In real estate investment, buying a house and reselling it for a profit is one of the most popular first forays for novice investors. Also known as “flipping” a house, this process sees buyers purchase a home in an up-and-coming neighbourhood. After adding a few renovations, the buyer then turns around and sells the home to someone who will presumably live there for some time to come.
Table of Contents - Step-By-Step Guide to Flipping Houses
- Stay calm (really!) when you Flip Houses
- An ideal situation, by the numbers
- Take your House Flipping budget and increase it by 15 percent
- The three D’s to Flipping Houses
- Don’t skimp on the contractor
- Renovate responsibly
- Don’t skimp on the real estate agent, either
- Real Estate Mistakes - Flipping Houses
Flipping a house seems like a relatively straightforward process from the outside, but once you enter the market, you will discover that there are several variables you never counted on. Not to worry, this is one new enterprise you can navigate. You just need to know the basics.
Stay calm (really!) when you Flip Houses
The phrase “expect the unexpected” hardly applies to anything as much as it applies to the real estate market, especially when you’re a first-timer trying to flip a home. Before you invest for the first time, you should try to accept that things will get stressful. The unforeseen will happen. You will end up juggling multiple tasks at every stage.
Flipping a house is a hectic endeavour, especially at first, so try to stay aware of your stress levels and take breaks as needed.
An ideal situation, by the numbers
When you enter the market, you’ll have certain expectations about how things will turn out. While the ideal scenario will likely never play out, it’s still good to have some idea of what to shoot for. The primary number you’ll be working with is called the ARV, or After Repair Value. This metric refers to—you guessed it—the value of the home after you’ve remodelled and put it back on the market.
In a perfect world, you will purchase a home at 40 to 60 percent of a home’s ARV and then upgrade it to around 70 percent of the ARV. Hopefully, you can subsequently sell the house for 100 percent of its ARV. That’s a 30 percent pure profit, about half of which will go to paying down financing and sales fees. So, at the end of the day, you will hope to pocket around 10 percent of the homes After Repair Value.
Take your House Flipping budget and increase it by 15 percent
Once you’ve zeroed in on the property you want to buy, you’ll need to establish a budget for your project. Your house flipping budget should encompass the cost to secure a mortgage, plus the amount you’re planning to spend on remodelling. Then, you should typically add another 15 percent to that number. Having a little extra money in your coffer is a great way to plan for unexpected hurdles and sudden expenses.
The three D’s to Flipping Houses
As you begin searching for your first real estate flipping opportunity, you’re going to want to remain vigilant for what is referred to as a “motivated seller.” These are people hoping to get rid of their home very quickly for a modest sum, typically below market value. Motivated sellers often fall into one of three categories:
When someone passes away, one of the most common assets that end up on the market is their home. Unless that home was particularly cherished by the family, the most common response is to unload the house as quickly as possible.
When a lot of marriages end, the home is just a bitter reminder of the time spent together. A lot of couples looking to move forward in their life are compelled to get rid of the home they shared with their former partner.
Maybe a couple has retired and is looking to move into a smaller home. Maybe someone was laid off, and they’re being forced to move into a smaller home. Either way, when a seller is ready to move into a smaller space, the first thing that needs to go is the bigger space.
Those are just the fundamentals when it comes to seeking out motivated sellers. Be creative, and you can always find someone looking to get rid of their home at or below market value.
Don’t skimp on the contractor
Don’t remodel the house yourself. When you’re flipping a home in Canada, you want to be able to present a professional touch. That means having a professional do the work. Unless you’re a licensed contractor, you should take the time to seek out and employ a skilled craftsman who can tackle your big remodelling jobs.
You can save some money by doing the easy stuff—replacing ceiling fans, painting, putting up shelves and more—but when it comes to laying down carpet, putting in new fixtures, remodelling entire rooms or putting in tile, you want backup from a pro.
When you enter the remodelling phase, you want to walk a tightrope between adding exciting frills and making sure your home remains affordable. A lot of professional house flippers advocate the installation of fun stuff like steam showers and home theatres. These touches can undoubtedly make your home pop out in the mind of potential buyers. That much is true, but it is also crucial not to go overboard.
When you’re shooting for an overall After Repair Value, make sure that you are pricing your new home alongside the other houses in the neighbourhood. You can work alongside your real estate agent to project neighbourhood growth, but even then, keep it contained. There’s nothing worse than pouring thousands into gorgeous upgrades to discover that your home’s market value is ten and twenty thousand more than the house next door. Even a state-of-the-art home theatre isn’t worth that kind of price increase.
Don’t skimp on the real estate agent, either
Once again, unless you have a real estate license, selling your home is something that should be left to the professionals. After you’ve put your heart, soul and bank account into revitalizing your home, you’ll inevitably be attached. That’s when a professional real estate agent can come in and proceed with detached calm.
Make sure to choose a veteran agent who is familiar with the neighbourhoods they work in. Keep in mind that you will hopefully end up flipping houses for several years to come, so it’s critical to pick a real estate agent that you respect and that you can get along with.
With careful research and plenty of professional help, you too can flip homes for a profit—a great way to start your portfolio.