Shows including “Flip or Flop” and “Flipping Out” have a firm hold on U.S. television sets, and house-flipping is at a six-year high. There’s no wonder, then, that more people than ever are interested in how to start a house-flipping business. For enterprising investors who aren’t afraid of hard work, flipping a house is an exciting opportunity for short-term investment. But there’s a lot of research to be done, plus financing and resources you need before you start a house-flipping business yourself.
So we’re all on the same page here, house flipping is the process of purchasing distressed, foreclosed, or otherwise desirably priced property with the intent to sell at a higher price within a short period of time. House flipping has become a common—and lucrative!—practice, attracting the attention of Wall Street investors and first-time entrepreneurs alike.
If you’re one of those enterprising investors who wants in, you’ll need to know more about how to start a house-flipping business. Follow this guide to help you develop a business strategy, plus determine and execute the optimal financing plan. To get started, watch this video for some tips from a pro real estate investor and house flipper:
Before You Start a House-Flipping Business
Before you can start a house-flipping business, of course, you need to learn as much as possible about the industry—and your own finances, too. Here’s where to begin:
Assess your skill level.
Identify the location for your short-term property investment, and what kind of renovations make sense with your available capital and knowledge. Depending on your experience, determine what kind of building and extent of renovation you’re equipped to oversee.
Get a pulse on the real estate market you want to flip in.
Scout property opportunities in your network or local market first. If you’re interested in investing in an unfamiliar area, talk to local homeowners and real estate investors to supplement your research. Here, knowledge is everything.
Research the applicable state, county, and city taxes that pertain to real estate.
Don’t get blindsided by an unexpected tax or property law. Find out which taxes, fees, and regulations apply to your investment.
Evaluate your finances.
Before making investment decisions, it’s essential to know where your personal finances stand. That way, you can plan your budget accordingly, taking into account the risk of losses associated with any first-time house flip. And if you plan on applying for a small business loan down the line, you’ll have a better idea of which types of loans you’ll be eligible for.
Pay special attention to these important factors:
- Your personal credit score. Although it’s possible to successfully finance a fix-and-flip property investment without stellar credit, a good credit score is necessary to secure a small business loan in the future.
- Your cash flow. Will you have a source of income during the fix-and-flip process? Or are you working with a stagnant pool of cash? Taking stock of your current cash flow will help you determine which loan type, amount, and term you’ll need to complete your projects.
Once you’ve researched the landscape, and your own books, you can start to plan out your real estate investments. Establish limits for your investment, and decide how much you’re willing and able to repay with interest before taking out a loan. Be realistic about returns, and plan accordingly: Your current financial means, not the estimated profits, should inform the scope of your investment.
And if you’re new to short-term real estate investment financing, think about talking to an investment counselor or loan specialist.
4 Steps to Starting a House-Flipping Business
You’re determined to invest in short-term real estate and flip a house—here’s where to start:
1. Make a business plan.
Before taking any action, financial or otherwise, it’s crucial to write a business plan. Determine the scope of your property investments, outline preliminary budgeting and payment plans, and make decisions about the location and type of your prospective real estate.
2. Start with what (and whom) you know.
Identify the resources already available to you to take full advantage of your strengths. Experience in the real estate business, access to a network of excellent craftspeople, or just a promising property are all assets.
Talk to friends or relatives involved in real estate investment, particularly in the area where you plan to invest in property. Anecdotal evidence and word-of-mouth advice can help you find reputable wholesalers, contractors, and realtors.
Reach out to your existing professional or personal network to find contacts within the industry, and seek out experts for mentoring and advice. Get active in local real estate investment groups or find your chapter of REIC to connect with industry professionals.
3. Assemble a team.
Whether you plan on bringing in a partner, hiring outside contractors, or renovating the property yourself, you’ll need to recruit a team of qualified people to complete a successful flip. In particular, consider sourcing for these roles, which could really help you keep things organized and get the most out of your investment:
Business Partners or Investors
A good potential partner might be an active private investor in your personal network, or a real estate investor looking for a project manager. A good business partner brings an asset or skill to the relationship, be it capital resources, skilled labor, industry expertise, or simply a great work ethic and determination to make an honest profit.
According to Jamell Givens, a partner and real estate investor at Leave the Key Homebuyers (featured in our video above), the advantage of having a business partner is the ability to evaluate a deal in different ways. Whereas one partner might think only of a home’s profit potential, the other might bring local knowledge or connections with contractors.
Realtors or Property Owners
A background in real estate and property ownership is a huge plus in the house-flipping business. An experienced partner can help you search efficiently for prospective properties, identify the most valuable improvements for a given area, and navigate contracts and sales once the rehabilitation is complete.
Or, if you know a homeowner looking to sell and willing to loan you the money for necessary repairs and renovations, owner or seller financing may work for you.
