There are plenty of myths out there about house flipping. At the top of the list is the idea that house flipping isn’t easy. While I wouldn’t say it’s for everyone, it is a great option for anyone interested, and you can make it happen if you have the passion.
Next on the list are “rules” for house flipping that are generally outdated and not as much of a rule as a guideline. These house flipping beliefs we’re about to challenge are related to how much a flipper should pay and how to pay it, what partnerships are needed or not, and design necessities.
The 70% Rule
The 70% rule in house flipping used to be a tried and true “rule.” Now, it can result in missed opportunities, and I don’t recommend making decisions this way.
The 70% rule says house flippers should pay 70% of the after repair value (ARV) minus any repairs for the home. This means, if you’re looking to buy a home that has an ARV of $200,000 and there are $10,000 worth of repairs, you should be buying the house at about $130,000 (200,000 x 0.7 – 10,000 = $130,000).
You might see how that can work, and it was a rule many flippers kept to in the past. I don’t recommend it as there are other factors to consider, and a complete analysis of the home is needed to determine your purchase price.
For example, the market might allow for a lower offer or may require you go in with a higher bid to secure the home. Additionally, if you don’t intend to quickly turn around and sell the house, the “rule” doesn’t make sense, as many things change over time.
Cash is the Only Way to Buy
Next comes the purchase. A common belief is a cash is the only way to buy. The truth is, that’s not always the case.
Low-interest rates can provide a much better opportunity to leverage. Instead of limiting yourself to just one project that’s entirely in cash, consider working on two projects by accessing funds at a low rate. Lost opportunity cost is also a consideration when flipping.
Not always. Low-interest rates can provide a much better opportunity to leverage. Instead of limiting yourself to just one flip paid entirely in cash, consider working on two projects by accessing funds at a low rate. Lost opportunity cost is also a consideration when flipping.
There are several ways to fund your flip, including a hard money loan, home equity line of credit, using your 401(k), seller financing, and private lending.
Partnerships Make it Easier
Some say it’s best to have a partner for home flips. I disagree. First, I want to say that learning from, collaborating with, and accepting help from others can help you get the job done, but that doesn’t mean a full-on partnership.
Unfortunately, taking on a project with another person can get you in a stressful situation. For instance, I had a partnership that went sideways. They picked awful paint colors, would only agree to spend money on half the roof, and chose the cheapest materials possible. As you can probably guess, my partner and I were on entirely different pages regarding expectations and goals for the home.
If you choose to engage in a partnership, be sure to define roles and expectations clearly. Without that, partnerships can be challenging and result in lower realized profit.
Design Doesn’t Matter
With the evolution of home improvement, things have changed in the house flipping world. Buyers want to be wowed, and that means the design has to be a priority.
Instead of putting off the design aspect of your flip, get in tune with buyers’ expectations by understanding the trends and highlighting the best parts of the home’s space.
With that said, there is a difference between going all-out with your renovations and making cosmetic upgrades. As part of your initial viewing and analyzing if the property is suitable for a flip, determine what is needed and where design can add additional wow factors.
It’s true, house flipping doesn’t necessarily require extensive design upgrades and staging, but it is a simple way to compete in the market and outshine many other potential listings.
Only List Your Flip in Spring
Another myth is that the best time to list is in the Spring. With the inventory shortages in many markets across the country, this is no longer the tried and true rule. If most traditional sellers are waiting until the Spring to list, that means there will be more competition for attention and offers.
When listing your flip, consider your specific area and market. You might speak with real estate agents to understand when may be the prime time to list.
Know the Myths and What’s Right for Your Flip
The “rules” of flipping are truly only more of a guideline than a hard and fast rule. And as you likely know, they are changing as the market evolves. While the 70% rule may be a rule of thumb to keep in mind, it is not as accurate as it once was. The same goes for how you fund your flip when you put your flip on the market and who you partner with. Knowing the limitations of each of these and when they may actually be incorrect is key to your flipping progress.
Ready to take that next step when it comes to flipping?
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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.
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