House Flipping: Is It As Easy As It Looks?
Joy Wallet is advertiser-supported: we may earn compensation from the products and offers mentioned in this article. However, any expressed opinions are our own and aren't influenced by compensation. To read our full disclosure, click here.
If you’re a fan of HGTV shows or social media accounts, it can be easy to become convinced that house flippers buy discounted real estate as an investment property and then "flip" the property by renovating the home and reselling it at a profit, making quick money. Is flipping homes worth it? Much of that depends on the purchase price, interest rates, and repair value. No two situations are alike, so you'll have to evaluate several aspects of your scenario to know if your real estate investment will soar or plummet. Here’s how to determine if flipping that piece of real estate you’re eyeing will be as easy as it looks.
In this article
House flipping
If you are experienced in property valuation and are confident you can negotiate for a low price before managing a renovation project, then house flipping could be an attractive way to invest in real estate. There are two major ways to flip a house — either find one priced well below its worth because of the seller’s financial circumstances or find a house needing some repair that you can renovate on a budget to increase the value.
Keep in mind that you'll need to invest significant upfront costs to purchase and renovate the property, as well as some sweat equity by either doing the renovations yourself or managing them on a tight budget.
Don’t get so excited about house flipping that you forget there are inherent risks to flipping a property. If your renovation project goes over budget, you could find your margins are slim. Also, if you have difficulty finding a buyer, you’ll be stuck paying the property’s expenses until you do. These can include mortgage payments, taxes, and insurance.
People who decide to become house flippers do so because they believe they can earn quick returns by acting fast to improve a home and list it at a higher price.
- Use Motley Fool's Stock Advisor To Invest
- Over 100 Stock Picks with 100%+ Returns
- Averaged Stock Pick Return over 593% (vs. 165% for the S&P)
- 2 New Stock Picks Every Month
- Investment Community With 700,000+ Loyal Members
- 30-Day Membership-Fee-Back Guarantee
- Joy Wallet Reader Deal: The Motley Fool is offering 50% off its top stock-picking service for new members (Limited Time)
Getting started with house flipping
Do you still want to flip houses? Here’s how you would get started in real estate investing.
Financially prepare
You'll need the capital to purchase the first house that you will flip. Unless you have enough cash to purchase a home outright, you’ll need to obtain a mortgage. It can help to get pre-approval for a mortgage so that you can act fast to purchase a deal, such as a , when you find one on the market. As with any mortgage, your credit comes into play. This type of investment requires a good credit score, especially if you already have a mortgage and need a second mortgage to test the waters of the flipping business.
Remember, you’ll also need money for your down payment, closing costs, and insurance on top of what you’ll have to set aside for renovations.
Find your team
Once you find a property that meets your requirements, you’ll need to assess the scope of the work, which will help you determine if you should hire contractors or if you can make cosmetic renovations yourself. Your real estate agent can help you make some estimations but it’s also smart to have a general contractor that you plan to work with. Down the road, you may need to potentially hire tradespeople such as a plumber or electrician.
Keep in mind that if you’ve never done renovations by yourself before, the process could be costly and expensive. If you’re the first-time homeowner of a fixer-upper it could be worth partnering with someone more experienced to help evaluate the extent of renovations necessary.
Make a budget and business plan
Obtaining pre-approval on your mortgage and talking to your real estate agent about the market in your area can help you better understand your budget for purchasing your property and making renovations. Remember to build an emergency fund into your budget that you can use for unexpected situations.
To help you evaluate which projects are most sensible for your budget and the value you hope to get out of the home, consider Remodeling’s 2020 Cost vs. Value Report for your area.
Purchase your property and get to work
Once you’ve found a property that meets your requirements, it’s time to make an offer. You’ll want to start your renovation process as early as possible to reduce the time you’re paying for the expenses of your home. Remember that there is typically a period between when your offer is accepted and when you can close on the home and take possession. You can use this period to organize your renovation project.
Costs and Fees
What are the upfront costs of house flipping? Here are the financials you should consider before starting your first flip.
Closing costs
Consider all the costs of closing your home, including a home inspection and a deposit on your mortgage. You might also have to purchase title insurance and pay for any legal fees associated with closing and any local taxes.
Labor
Unless you’re doing all the renovations and updates yourself, labor will likely be a major cost for your house-flipping project. Many first-time house flippers opt to take on smaller projects that simply need cosmetic upgrades to save on labor costs until they truly understand how the mechanics of house flipping work.
Materials
The materials you use to remodel your home can significantly impact your total project cost. Before getting started, consider where you can find used materials for a discount to help reduce costs.
Taxes
You’ll need to pay property taxes for the duration that you own the property. Property taxes are calculated based on your home’s value. The number is usually in flux from year to year. In some jurisdictions, the seller will have already paid the year’s property taxes when you purchase the home. In other cases, you might owe property taxes monthly from the day you take possession.
