By George Nicola (Expert Stager)
Besides conducting extensive research and having an unwavering appetite for risk, it demands building key relationships with lenders and contractors while supervising the entire project to completion.
The biggest mistake I see people making is purchasing a property, thinking to renovate it from scratch, which is the wrong approach, leading to money loss in 75% of cases. What will make your efforts more profitable is starting from the start and discovering the right property to renovate in the right place and demographic with a long-term plan in hand!
George Nicola (Expert Stager)
House flipping actually involves purchasing a below market value home, meaning you are likely to have more than one mortgage and at the same time come up with a down payment.
Read on to know the practical steps of buying a house to renovate and sell, the best and worst scenarios as well as the pros and cons of house flipping.
What is House Flipping?
Generally, house flipping is the process of buying a rundown property at the lowest possible rate to fix it and resell it for a decent profit. Real estate investors usually dedicate ample time and financial resources to renovate them completely.
While flipping houses may not be a long-term buy and hold strategy, you can earn a decent living through it, especially if you strictly follow the BRRRR method (buy, rehab, rent, refinance, repeat).
However, it is essential to note that house flipping involves substantial financial risks. This means that it is not guaranteed that you will always sell for profit.
This is where the 70% rule comes in handy! House flippers always try to find and buy below market value and use this rule to calculate the maximum amount to buy a distressed property for flipping. Essentially, you should spend 70% or less of the property’s after-repair value minus the renovation costs.
If you purchase a house for $500,000 (£368,000), spend $100,000 (£74,000) to renovate it, and eventually sell it for $540,000 (£398,000), you will make a loss. This is because you must consider the renovation costs, along with other costs of holding and selling the property.
Should You Buy an Old or New House?
Irrespective of the one you want to buy, you can still make a decent profit from an old house of new house once it is renovated, but there is also a possibility of making a loss.
Pros and Cons of Flipping a New House
The current market is one of the biggest pros of flipping a new house. Potential buyers will be more attracted to newly constructed homes in areas with flourishing real estate markets.
Therefore, flipping new houses is usually lucrative in such hot markets. Moreover, new places are cheaper to build in locations with rapid development, meaning flipping new homes is more profitable.
It could be challenging to secure enough funds to buy a property unless you were lucky enough to work with a trusted lender beforehand.
Furthermore, covering all overhead costs during renovation requires enough cash on hand. This also means hiring an experienced contractor who will help you identify areas that need remodelling and calculate the costs with accuracy.
Pros and Cons of Flipping an Old House
Making a substantial profit is a clear advantage of buying an old property to renovate and resell compared to a new house.
If the derelict house has been vacant for a lengthy period, you’ll save a lot of money on the purchase. In addition, if its overall condition is good, and the renovation needed is straightforward, you can make a significant profit.
An old house usually has cracked foundations, leaky roofs, defective electrical wiring, plumbing issues, broken windows, faulty heating and cooling systems, etc. Furthermore, old houses may lack modern fixtures sought by potential buyers. It might also be costly to fix health hazards, such as mould or asbestos.
While flipping old houses is more time consuming, it is more profitable than flipping new dwellings. Since making a profit is usually the primary goal, buying an old home is ideal.
Retrofit or Start from Scratch
Retrofitting involves updating older systems in a house while starting from scratch means tearing it down and rebuilding afresh.
Pros and Cons of Retrofitting a House
Retrofitting takes less time compared to starting from scratch. The average time is usually a few weeks to a few months, depending on your skills, planned money and people involved in the retrofit. On average, in the US, a house flip takes between 0.9 to 4 months, and in the UK, it takes between 0.5 to 5 months.
However, bigger houses might take longer, especially if you must break down and rebuild walls.
Also, retrofitted homes reduce carbon emissions, which helps you avoid dampness and poor ventilation problems. Generally, retrofitting is less expensive if you plan and research in advance.
However, retrofitting can cause damage to historical buildings ad heritage sites. Therefore, before retrofitting, you need to hire an expert to critically analyze the structure because any small negligence or irresponsibility can cause significant damage.
This means that your workforce must have exceptional good expertise.
Pros and Cons of Starting from Scratch
If you need more space, it’s advisable to build something new that’s perfect in the long term. Also, if you hate the house but love the neighbourhood, the cost of retrofitting may outweigh the cost of starting from scratch, especially if there is available land.
However, new construction typically involves more labour, materials, and finances. It also takes longer due to the total amount of work required, such as digging the foundation, fixing utility equipment, and building the entire structure from the ground up.
