Are you a first-time home flipper hoping to make some money? In this video, we’re going to talk about four things you need to know if you plan on making any money when you flip a house. I’ll also give you a bonus formula for a quick back-of-the-envelope method of assessing property.
Do You Want To Flip A House?
Flipping houses looks easy and fun, right? I don’t know. Thanks to HGTV for bringing this into our minds and our living rooms, we get a lot of calls about this. It’s tough to get started on flipping houses. There are just two pieces that you need to know. First, there’s the money. And if you’ve got the money, honey, the next thing is doing the work. You just have to figure out how to balance all of it.
Let’s start with the money first, as the work is divided into several different parts. If you have no experience, you’re not going to be able to get a bank that’s willing to lend money to you. If it’s not a job, a career, or even barely a hobby right now for you, it’s just a dream. If you’ve never done this before, no commercial bank in their right mind is going to give you money to plunk down on a house claiming that you’re going to fix it—especially with no track record behind you to prove that you know what you’re doing.
A Hard Money Lender
You’re going to have to go to a hard money lender. A hard money lender is somebody who is going to lend you the money and then charge a really high interest rate. You’re likely going to have to do something like this to get started, get your foot in the door, and get your business off the ground. Once you make connections and you have an established track record, you’ll probably be able to find other financing options.
The interest rates on these loans are very high because these guys are taking on a lot of risks. Look at it from their perspective. Here’s a person who’s never flipped a house before who suddenly decides, “Hey, I think I can be good at flipping houses.” They’re taking a really big chance on you, and that’s why they’re charging high interest rates.
You’re also looking at potentially paying a one-time fee, which is usually a few percentage points, plus 8% to 15% interest on it. So if we take your $250,000 house that needs $50,000 worth of work, you’ll want $300,000 from the hard money lender. They’re then going to charge you a few $1000 up front just for starting the process. You’re then going to pay a 15% per annum of interest.
So for the $300,000 that you’ve borrowed, you’re going to owe $45,000 over 12 months. If you can flip this house in six months, you’re looking at $22,500. You’re going to need to add that to your purchase price plus your construction costs. You’ll also need to account for the few percentage points that they charge as well as any purchase costs, transfer costs, recordation, and things you have to pay on the actual purchase. So make sure that you consider all of those in and that you know what your actual acquisition costs.
Doing The Work
Next, you need to consider the ability to do some work. The ability to do it yourself—or to be a general contractor and manage everybody else who’s doing the work—is important. Maybe you don’t have the money, but you’re handy. You can paint, change some light fixtures out, change hardware, and do things that don’t require a license or a permit. Great. This is going to save you money, but it does not replace the need for licensed contractors when it comes down to doing big things like plumbing, electrical, structural, and additions.
Doing the work yourself is a slippery slope because sometimes people merge into areas where it may or may not require a permit. Depending on the jurisdiction—and if you run afoul of their laws—they may end up putting that big old stop-work order on the front of your house. Then you’re going to have problems.
The other option—if you don’t have the money and you don’t have any handy skills to do the work—is to just be the general contractor. You can get the money from the hard money lender, and you’re going to save some money on contractor fees.
Being A General Contractor
It’s important to understand that managing trades is tough. They don’t complete their jobs. They don’t show up sometimes. They complete 80% and then just disappear off to another job and they seem to never finish. And then their tools are at your house. Or you come home from a weekend vacation where you’ve told your contractor, “I want you to get the F out of my house,” but by the time you get home on Sunday night you walk in and find out he’s re-caulking the molding on your crown molding in the living room. Not that this has ever happened to me. It has. Additionally, supplies could be late and they can disappear.
Being your own GC is tough. There’s a premium for managing a job and if you’re willing to take this on, you’ll probably save yourself a few $1,000. This is built into the cost of any bid if you go straight to one contractor. What that contractor does when you go to him is to say, “All right, here’s the electrical work that I need.” If he doesn’t have an electrician’s license, then he goes out and finds the electrician.
Most of the bigger contractors are going to have their own electrician and their own electrical licenses. It’s the same thing with plumbing and structural. You don’t want to end up being in the position where you’ve got somebody being the middleman if you can do it, as that’s the last place that you could potentially save money.
So if you have any of these strengths—if you’ve got the money to fund it, if you can do some work yourself, if you can be the general contractor, or any combination of those three—then you are going to save some significant money.
How To Assess Your Property
The fourth thing that will help you make money flipping houses is how you assess the property. There’s something in the industry called the 70% rule, which means you don’t want to pay more than 70% for a house’s ARV, or after repair value.
For example, let’s say you minus the cost of renovations and the after repair value is going to be $300,000. You look at the house and think, “I can sell this for $300,000,” and you assess that it’s potentially going to cost about $50,000 to fix it. If you take the $300,000 after repair value minus the $50,000, that gives you $250,000. You want to take 70% of this number, which is $175,000. That is your offer price. That’s what you need to get the house for. That, of course, assumes that you’ve got all your numbers, all your I’s dotted, and all your T’s crossed. There’s not going to be a ton of overruns, and you’ve also built in for potential overruns during construction.
Making Money On Your Flip
Don’t forget that the money you make depends on the three things. One, if you’ve got the money yourself, then you don’t have to pay those exorbitant hard money lender interest rates. Two, if you can do some work yourself, you’re going to save some money there. And three, if you have the wherewithal and time to be the general contractor, then you’re going to save some money there—but you’re also going to take on headaches. Any value that you add is going to pay you back many, many times over.
This is, again, not something that should be taken lightly. I highly suggest that you figure out how to study what other people do, even if they don’t want to share their secrets—because a lot of people don’t.
Finding houses, especially off-market, is key. Finding them once they’ve been listed on market will make it impossible to cut a deal that’s going to make sense for you. That’s where you want to have your ear to the ground on off-market deals so you can get that purchase price low. This is important in case your other costs of having to borrow, contractors, and construction run high.
If you have any more questions about that, make sure to reach out to me and I’ll be happy to connect with you!