Contractors and Craftspeople
Even if you plan to contribute sweat equity to your house flipping business, you’ll probably need additional contractors to complete a project successfully. Look for contractors with a portfolio of demonstrable work, references, and positive feedback from previous projects.
A trusted general contractor can also look over any remodeling plans and budget projections you make to check for accuracy with regard to cost and timeliness.
Seeking legal advice about any financial agreement or contractual obligation is a good idea, especially when you’re considering making major investments and buying property.
4. Source your deal.
The success of flipping a home depends in large part on supply and demand in the local real estate market, as well as cost of labor and value appreciation of the renovations.
Identifying your target property market might help you decide if a real estate wholesaler, auction, or traditional broker is the right choice for your project. If you’re interested in distressed or foreclosed properties, a wholesale broker or auction will have higher volumes of properties available. A traditional broker might be right for you if the real estate market is new to you, or you need help finding a specific type of property or building.
Determine the scope of renovations or rehabilitation you are equipped to complete on a property, keeping in mind the duration and amount of your fix-and-flip loan.
The Best Financing Options for First-Time Home Flippers
You’ve found a partner, done your research, and identified a property for starting a house-flipping business. Your ducks are in a row, and you’re ready to finance your house-flipping business’s first fix-and-flip!
If this is the beginning of your house-flipping career, you’re probably not going to be eligible for a traditional bank loan. Typically, banks only approve businesses with many years of profitability under their belts. And in house flipping, time is money. That makes the best fix-and-flip loans short-term financing option—usually around 12 months. Repayment terms on bank loans, on the other hand, can run between five and seven years.
That said, you do have a wide variety of fix-and-flip loans available to you. As a brand-new business, you also have a good option to to tap into your personal funds or investments. It’s a little risky to throw your own skin in the game—in other words, your nest egg—but it’s likely that your business doesn’t have the revenue and financial stability that most lenders want to see before extending you a business loan.
As always, it’s wise to explore all of those possible options before settling on a loan that best suits your needs. Start your search with three of the best financing options for new house-flipping businesses.
Friends and Family Loan
Many rookie real estate investors fund their first projects with personal loans from partners, friends, or family members. If the loan is comfortably within a close relation’s means, this alternative to a bank or private loan can alleviate some of the pressure of a traditional loan, as well as ensure a degree of accountability.
If a friend or family member is an investor or partner in your house-flipping project, it’s a good idea to establish terms of the arrangement in writing as soon as you reach an agreement.
Tap into Your 401(k)
For first-time flippers with a retirement plan who are not planning to retire in the near future, one financing possibility is taking out a loan from your 401(k). This option incurs the risk of losing your nest egg, which is always a scary prospect. But financing a business with a 401(k) might be the only viable option for entrepreneurs just starting out—and if you’re smart with starting your house-flipping business, you can hopefully make back the cash and then some.
There are two main options for 401(k) loans: The classic 401(k) loan, in which the IRS allows you to borrow up to half the vested balance, or $50,000, whichever is amount is lower; or a ROBS loan. You’ll determine which type of loan makes the most sense for you based on the size of your investment, and your willingness to dip into your retirement savings.
Many experienced short-term real estate investors find success using multiple financing sources to purchase and renovate a property. Depending on your own capital, a partner or investor, and external lenders, it’s likely that you’ll end up using a combined solution to finance your house flipping business.
Follow These Best Practices for a Successful House-Flipping Business
Once you develop a business strategy, assemble a team, identify a property, and secure financing, it’s time to start implementing your renovation plans, thinking about marketing and selling the property… generally getting your house-flipping business underway. Make sure you:
Commit to your business plan. Planning, logistics, and administrative organization will make or break your project—although you have the potential to make a big, quick profit, starting a house-flipping business is no walk in the park. You’ll need to scout properties, calculate renovation costs, source a trustworthy crew, possibly apply for a small business loan… not to mention the curveballs that may arise with every step.
Approaching the process with a detailed house-flipping business plan in hand will help keep you on track. And the more confident you are in your business strategy and execution plan, the more adaptable you’ll be to those unpredictable circumstances that’ll inevitably arise.
Grow your network. Use your first fix-and-flip project to foster relationships with industry professionals—from investors to realtors to carpenters—whose collaboration and skills you will need for your next house flip. Experienced contractors and agents can connect you with other vendors, give you leads on properties and service-providers, as well as provide advice on specific projects. Trusted contacts in the industry can also help you cover your blind spots, and make sure estimates for properties and repairs are accurate, saving you time and money.
Make estimates. Double them. Unless you’re already in possession of a property, sufficient cash, and experienced with home repair, the process of flipping a home will require timelines and cost estimates at every turn.
Err on the side of caution when making any projections about the cost and duration of renovation. That’s especially important if you’re financing your startup with outside investors, who need to see that you’ve done your due diligence before putting their own capital on the line.