Depending on the type of structure it can take from a few weeks for pre-fabricated buildings, to a few months or even a few years for large and more complicated buildings.
In extreme cases, a build from scratch can be a better solution than a retrofit.
The right decision depends on the scope of the project. Generally, starting from scratch gives you more control, as you can effortlessly modify the house to match your exact needs, but it could take longer and be pricier than retrofitting.
Best and Worst Scenario When Buying a House to Renovate and Sell
Buying and renovating houses demands building vital relationships with lenders and contractors while supervising the entire project to completion. Irrespective of the property you want to buy, consider the following best and worst scenarios.
- You can flip any type of property in any location.
- You can have more control of a project until its successful completion in terms of research, costs, skills, manpower, etc.
- You can hire the right people, such as expert realtors, contractors, and designers to increase the odds of successfully flipping a house.
- You may be required to cater for capital gains tax on the sale.
- You can end up renovating a house excessively and mismatch the value of other neighborhood properties.
- You might make a loss if you fail to factor in all expenses, such as renovation, holding, and selling costs.
How to Flip a House in 3 Key Steps
As a real estate investor, buying a house to renovate embroils systematic research and planning before you sell it to a potential buyer. There are the three key steps that you need to consider as a house flipper:
Step 1: Research
1. Location! Location! Location!
Since it’s impossible to change a property’s location, your potential investment depends on your preferred area. Therefore, you should consider the following common characteristics of locations:
- Is it rural, urban or suburban?
- Does the area have a high demand for housing?
- Does the neighbourhood have new constructions or vacant properties?
- What types of tenants (families, bachelors, middle class) currently live there?
- What’s the distance to your primary residence? (Helps you calculate travel expenses).
- Finally, what’s the proximity to key social amenities, such as schools, hospitals, shopping centres, and transportation?
2. Crunch the Numbers
To determine your budget, ask yourself the following questions:
- How much money do I want to invest?
- How much money am I comfortable losing?
- Where will I get additional funds, if needed?
- How much mortgage + interest will I need to borrow?
To determine the property’s value, start by examining its income and expenses over the years. This will not only help you predict its operating costs, but also calculate its Net Operating Income (NOI). Then ask yourself the following questions:
- How much rent do you want to charge?
- How much are comparable properties in your location sell for?
- What is the average vacancy rate of properties in the location? The vacancy rate is the percentage of units in rental properties that are currently unoccupied.
- What will be the annual cost of maintaining the property?
- What is the cost of insurance?
- How much tax will you pay?
- What is the Capitalization Rate of the local market?
- Have you conducted a Comparative Market Analysis? (This helps you set a sensible listing price).
3. List the Much-Needed Renovations
You must identify the necessary repairs and estimate whether your budget can accommodate them. This will help you answer questions such as:
- Does the house require cosmetic repairs, such as applying one or two coats of paint etc.?
- Does the house require an in-depth amount of work that includes new plumbing, flooring, electrical wiring, etc.?
After identifying the necessary repairs, it is crucial to know whether you can afford them. Generally, repairs in a house that requires renovation usually vary depending on whether you hire a contractor or do it yourself.
In addition, not only does the cost of labour varies from one state to another, but the cost of materials also depends on the value of the house. For instance, a house you bought for $1 million (£740,000) will need higher quality materials than a cheaper one that costs you $100,000 (£74,000)
In most cases, repairs usually surpass the budget significantly when you exceed the anticipated time for completing the project. This will force you to cater for other overheads such as the mortgage, insurance, and property taxes on the vacant property until you complete the repairs.
4. Know Your Local Real Estate Market
Do you want to buy a house, renovate it and sell it quickly or are you looking for a long-term holding strategy?
During a recession, it is not easy to flip a house such as a McMansion (US) or other mass-produced houses with easy to afford mortgage solutions in other countries.
Mass-produced dwellings aimed to serve the upper-middle-class, mainly in the United States. The McMansion trend appeared first in the 1970s along with the cheap oil boom that allowed people to keep large houses and drive anywhere.
Instead, you should purchase a foreclosed property and flip it because there will be many potential tenants looking to rent. However, if you can finance its expenses, a McMansion can give you a decent profit if you hold it in the long term.
You should also know the resale value of the property in the market.
Always invest in a house that you can easily buy and sell irrespective of the nature of the real estate market. Just ensure that you renovate the house in such a way that it will appeal to many potential buyers and prospective tenants.
