Today’s blog is a detailed list of the top fifteen lessons I have learned over my 15 years flipping houses! While there’s truly no replacement for learning from doing, I have extensive experience and would love for you to learn from my mistakes and take the advice I hold true!
I am happy to be a resource and help flippers and real estate investors. I have seen it all from luxury homes to low-cost homes, tough neighborhoods, and ruined timelines. No matter the market, there are a handful of things I learned I want to touch on today!
1: Know Your Exit Strategies
You have to know your exit strategy. There are several options, and you need to be aware and confident in the one you will be going with. Often, people will feel like they want to flip but are worried about the market changing or not being able to sell ASAP.
The truth is, anytime you put that kind of pressure on yourself or a situation, it isn’t the best route for you. For example, if you think “I have to sell this property as soon as possible, and I cannot keep it, and I don’t want it.” You’re more than likely to make a decision that might not be in your best financial interest.
You can look at a property from a rental standpoint. You’ll ask yourself, how can you make the home a desirable, profitable rental? I recommend a website called “Rentometer,” you can type in the number of bedrooms, bathrooms, and zip code, and it will tell you what the low, median, and high rents are for the area. If that works, you have another exit strategy.
You can also check out the short-term rental option, in which I recommend the website AirDNA for information on the average nightly range for a given zip code.
So you can come up with a couple of different options for exit plans. It’s going to take a little bit of time, but at least you have an idea. Working out an exit strategy with backups (keeping the property as a rental) gives you a sort of safety net and confidence.
One time back in 2014, I bought an auction property. That purchase was the only home I have ever bought without seeing it myself (I sent someone else to look at it in person). It ended up being a nightmare of a property.
The project took longer than we thought, cost more, and was a headache the entire way. After sitting on the market for almost two months, we got a break-even offer. After weighing my options, I decided to go the rental route, and the property has been cash flow positive for nine years now.
When you know you’ve got a backup plan, when you know you’ve got a deal that can make money more than one way, that’s also really valuable in case maybe you need to sell it to another investor. You know how it’s going to work out.
2: Finding for Purchase and Renovations
You need to know where you will get the funding, both for the purchase and the renovations. And you need to know that before you put an offer in because it will affect your numbers as you look at that property and that project and the profitability.
Anytime you’re flipping houses and you only have one of anything (an electrician, a plumber, etc.) it makes you really dependent on that one person. And if for some reason something happens and they’re not available, it can put you behind, or it can cost you a project.
This roadblock also pertains to having just one lender. You might not be able to put an offer in if you only have one lender and for some reason, they’re not available to get you that approval letter or they’re unsure about the project, because that does happen. So make sure you know how you’re going to fund your purchase and how you’re going to fund your renovations. And sometimes, you can have two different lenders.
In my experience, the last several years, we use a combination of a commercial line of credit with a bank, and we use private money. That means when we go to make a purchase, we don’t bring any of our own money to the table. This is helpful in a few ways. One, we don’t have to wait until something sells before purchasing something else. Two, we’re able to move quickly with our offers. Three, we can continue to move forward on projects and do multiple projects at a time.
3: Cost to Borrow Money
There’s a tendency for people to think that if they’re using cash, there’s really not an expense to using the money.
However, if you have $100,000 and you have all of it in a project, and then you have another project that comes available that you would like to put an offer in on, but all your money is tied up in the other one, you might end up losing that one. So if instead, you use a commercial line of credit that you have and instead of having to put $100,000 down, you only had to put down $30,000, now from your one project you’ve still got 70,000 in the capital left from that 100 that you started with.
That means you could potentially go write another offer on another property. And you’ve got a way to show that you can provide the down payment that’s needed.
So there’s a cost even when you’re using cash. And I think sometimes people forget about that. Every type of loan you use for each type of purchase should make sense.
4: Finding the Right House
The market is full of houses, both on and off the market. There are also different strategies that people use, like pay-per-click to find motivated sellers, or there are mailers that people send, like postcards. There are all different ways to find houses.
There are always houses to buy, but not every house that you buy is going to be attractive to a buyer after it’s renovated. There are certain things that are going to make homes more appealing. So make sure you’re not just buying a house to buy a house. Always buy houses in areas that people want to live in, and where people are going to want to buy.
It’s always easy to find a house, but it’s not always easy to find a house at the right price that you know buyers will want when it’s done. That’s what you need to make sure you’re focusing on.
5: Knowing Needs vs. Wants
What I am referring to here is knowing what repairs will be needed versus what you want to do. When I first started flipping, there was this desire just to go in and be like, “Oh, we want to do all of these things.” However, we were constricted because those houses were only going to sell for so much when they were done, no matter how much was done to them.
