenders fees. By creating a schedule and mapping out the specific project and tasks, you will have a good idea of where you stand each week (day) on the project. This will give you more leverage with your contractors to keep them on pace and will let you know why you are behind or ahead of schedule.
When you create your schedule, you should sit down with all of the contractors that will be on the job and work with them to determine specific start and completion dates for each task. This way they have a good understanding of what you expect before the project begins.
6) Creating A Material List
This is a tool that is often overlooked by house flippers but is a system that needs to be developed and mastered. Creating a material list for your specific project will give you a great idea of the exact material costs for the job. The material list that you create will come from the creation of your scope of work, which will lay out the exact tasks associated with this project. When it comes time to create your material list, you will go task by task through your scope and designate the material needed for that specific task.
Before you start the project, determine what material you will be purchasing and what material your contractor will be purchasing.
7) Create A Scope of Work & Budget
These are the final tools that you will use to ensure that you make a profit on each of your flips. The most important system for your rehabs that you need to implement will be the creation of your scope of work. This is the main document that will create all of the other systems we have discussed. Your scope of work will lay out all of the tasks that will be completed for this specific project. This will allow you to get fair and equal estimates when you put the work out to bid.
From the creation of your scope of work and material list, you will be able to create a project budget. This budget will be the total repairs costs associated with your project (labor and material). By creating this budget you will know exactly how much it is going to cost you to get this house in the condition you need to sell for the price you will be asking.
8) Finding Funding For Your Project
This is an expensive business. It costs thousands of dollars to purchase a property and rehab it. The only way to truly scale and grow this business is to build relationships with private money lenders and hard money lenders. These are individuals or companies that will be able to fund your projects outside of a traditional bank lender. This is said to be the second most difficult areas of this business. If you have access to capital and do a good job marketing, there is no telling where you could take this business.
If you are just starting off, we recommend trying to build a relationship with a private money lender. A private money lender is anybody that you know that may have extra money laying around that would be willing to invest with you. These could be folks such as your parents, friends, family, doctors, lawyers, business owners, etc. You will use the tools we spoke of previously to build a credibility package and pitch your deal. Private money lenders are the best source of lending because they typically do not charge any fees and interest rates can range from 6%-12%.
9) Developing A Great Team
The great thing about real estate is that you can develop a great team to work for you that you do not have to have on pay roll. Just like with any business, the team that you have working for you will directly impact the success of your operation. Here are the team members that you need to build relationships with:
Real Estate Agent
Real Estate Attorney
Title & Closing Company
Contractors
Wholesalers
Bird dogs
Real Estate Accountant
Mentors
Insurance Agent
Private Money Lenders
Hard Money Lenders
Brokers
Banks
By establishing great relationships with real players in your community you will increase the chances of your business being successful. Use all the resources available to you and make the most of your efforts.
10) Price The Home Right - Ensure Accurate ARV
When you first started this process, one of the most important figures we discussed was the ARV. The ARV is the after repair value of the property or the price that you believe you will be able to sell the property. Once you complete the rehab, you will want re-evaluate the resale value of the property. If you are working with a real estate agent, this will be their job. Make sure that there was no correction in the market or take a look and see if you had some appreciation and you may be able to get more for the house. Falling to accurately determine the ARV of a property will have detrimental effects on your overall profit.
Wrapping It Up
We hope that this post gave you some good information on how to plan and execute your next flip. By following these tips and guidelines you should be well on your way to becoming profitable in this business. I have to say this business is not rocket science. In our opinion it is one of the easiest business models to replicate and produce an income. Stick to your rules and guidelines and be patient. Make sure you buy right and list at market value. Begin to build relationships and do not give up. The more relationships you build and the longer you are in the game, the more success you will have.
In the comment section below, let us know what tips your business works off of. Let us know what type of success you are having or if you are having trouble, let us know, hopefully we can help.
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