House Flip – 5 Main Ways to Profit
‘House Flip’ is a common definition for re-selling a property for quick profit, which has been purchased at below market price and improved to increase its value. House Flip is different from long-term investing, also referred as ‘buy and hold’, whereas the buyer purchases a property and rents it out for passive income. Learning the process of flipping and the best practices to adopt in order to make it a profitable venture are essential elements of this common real estate investing strategy.
Before going into the 5 main ways to profit from a house flip, I would like to outline the most common points to keep in mind in order to make this a successful strategy:
1. Understand and Educate Yourself about the Present Real Estate Market – the real estate market is like the stock market. It has both bull cycles (growth and high demand) and bear cycles (contraction and low demand). The difference is that the housing market takes longer than the stock market to switch from one cycle to another.
As an investor you have to understand the cycles in order to fine tune your investment strategy – ‘house flip’ during a bull cycle and ‘buy and hold’ during a bear cycle.
A good resource to find out more about real estate trends and forecast is realtor.org.
2. Evaluate the Risks of House Flip – there are unforeseen and unpredictable problems that might happen when you house flip. A lot of money is tied up in a project either by borrowing it (mainly with hard money) or using your own cash reserve. Sometimes the payoff doesn’t materialize as expected.
Also if you don’t have experience in renovations, you will have to get some basic knowledge of general construction requirements and permits, plus find reliable contractors to work on the project.
3. Know Where and How to Buy Highly Discounted Properties – house flip (where you buy and improve the property) or wholesaling both require that the property in question be purchased at the right price from the beginning. You have to buy low with enough room to make a profit (I usually suggest that the net profit be at least 10% of the final sale price,) after adding rehab costs, holding costs, finance costs and closing costs.
There are several ways to find highly discounted properties – I teach them through any of my coaching courses. Your skills and success depend on finding these properties before other investors do and negotiate favorable prices.
Now as far as the 5 Main Ways to Profit from a House Flip:
1. Using Your Own Funds – Cash and savings, equity you’ve built up in your home (most likely via a home line of credit), and a very popular one nowadays, self-directed IRA (important to remember that any money put into the property after initial purchase must also come from the IRA.)
2. Hard Money Loans – High-interest, short-term loans that are often attractive to investors who can’t qualify for other types of loans. (One benefit of hard-money loans is that the lender often accepts the investment property as collateral for the loan, so you don’t have to place your own home at risk, and they are more lenient on personal credit or income history.)
3. Government Loans – If you’re buying properties from government-sponsored programs, you may qualify for government loans, even as an investor. There are also several grants available, especially if the house flip occurs in area where neighborhood stabilization or improvement are needed.
4. Private Money or Joint Ventures – I call this ‘bringing in money partners.’ There are several individuals who have money to invest, but do not personally want to deal with finding properties, supervising construction and selling properties. This strategy has actually been a game changer for me – I tech about it in this course: Private Money Made Easy.
5. OPR (Other People’s Resources) – if you can come up with the purchase price of the property, but don’t have the funds for the rehab materials or labor, partner with a general contractor, who can do the work and supply highly discounted materials through his affiliations, for a percentage of the profit at the sale of the deal. This is actually the strategy I have personally used when I started flipping houses. I borrowed the purchase price through a hard money-lender, but then I used a general contractor who was willing to work as OPR – he ended up making more money under this arrangement instead of a regular contract, so we continued to work with this model for several years.
Like everything else in life, the more you get into it and sharpen your skills, the more you will come up with creative ways to put deals together and make them a win-win situation.