Whether you’ve already set your mind to flipping houses or you’re still on the fence, it’s important to understand what this business requires to be a success. We’ve outlined six steps to starting your own house flipping business that will help you determine if this business is right for you. If you find it is, these tips can help you get on the right track. Let’s jump right in.
1 – Write a Business Plan
I know, you’re probably itching to get started, and not looking forward to the logistics, but it’s extremely important to not skip this step. Every business should have a business plan, and a house flipping business is no exception.
A business plan is important for several reasons. The U.S. Small Business Administration shares five reasons you need a business plan:
- It helps to steer your business in the right direction at conception and as you scale.
- It’s not hard. It’s a written tool about your business with a rough plan for the next 3-5 years.
- It helps you reach business milestones (think: securing loans, hiring team members, etc).
- It can help you get funding. Business plans are attractive to investors!
- There’s no wrong way to write a business plan. It’s about you, your business, and your goals.
Starting your business off right includes dedicating some time to your business plan. As USBA says, there’s no “wrong” way to create one. For example, you can create a Google Doc, a PowerPoint, or turn to plain pen and paper.
No matter how you create your plan, I recommend including a few specifics to the house flipping business. These include basic timelines, projected budgets, your market, and the types of properties you plan to flip.
2 – Set Up Your Business
Now that you’ve completed your business plan, you have some solid direction for how you’ll set up your business. At a minimum, this includes choosing your legal structure (i.e. Sole proprietorship, partnership, LLC, corporation, etc.), registering your business name, setting up a
business bank account, and acquiring any licenses or permits.
A legal structure is also called a “business ownership structure” and basically determines the way you’ll file taxes, how many taxes you pay, and your risk exposure as a business. It’s important to know your options and take time to find what works best for you and your business. Here is a quick breakdown (learn more about these here):
- Partnerships are dual-status as a sole proprietorship or limited liability
- LLC’s are protected from personal liability
- Corporations can sell shares of stock to gain funding
Find more information on business structures by state: State Guide: Corporations Offices.
Once you’ve determined your legal structure, you’ll need to register your business name with the state in which you’ll operate. Depending on the legal structure you select, additional fees and paperwork may be required.
Licenses and permits
Next, come necessary licenses or permits. While it’s not required to have a real estate license to flip houses, it can be beneficial. Some flippers choose to get their real estate license to complement and help their house flipping business. While it’s not for everyone, getting your real estate license teaches you the ins and outs of home buying and selling, and the more information the better!
What about a contractor’s license? If you’re looking to do a lot of your flip by yourself, you might be wondering if you need a license or permit for that. This will differ from state to state. While some states require a contractor’s license, other states have no such requirements. With that said, it’s critical to do your own research into your location before moving to the next step in your business.
Another bit of red tape on your way to flipping is necessary permits. Depending on the scope of work you’re doing and where you’re doing it, you may need to secure building permits to avoid complications with buying a home. To find out more about permits in your area, look to the local municipality where the property is located. You’ll also want to confirm others on your team have the necessary permits.
Finally, you’ll need to set up your business account. Be sure to complete the above steps before heading to the bank, opening a business account will require you to be licensed.
Your business account will be where you track all expenses and income. While it might be tempting to use existing accounts, you will find several benefits to opening a business account including:
- Separating business and personal funds
- It is more professional
- Can protect your identity
- Working with a bank through business accounts strengthens relationships that can be helpful in the future
- You can accept credit card payments
- Tax preparation is easier
- Easier to sell your business
There are few if any negatives to opening a business bank account.
3 – Know How to Find and Secure Funding
You’ve taken all the steps of setting up your business and your new bank account. Unfortunately, your new business bank account is probably looking pretty empty… And in most cases, there certainly isn’t enough cash to buy and flip a property.
The good news is, that’s not uncommon for new flippers (or new business owners in general). It’s rare to find someone with their own cash to start and fund their own business, so that’s why new business owners turn to lenders or investors to get the capital they need to start and operate their businesses.
Here are a few funding options to fund your house-flipping business.