Step 2: Plan
1. Hire Contactors or Do-It-Yourself?
You should decide whether you will hire a contractor or DIY. In most cases, while you can do much of the repair work on your own, a specialist handyman is needed for certain tasks, such as plumbing, electrical wiring etc.
Where necessary, apply for permits for the DIY tasks. While hired contractors usually take care of permit applications, you should protect yourself from unethical contractors who can rip you off by doing shoddy renovations. If you become a victim, here’s how you can get revenge on a bad contractor.
2. Hire an Interior Designer
Whether you want to retrofit the house or build it anew, hiring an interior designer to draw a detailed architectural blueprint of the remodelled house is important. Hiring an expert interior designer can help you correct errors before you start the physical repairs, which is cheaper and less frustrating in the long run.
3. Optimize the Layout to Maximize Value
To maximize the value of your investment, you must first know the features that appeal to your potential buyers. Avoid costly and labour-intensive features, and instead optimize the layout with sensible and cost-effective features, such as:
- New flooring
- Raised ceilings
- Fresh internal and external coats of paint
- Uncluttered garden and landscaping
- Introduce balconies where necessary
- Master suite conversions
Concentrate on the kitchen and bathroom because they maximize the value of a home. Also, use neutral paints, colours, textures and materials.
Avoid renovations that devalue a house, such as bold colours, excessive wallpaper, textured walls, built-in electronics, removing closets, too much carpeting, luxury bathrooms, etc.
A perfect way to increase the value is converting an ordinary bedroom into a master suite; here we’ve written a concise guide.
4. Create a Timeline
Before you start the renovation process, come up with a clear timeline for repairs complemented by a detailed schedule for every contractor. You can put this on a shared spreadsheet to ensure everyone is aware of the tasks beforehand.
Step 3: Execute
1. Sell through Realtors
Hire a skilled local realtor to guide you through the sale process because they can even introduce you to many quick-sale cash buyers. But ensure you control the asking price so that you can make a decent profit once you are ready to sell.
Apart from selling to buyers, you can also sell to investors since they usually see the potential of a house over its perfection.
Therefore, as a homeowner, watch out for these 3 types of investors who are always on the lookout for renovated properties: flippers, deal hunters and remodelers.
2. Sell through Conveyancing
You can also sell through a conveyancer, which takes about 12-16 weeks.
It entails the below steps:
- Contact your mortgage lender to find out your outstanding mortgage
- Find the right licensed conveyancer
- Fill and return questionnaires (paperwork and legal documents) to conveyancer
- Your conveyancer will prepare a draft contract and send it to the buyer’s conveyancer
- Buyer’s conveyancer reviews draft contract and submits pre-contract enquiries to your conveyancer.
- Prepare your property for survey
- Respond to buyer’s pre-contract enquiries truthfully
- Finalize contract and settle on completion date
- Exchange of contracts between your conveyancer and buyer’s conveyancer
- Completion day: vacate property for buyer to move in
If you have encountered problems during the conveyancing process, you can:
Complain to the Legal Ombudsman’s service if it’s about poor service
Complain to the Council of Licensed Conveyancers if it’s about a breach of rules
3. Tax Implications
After completion day, your conveyance will organize on how you will pay Stamp Duty or Land Transaction Tax that is due on the property.
Your conveyancer will send the Stamp Duty to the relevant tax authorities and, in turn, receive the title deeds, transfer deed and proof that you paid the property’s outstanding mortgage.
What to do after the House is Sold?
After you have sold the house, take advantage of the BRRRR Method to boost your income. Once you have built sizable equity in flipping rental properties, you can buy a second property by refinancing the first one.
Traditionally, if you wanted to buy six rental properties, for instance, you’d have to make a down payment for all the six properties along with a mortgage on each. However, the BRRRR method helps you grow a portfolio of many rental properties with less cash.
To be successful at BRRRR, you must find the right people and discover quality off-market properties that will further your property investments. In short, the BRRRR investing method helps you secure funds for other projects.
- House flipping is the process of buying a rundown property to renovate and resell for profit.
- You might make a loss if you don’t consider all renovation, holding, and selling costs.
- You can flip any property in any location.
- Generally, it is more profitable to flip old houses than new ones.
- You can renovate yourself or by hiring a contractor
- The BRRRR method helps you secure funds for flipping more houses.
House flipping involves substantial financial risks. This means that it is not guaranteed that you will always sell for profit. Nothing in this article is advice, and you should always consult with experts.
The author and owner of this website do not take any responsibility.