What Is House Flipping?
House flipping is when real estate investors buy homes, usually at auction, and then resell them at a profit months down the road. Can you make money doing this? Yes. Can you make a lot of money doing this? Yes. But you can also lose everything you own if you make a bad decision.
House Flipping Requirements:
You can find some real bargains in the real estate market. In fact, there are 1-2 million foreclosed homes for sale right now, and the Wall Street Journal reports that another 7.5 million U.S. homeowners are either behind on their payments, or in the foreclosure process.
Thanks to tighter lending standards, and a depressed buying market, you need plenty of cash, and nerves of steel, to get into house flipping. Imagine buying a house for $50,000, investing another $20,000 in renovations, and then…nothing. No one wants to buy the house. You now have to pay for your own rent or mortgage, plus the mortgage for this home, and utilities, insurance, and property taxes.
So what do you need to get started?
1) First, you need a good credit score. Lenders have tightened their requirements for loans, especially if you want a loan for a high-risk house flip. If you don’t have great credit, try to partner with someone who does. Usually a lender will take the higher of the two credit scores.
2) You need cash. Use the cash for a down payment and closing costs. The more cash you can bring to the project, the more favorable a lender will look at your financing application which means lower interest and fees. If you can finance your owner renovation costs that’s even better, though most private lenders are willing to create draw schedules for construction or reimburse you at the end.
3) You need to know the real estate market. You want to buy a home in a great location, fix it up, and sell it at a profit as quickly as you can. In order to sell the home quickly, it must be located in a great area. The longer it takes to sell the house, the more money you’re going to lose to monthly mortgage payments, and payments for insurance, utilities, and property taxes.
4) You need a good, trustworthy contractor. Unfortunately the trust part will only be proven with time but you can ask around for a good contractor. Find someone who is comfortable with the area, can work quickly and has access to contractor/wholesale suppliers for appliances, cabinets, paint, etc. Make sure they are licenses and bonded, and request to have a copy of that information upfront.