Hard money lending
Once I started using hard money loans, it completely changed my business. A hard money loan is a loan from a private investor or individual. This kind of loan has lower qualification requirements and can provide the funding you need in as little as a week or two.
Over the years, hard money lending has become more popular, and there are various private business loan lenders and online platforms that specialize in facilitating these.
A few things to note with this funding option:
- They charge higher interest rates (10%-20%) and additional fees.
- Usually, hard money loans are received and repaid within a year (although there are other options available).
- Loan money is sent in parts, first to buy the home, then for the first set of renovations, and so on.
Business line of credit
Next, we have a business line of credit. This option is best for experienced flippers with a history of successful flips. Once a bank can see a successful history, they open up to working with you with a line of credit.
This lending option has some unique differences to other loans:
- You get access to a specific amount of money, but only pay for what you use.
- Lines of credit can go up to as high as seven figures
- Apply for these loans at your local bank
- You will need an excellent credit score, a decent amount of money in the bank, and stable revenue history to be approved
Home equity line of credit
This funding option is also known as HELOC and is an option for people who want to fix and flip and already own their own home.
To use this lending option, you’ll need at least 20% equity in the home. Here are some additional details about HELOC:
- Money can be drawn as needed and interest is paid on only the money that you use
- Interest rates and amounts available are usually favorable
- To qualify you’ll need at least 20% equity in your home, good credit, and enough monthly income to afford the mortgage and HELOC payment
- You may not get enough funding this way, but can combine this option with others
This loan type is best for house flippers who have retirement savings in their 401k (employer or another type), and don’t need it immediately. You may also be able to take a loan or withdraw funds from your 401k account.
I got started by using my 401(k), combined with a few other lending options. Some things to consider with this lending option:
- Most employer accounts allow a loan up to 50% of the account balance, or $50,000 whichever is the lower amount
- Interest is payable on the loan but the money is yours, so you’re paying yourself back
The last funding option we’ll get into is an option if the selling doesn’t mind an unconventional sale. Seller financing is also known as owner financing, as the seller acts as the lender.
As a buyer, instead of looking for funding elsewhere, you ask the seller to finance the fix and flip deal, it isn’t appealing to some sellers, but it’s always worth it to ask.
Some additional things to note about this lending option:
- Seller financing is advantageous to both seller and buyer. The seller is happy for getting the asking price, and the buyer gets a profit from the flip.
- Usually, the flipper makes interest-only payments until they sell the property.
- The seller can set a “balloon date,” which is a date the borrower has to pay back the loan.
- Always get the terms of this agreement in writing and work with an attorney to draft up necessary documents.
4 – Connect with Contractors and Other Professionals
The next step in kickstarting your house flipping business is connecting with contractors and other professionals who will contribute to the success of your business.
Even if you plan to get hands-on with the renovation of your properties, you’ll still need a team of contractors to hello with the work, particularly when distressed properties are involved. Not only will a contractor complete the work required to flip a house for profit, but a good contractor will know about licenses, permits, and other local requirements. You can also discuss your timelines and buffets with your contractors so you don’t have extended timelines or unnecessary expenses cutting into your profits.
Finding a contractor
Choosing the right contractor(s) can feel overwhelming, especially since you’ll want to connect with a few to find the best. I recommend starting with friends and family first, ask who they know and recommend.
If you get recommendations, it’s up to you to vet them and ensure they’re the right pick. If you don’t get recommendations that way, take a look online and read reviews.
There are some things I look for in a good contractor, including:
- References, and online ratings and reviews
- A successful history of contracting work
- Open communication
- A realistic bid (not too high, not too low)
- The proper licenses, permits
- Agreement on timelines and expectations
Finding a real estate agent
Another professional you’ll need on your team is a real estate agent. Real estate agents are a valuable asset as they have insight into the market, and access to databases to find homes first. Working with a real estate agent can also make you money, and keep you on track to buy and sell at the right price.
This is another part of your team that can be found through personal referrals. Here are some things to look for in a real estate agent:
- Experience and connections
- Positive reviews online
- Check references
Finding an attorney
Another person to keep on speed dial is your attorney. This isn’t just any attorney, you should be working with one who specializes in real estate. A real estate attorney has expertise in the laws and preparing documents essential to the home buying and selling process.
