If you are in the real estate game, or interested in getting in the real estate game, you have likely heard the term “fix and flip” a few times. The fact is, fixing and flipping residential and commercial properties can yield significant returns. Unlike investing in real estate, flipping houses is a job that is much more hands-on, and the risk with it is much higher.
Flipping houses is a great way to make money in the real estate market. But it’s important not to underestimate the risks involved. There are certain rules and regulations that must be followed when flipping a house, whether you’re an experienced investor or a first-time flipper. Knowing these rules can help you avoid costly mistakes and ensure that your flip is legally sound and financially successful. Let’s look at some of the most important rules you need to know when flipping houses.
If you want to give yourself the best chance of a successful fix and flip project, make sure to follow the “rules” listed here.
Understand the 70% Rule
An essential and time-tested concept that house flippers need to follow is referred to as the 70% rule. This rule tells you what you can spend on a property to give yourself the best probability to earn a profit.
This is how it works. The all-in costs of the house you are flipping, which includes the purchase of the property, repairs, and anything else, should never be more than 70% of the expected after repair value (ARV).
Get Over-Prepared for the Fix and Flip Costs
If you use the 70% rule, you will limit the project costs to just 70% of ARV. This means you provide yourself a bit of a cushion, just in case something goes wrong. If you have to keep the property longer than you expected or if there is an unexpected repair for you to make, the 70% rule will help ensure you are still able to make money – or at least that you don’t lose anything.
Another important point is that fix, and flip projects are going to rarely go according to plan. This is true even for experienced investors. The more projects you take on, the better you will get at estimating your repair costs and possible selling prices. But a lot of this is out of your control. When you over prepare for these issues, you will not eat into your profits.
Be Realistic When It Is Time to Sell
A common, rookie mistake is pricing your property so high that no one is interested. While you want to get as much as you can for the house, you also do not want it sitting on the market for months longer than it should.
When repairs are complete, be sure to check out the recent comps, get an appraisal, or have a conversation with your real estate agent about what you can realistically expect to get for the home if you are trying to sell quickly. Once you have an idea of what you can get, be sure to set your price accordingly.
If you want to have the best chance possible with your fix and flip project, make sure to keep the rules here in mind. Doing so is going to help ensure you get the desired results and that your project is profitable. Working with the professionals through the process and others who have conducted fix and flip projects in the past can also be beneficial.
Research Your Market Thoroughly
The key to any successful real estate investment is doing your research before you dive in. That means researching the local market thoroughly so that you understand what kind of properties are selling and for how much. This will give you an idea of what type of properties are worth investing in and how much profit you can make from them, as well as what kind of renovations or repairs may be needed to increase their value.
Know Your Land Use Laws
Another important rule to follow when flipping houses is knowing your local land use laws. Depending on where you live, there may be restrictions on what type of renovations or additions you can make to a property, so it’s important to do some research before beginning your project. Additionally, if you plan on renting out the property once it has been flipped, there may also be additional legal requirements that must be met in order for it to be considered habitable by tenants. Be sure to check with your local government agencies for more information about these laws and regulations before investing in a house flip project.
Understand Your Financing Options
Finally, it’s important to understand your financing options before starting a house flip project. There are several different types of loans available for real estate investors, such as hard money loans or private money loans, so it’s important to shop around for the best rates and terms available for your particular situation. Additionally, understanding tax implications for any profits made from flipping homes can help ensure that all taxes due are paid properly and on time—which could save you thousands down the road!
Flipping houses can be an incredibly lucrative venture—but only if done correctly! It’s important not to ignore the rules when flipping houses by doing thorough research beforehand, understanding land use laws, and being aware of financing options that could work best for your particular situation. Following these guidelines will help ensure that your house flip is both legally sound and profitable!