House flipping involves buying a property at a discounted price, improving it in some way, and immediately selling it for a profit.
Popular cable TV shows make flipping look like an easy way to make thousands of dollars quickly. Of course, these “reality” shows are for entertainment. The reality is that house flipping is a business endeavor and it’s much easier to lose money than it is to make a fortune flipping properties.
Flipping can result in a nice payday if you know what you’re doing.
Here’s a peek inside what it takes to profitably flip properties.
1. Finding Deals
It all starts here. House flippers need to acquire the right property at the right price. Finding those properties requires having multiple sources, like the MLS, wholesalers, auctions, foreclosures, short sale negotiators, and your real estate network. And it involves intimately understanding the market so you can quickly distinguish a deal from a money pit.
Real estate is local, and since you can’t possibly know enough to find good deals in every neighborhood, narrowing your search is key to efficiently getting deals under contract.
Experienced flippers seek out properties that satisfy the 70% rule, which means buying the property at 70% of the after repair value (ARV) minus rehab costs. For example, a house flipper would offer $112,000 for a home with a resale value of $200,000 that will take $40,000 in rehab costs ($200,000 x 70% – $40,000 = $112,000).
The 70% rule is simply a rule of thumb to do a quick evaluation, not a guarantee of profits. In this example, it looks like the flipper is pocketing a profit of $48,000, which may sound extremely lucrative. But it doesn’t take into account many costs involved in the house flipping process, such as taxes, holding costs, financing expenses, and selling costs.
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