Real estate flipping, or house flipping, is an investment strategy based on the purchase of undervalued or in need of repair real estate in order to quickly improve it and resell it at a higher price.
The basic idea of flipping is to invest in cosmetic repairs or remodeling of the house, increasing its attractiveness to buyers and, consequently, its market value. Flipping focuses on generating quick profits by effectively managing the time and budget of the renovation.
Key aspects of flipping:
- Finding undervalued properties: Flipping success starts with the ability to find properties that are selling below market value. These can be homes in need of repairs, properties after bankruptcy, or homes that are being sold in a rush sale.
- Quick and efficient repairs: A key factor in the profitability of flipping is the speed of repairs. Typically, flippers focus on cosmetic repairs that can be completed in the shortest amount of time possible without dragging out the process or increasing costs.
- Increasing curb appeal: Repairs should focus on making the home more appealing to the buyer’s target audience. This can include updating the interior, kitchens, bathrooms, improving landscaping and overall creating a modern and cozy space.
- Quick resale: The goal of flipping is to sell the renovated home as quickly as possible to recoup the investment and make a profit. Time is money in flipping, and delays can eat up potential profits.
Example of Successful Flipping: A Real Case Study
To better understand the process, let’s look at a case study:
- Purchase: A home was purchased three months ago for $760,000 in California.
- Condition at time of purchase: The exterior of the home was in relatively good condition, allowing the focus to be on interior renovations.
- Resale Price: The home is listed for sale for $900,000.
- Estimated profit (before expenses): $900,000 – $760,000 = $140,000.
- The entire flipping process, including purchase, renovation and sale, is expected to be completed within 4-5 months, including time to close on the contract with the buyer.
What was done during the renovation process:
The focus was on the interior spaces. As mentioned the exterior of the home was quite decent.
Guest room:
Floor: Replaced old flooring with new laminate, a modern and practical material that is easy to install and looks attractive.
Ceiling: The beams on the ceiling were painted to give the room a fresher and more stylish look. A contrasting color may have been used to accentuate the architectural features of the room.
Fireplace: It was repainted in light colors. This makes it look more modern.
Lighting: Replaced the light fixtures with more modern and energy efficient fixtures.
Dining Room and Kitchen (combined space):
Lighting: Replaced light fixtures in the dining room to match the overall style of the house.
Ceiling: Painted the beams on the ceiling, continuing the styling used in the guest room to create a unified design.
Windows: Replaced the windows with new ones, now double-glazed.
Layout: Removed the wall between the dining room and kitchen and made an island. This is a popular interior layout solution in the US. The island adds functional workspace in the kitchen and can serve as a breakfast area.
Kitchen Furniture: Changed all the furniture in the kitchen for a new kitchen set, choosing a modern style and materials. The new cabinets greatly improve the functionality and appearance of the kitchen.
Appliances: Replaced the appliances with modern ones. Black color is chosen for them, which blends well with the light tones of the kitchen itself.
Bathroom:
Complete remodel: The bathroom was completely renovated including replacing the sink, toilet, flooring, tile and shower. Bathrooms and kitchens are the areas that most influence a buyer’s decision, so they are often heavily invested in when flipping.
Painting: New painting of the walls and possibly the ceiling to complete the bathroom update and give it a fresh look.
Backyard (Backyard):
No change: Nothing was done to the backyard, it was left as it was. In this example, perhaps the backyard was in acceptable condition and did not require immediate investment, or the budget and timeline were limited and the focus was on interior improvements. However, in other cases, backyard improvements (landscaping, patio, seating area) can also significantly increase the value of a home.
Financing Flipping Projects: Basic Types of Mortgages
There are two main types of mortgages available for flipping financing in the United States: the Hard Money Loan (private financing) and the traditional renovation mortgage.
“Hard Money Loan” (Hard Money Loan) are short-term loans from private investors or funds, characterized by fast closing times (2-5 days) and disbursement for up to 12 months. These loans require a down payment of 20% or more, but have minimal documentation requirements, focusing on down payment and property value. The interest rate is higher than a traditional mortgage, usually around 9% APR, which is justified by the speed and flexibility of this option. “Hard Mani” is suitable for investors who need quick financing with a substantial down payment and the certainty of a quick resale. This option is the one most often used for flip.
A traditional Rehab Mortgage, on the other hand, is a mortgage loan from a bank that includes funds for the purchase and renovation. The process of obtaining such a mortgage is longer (more than 30 days), but the terms tend to be more favorable. The interest rate is lower, for example, about 5% per annum, and there may be more favorable conditions on the down payment. However, banks have stricter requirements for the borrower’s credit history, income and documents. This option is suitable for investors with a good credit history, who are ready for a longer process of obtaining financing and prefer lower interest rates.
Conclusions:
Flip homes are a potentially lucrative type of real estate investment.
Success depends on careful planning, controlling costs, and understanding the market.
Before starting an endeavor, you need to thoroughly research all aspects, and calculate all risks.