If the wall was open to the kitchen or it wasn’t open, it didn’t even matter. But if the kitchen was new, that did matter. So those are the things that we had to focus on.
Here are some real examples:
- It didn’t matter if we opened walls between kitchens and dining rooms, but we needed new cabinets.
- It didn’t matter if we had two bathrooms or three bathrooms, but we needed to have at least two to get our price. The third bathroom was just kind of icing on the cake in those markets, in those price points.
- The difference between a two and a three bedroom didn’t matter.
- It didn’t matter if we used tile or vinyl flooring. People weren’t paying more to have a tile floor in properties at that price point. (But there was a big difference, nearly double when we came to allocating cost for a vinyl floor versus tile.)
So those are the types of things you need to know, that there are repairs that are going to be needed and there are repairs that you’re going to want to do. It might not always be the most amazing thing, but most houses that are old are going to need mechanicals. So that’s where you want to spend your money.
A lot of older houses are also going to need a roof. That protects the integrity of the structure, so that’s something you have to do, versus you might have a dated bathroom that you don’t love. Still, you might be able to do some things with it to add some value, to make it a little bit more updated, that doesn’t involve demoing the entire thing.
It will always depend on your price point but just know about those repairs that will be absolute musts versus those that are wanted. “Musts” are if you have to finish a basement because you need to get your price point at a certain level to the comparable homes in that neighborhood, then you gotta finish the basement. You got to add the extra bedroom and the bathroom. So those are the things you need to make yourself familiar with and know pretty quickly, what’s a need and what a want.
I’ve looked at many houses where I’ve been like, “Gosh, if we could put an addition on here, this would be amazing, and we could be at this price point.” But the cost of the addition, the time to do the addition, and the extra effort for drawings and permits, and inspections doesn’t always make it worth it. So keep that in mind as well.
6: Estimate for Repairs
Get an estimate for the repairs that will be needed or a strategy for calculating some number to cover your expenses. So one of the things I get asked often from people is, “When you don’t have any experience, how on earth do you know what to account for when it comes to renovations?” I will say, over the past three to five years, it’s pretty uncommon to see projects that need anything less than $100,000 if there’s any type of big component to that renovation. So roof, window, siding, those are all mechanicals, and this is across different markets. Of course, every market varies a bit, but I would say $75,000 to $100,000 for full renovation is probably pretty consistent.
Now, knowing that, I don’t think I’ve had a budget in probably two years that has been under $150,000. Most of my budgets are right around the 175 range. And we’ve been starting to creep up well over 200 if it’s a larger house.
If you have no idea, the very first thing you need to be doing is finding out online, Googling your local real estate investment groups. Go to those meetings and start listening to people. Start asking people when they’re talking about if they do renovations if they’ve flipped houses, and what is their average budget. Give yourself a benchmark.
In some markets, it works to come up with a price per square foot. For example, if there’s a 2,000 square foot home, at a $100,000 budget, 2,000 square feet, at $100 per square foot, that would be a $200,000 budget. That’s a big budget for a $200,000 home.
You could also get a bid from somebody on a project and then break it down and determine what it looks like cost per square foot. I like the idea of trying to be as specific as possible, and because houses are so vastly different, you might have one house that needs windows, a roof, and siding, and you might have one that doesn’t need any of those. That will be a little bit different, even if they’re the same size, to calculate for. So I like just having a general number.
You’re never going to know all the numbers exactly when you start, you just have to give yourself ranges that you’re comfortable working within. It can take pressure off people by trying to feel like you cannot get started until you know what things should be.
So think of it this way, what are you comfortable with? If you’re doing one flip a year and you make $30,000 on that flip, is that sufficient? Would that work for you? If you were able to learn how to build and scale a business that in two years, three years, four years down the road you could transition to full time and you felt confident doing that, is that 20,000 worth it? Is that 30,000 worth it? You have to decide for yourself.
Over time, the knowledge, experience, and profit that you’ve built are what’s going to make a difference in your business in the long term.
Come back next week for part two!
Ready to take that next step when it comes to flipping?
Here are some resources I’ve put together to help you get the information you need to move forward on creating your flipping life.
Make sure you have the Fixer Upper Checklist, so you know which areas are critical to added value in a home.
If you are interested in learning more about the House Flip Blueprint course, go here!
There are several videos on finding houses, renovations, and funding on YouTube. Check out your favorite flipping topics and new videos weekly.