Insurance
Home insurance will likely be mandatory if you get a mortgage and is strongly advised even if you do not. If you’re not dwelling in the home, be prepared for your insurance to increase. Certain home renovation projects can increase your insurance initially, although some upgrades could lower your insurance over time.
Related: Best Homeowners Insurance
- Use Motley Fool's Stock Advisor To Invest
- Over 100 Stock Picks with 100%+ Returns
- Averaged Stock Pick Return over 593% (vs. 165% for the S&P)
- 2 New Stock Picks Every Month
- Investment Community With 700,000+ Loyal Members
- 30-Day Membership-Fee-Back Guarantee
- Joy Wallet Reader Deal: The Motley Fool is offering 50% off its top stock-picking service for new members (Limited Time)
Pros and cons of flipping houses
Flipping a house is a serious project, not to be undertaken by the faint of heart. It can take lots of time to remodel a home, and you aren’t guaranteed a return on your investment. Here are the advantages and disadvantages to consider.
Pros
- Could be a faster return on investment than significantly hedged investments in the stock market.
- You have a measure of control over flipping a house, unlike other real estate investments.
- Enjoy the relative predictability of the real estate market.
Cons
- Flipping a house can get expensive, especially if you are taking out a mortgage to pay for the cost of purchasing the home.
- Renovations can take a lot of time. If you are paying someone else to renovate the home you also need to provide a high level of oversight.
Other ways to invest in real estate
Flipping a house isn’t the only way to make money in the real estate market. If you want to make money as a real estate investor but aren’t sure house flipping is for you, consider all your options before you forge ahead. Here are some strategies to weigh.
Rental properties
Instead of flipping a house immediately, another option is to turn your property into a rental unit. While some upfront capital is needed, you might not have to invest as much money renovating a home to rent as you would if you were trying to re-list it.
Turning your property into a rental can provide you with monthly income. You don’t have to rent your entire property, either. If you can find a home with two separate suites, such as a garden suite or a basement suite, you can rent out part of your property while still living there.
Keep in mind that becoming a landlord does involve managing your tenants. You’ll have to make repairs and ensure your property is kept clean and up to date. There’s also a risk that your tenants could damage the property, so you’d have to factor the cost of any repairs into your overall earnings.
Real estate investment trusts
If you want to take real estate action without buying a physical property, you could consider investing in a real estate investment trust (REIT). You can buy into a REIT like you would purchase a stock. The trust will use the pooled funds from everyone who has bought into it to buy and manage properties.
REITs pay a dividend to shareholders, so depending on how well it does in the market, you could count on some additional annual income. They’re also one of the easiest ways for small investors to participate in commercial real estate.
However, remember that there is a level of investment risk with a REIT. For example, if you’ve invested in a mortgage REIT, you’re exposed to any potential losses the mortgage industry might take.
Real estate crowdfunding
A relative newcomer on the block is the world of real estate crowdfunding. Through online platforms, such as Fundrise or RealCrowd, investors can participate in projects initiated by real estate developers. This method of investing allows you to become a shareholder in various properties on the platform.
Even though it doesn’t take a lot of money to participate in a crowdfunded real estate venture, the risk can be quite high since you often know very little about the investment and who is managing the project, particularly if you aren’t able to read the financial history of the company first.
- Use Motley Fool's Stock Advisor To Invest
- Over 100 Stock Picks with 100%+ Returns
- Averaged Stock Pick Return over 593% (vs. 165% for the S&P)
- 2 New Stock Picks Every Month
- Investment Community With 700,000+ Loyal Members
- 30-Day Membership-Fee-Back Guarantee
- Joy Wallet Reader Deal: The Motley Fool is offering 50% off its top stock-picking service for new members (Limited Time)
The bottom line
House flipping might not be as easy as it looks on television, but a well-executed house flip can be a worthy investment opportunity. Before getting into any investment, be sure to understand the risks. Know your budget and create a business plan to ensure you’ll make a profit on any home you buy.
Joy Wallet is an independent publisher and comparison service, not an investment advisor, financial advisor, loan broker, insurance producer, or insurance broker. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. Joy Wallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. We encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Featured estimates are based on past market performance, and past performance is not a guarantee of future performance.
Our site doesn’t feature every company or financial product available on the market. We are compensated by our partners, which may influence which products we review and write about (and where those products appear on our site), but it in no way affects our recommendations or advice. Our editorials are grounded on independent research. Our partners cannot pay us to guarantee favorable reviews of their products or services.
We value your privacy. We work with trusted partners to provide relevant advertising based on information about your use of Joy Wallet’s and third-party websites and applications. This includes, but is not limited to, sharing information about your web browsing activities with Meta (Facebook) and Google. All of the web browsing information that is shared is anonymized. To learn more, click on our Privacy Policy link.
Images appearing across JoyWallet are courtesy of shutterstock.com.
Writer
Jolene Latimer has her Master's in Specialized Journalism from the University of Southern California. She writes about personal finance, entertainment, sports, and more.
Share this article
