If there’s one investment that always stands the test of time, even weathering serious financial crises, it’s real estate. If you’re looking for a lucrative investment that diversifies your portfolio and sets you up for retirement, look no further than buying property.
That’s not to say that it’s not a real business that requires extensive work, because it does. But with the right steps and some trial and error, you too can start flipping houses, increasing your retirement nest egg, or fulfilling any other financial goal you may have.
Before you jump in headfirst, check out the steps you should take.
#1: Choose your Business Structure
Before you start, consider how you want to run your business. Buying and flipping houses is risky. Things could go wrong (we hope they don’t), but you should always protect yourself financially. Operating as a sole proprietor puts your personal finances at risk. Instead, take the burden off yourself and structure your business as an LLC or S-corp. Talk to your tax advisor or attorney to determine which structure suits your plan the best.
#2: Set a Budget and Create a Business Plan
You can’t invest in homes without a budget or business plan. Think of flipping houses as a business (because it is). Don’t start without putting pen to paper, figuring out your short-term and long-term plans.
Important details to include are:
- How much do you plan to invest?
- How much do you plan to hold in liquid reserves?
- What types of homes are you willing to buy/flip? Are you looking to do extensive repairs or just fix cosmetic issues?
- How long do you plan to hold a home before flipping it?
- How will you get financing?
These are just a few questions to get you started. Think about all aspects of the business and create a plan to ensure you get the most out of it.
#3: Determine how you’ll Finance the Properties
A big part of your plan includes financing. Where will you get the capital? Are you investing cash and is it an all-cash purchase or will you take out a mortgage? Where will you get that money? A few common places include:
- Equity in your current home
- Selling other investments
- Hard money loans
- Using capital that you have saved
For example, if you were to find an ideal property to flip in New Haven, Connecticut the simplest way to fund the property would be to use the combination of a hard money loan, and capital that you have saved (usually for the down payment). Provided your credit score is good, this is the fastest and most hassle-free way to purchase a fix and flip.
#4: Network with Contractors
Before you look for homes, get your contractors lined up. Once you buy the property, you’ll want everything to move along as fast as possible to put the money back in your pocket.
Interview at least 3 contractors, asking about their experience with fix and flips, their timeline, and of course their costs. Make sure any contractor you choose is licensed and insured and understands your desired timeline as you outlined in your business plan.
#5: Find the Right Properties
It’s finally time to find properties! This can be fun and frustrating at the same time.
Look at the local foreclosure listings, Notice of Defaults recorded, and even listings of properties selling (as-is). Ideally, you want to buy a property selling for less than its market value so there’s room to fix it up and sell it for more than you invest in it.
#6: Make the Renovations
Once you own the house, get the renovations started right away. This is why having a contractor ready is crucial. The longer the house sits, the more your carrying costs increase, which decreases your profits. Make sure your contractor still has the same timeline by the time you close on the property – if not, look elsewhere as time is money in this case.
#:7 Sell the Property
The final step is to sell the property. This is a time to look back and see how it all went. Did it go according to your business plan or does it need some tweaking? Your first flip probably won’t go on without its issues, so don’t get too upset, but make note of any issues you incurred and determine how to prevent them from moving forward.
#8: Bottom Line
Flipping houses is fun, profitable, frustrating, and overwhelming all at the same time. Before jumping in headfirst, create your plan. Do your research, know the area, talk to other house flippers, and learn from their mistakes. The more resources you have at your disposal, the easier your first ‘flip’ will be and hopefully, it paves the way for a lifetime of fixing, flipping, and earning profits.