Real estate attorneys will specialize in the state and local jurisdictions and can confirm you’re not missing important documents or steps in the house flipping process.
Over time, there may be additional professionals you’d like to have in your corner.
These other professionals include:
- Home inspector
- Insurance agent
Those additional team members will come with time. For now, I recommend focusing on finding the right contractors, attorneys, and realtors for your house flipping team.
Be sure to meet with all potential team members in person and have interviews with each. Compare them and refer to your business plan for the ones who fit your team best.
5 – Understand the Importance of Market Research
Knowing your market is key to maximizing profits as a house flipper. Buying the wrong property in the wrong neighborhood could result in a low profit that’s not worth the time invested in the property, or worse, a loss.
When you get into market research, focus on learning about the following:
- Look at the neighborhood features and statistics including crime rates, new developments, new businesses opening, schools, parks, and more.
- Get a sense of the market and how quickly (or not) things are selling
- Identify the house and homeowner ages to get an idea of how dated homes may be
To get the full scoop on the market, it’s a great idea to work with a realtor. Realtors have an inside look at the hottest neighborhoods, information on recently sold properties, and other data that can help you find the right homes for flipping.
When in doubt, or to supplement your real estate agent advice, the internet has a vast amount of information available for free. Market research is key to a successful house flipping business, it’s a good idea to spend time here, the more information you have the better.
6 – Buy, Renovate, and Sell Your Flip
You’ve set up your business. You’ve connected with a team of reputable professionals. You’ve found and secured funding, or are at least aware of a few potential options. You know your market, you’ve researched recent selling prices, and there are properties on your radar.
Now, it’s time to pick a property, buy it for the right price, renovate it, and then flip it for a profit.
Turn to your team
This is where your team will really come in handy. Your team of real estate agent, attorney, and contractor(s) will get your project moving.
First, you will work closely with your real estate agent to find a home within your budget that has the potential to make a profit. You’ll bring in your attorney to keep things above board, ensuring the proper documents are filed and for overall peace of mind. And of course, your contractors are essential in these steps as they will adhere to your plans and get moving on renovations.
Work through your budget and timeline with your contractors, and put the research you did earlier to good use.
Look at comparable properties when determining what renovations need to be completed. For example, if recently sold houses in the same neighborhood have updated countertops, add those to your list too. And be prepared for the unexpected.
List the house
After the renovations are complete, it’s time to list the house on the market. There are quite a few steps here.
- Work with you agent and consider market research when determining when to list and at what price point.
- Get a pre-sale home inspection
- Get professional photos
- List your home on websites like Realtor and Zillow
- Have open houses
- Review and negotiate offers
Let’s make one thing clear: Flipping houses isn’t easy, no matter how simple it looks on TV. But if you’re ready to put in the work, you’ll find that house flipping is extremely rewarding.
As you start your house flipping business, complete your first flips, and begin to find your groove, you’ll find that the process gets easier. You don’t have to go at it completely alone, though. We have a load of great small business resources out there, so check them out and get ready to build your business.
Ready to take that next step when it comes to flipping?
Perfect! I’ve got additional resources 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 key to added value in a home.
There are several videos available on finding houses, renovations, and funding on the Threshold Homes YouTube Channel. Check out your favorite flipping topics and new videos weekly.
You can’t close a successful and profitable flip unless you start. What is your biggest challenge with getting started house flipping? Let me know. It may be an area I’ve also had questions about myself. I’m here to help so drop me a DM.
Want to buy a property and renovate it?
Get my checklist that will help you — 8 Things I look for When Purchasing a Home. Just click here to download it.
Love before and afters?
Follow us on IG @thresholdhomesmn and FB @thresholdhomesmn to see the projects we’re working on. And for more ideas on renovating & restoring fixer-uppers!
Looking to buy a house to renovate? Check out the fixer upper checklist to help you find the house with the most “flip” potential. For more inspiration follow me on Pinterest @thresholdhomesmn
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