Your Step-By-Step Guide To Starting A Successful House Flipping Business
If you’re intrigued by the thought of making money by flipping houses, you aren’t alone. Flip through the TV channels (pun intended), and you’ll see home improvements that lead to a five- or six-figure payday. You may have even received an email promising frozen cocktails on the beach while raking in the dough … all because of house flipping.
What these TV shows and emails don’t tell you is that there is a lot of hard work involved in starting a house flipping business. I know, I know. The idea of a burgeoning bank account without having to do much work is appealing, but it isn’t the reality of the industry. That said, don’t be entirely discouraged — you can build a successful business that centers on flipping houses for a profit. You simply have to be prepared to put in the hard work — just as you would with any other business.
In this guide, we’re going to look at how to start your own house flipping business, step-by-step. While this isn’t a get-rich-quick scheme or even a guarantee of profitability, understanding the industry and what it takes to open and operate your business can increase your chances for success. Whether you’re brand new to house flipping and toying with the idea of becoming an entrepreneur, or you’re ready to hit the ground running, this guide is a must-read before you get started.
Why Start A House Flipping Business?
If you’re reading this, you probably already have at least some idea of what a house flipping business does, but let’s briefly review what this type of business entails. A house flipper buys a property at a low cost. This property could be distressed and in need of repairs, a foreclosure, an older home that needs to be updated, or a house that is located in an up-and-coming neighborhood. Once the home is purchased, it is renovated and resold to another buyer at a higher price.
So, why are people jumping into this industry? One reason that many people choose to flip houses is the potential for profits. If a property is purchased and renovated at a price that’s low enough and resold at a much higher price, you have the potential to pocket thousands of dollars per house. For example, let’s say you purchase a house for $120,000. After putting $20,000 into the house to replace floors, cabinets, counter tops, and make other cosmetic repairs, you are able to resell the house for $150,000. You have only invested $140,000 in the house, so you make $10,000 on this flip. Of course, there are circumstances where a flip doesn’t work out exactly as planned (which we’ll cover a little later), but there is the potential for big profits with a house flipping business.
A house flipping business may also be a great opportunity if you’re somehow already familiar with the industry. Maybe you have experience as a real estate agent or contractor, and you’re familiar with how the business works. You might have even flipped a house or two to make extra cash in the past, but now want to make it a full-time career. If you have experience — whether it’s selling properties or fixing them up — you can put these skills to work for your own house flipping business.
Finally, right now may be the perfect time for you to flip houses. We all remember the housing crisis of 2008, but more than 10 years later, the real estate market is hot again. Housing prices are on the rise, and investors are grabbing up properties to flip. According to Realtor.com, mid-sized cities in the South and Midwest with strong economies, growing populations, and an abundance of older properties in need of rehab are prime markets for flipping. If you live in these areas, house flipping may be the right business opportunity for you.
No matter what your reasoning, you must be prepared to work hard to make your business a success. From finding and securing financing to marketing and reselling your properties, you’ll need to be fully involved every step of the way (at least at first) and be prepared to encounter bumps in the road on your path to building a business.
6 Steps To Starting Your Own House Flipping Business
Whether you’ve already set your mind on flipping houses or you’re still on the fence, it’s important to understand what this business requires to be a success. We’ve outlined six steps to starting your own house flipping business to help you determine if this business is right for you. If so, these tips can help you get you on the right track. Let’s jump right in.
#1 Write Your Business Plan
Every business should have a business plan, and a house flipping business is no exception. A business plan is important for a few reasons. The first is that it acts as a road map for your business. It outlines the purpose of your business, evaluates the industry and your competition, projects profitability, and states the goals of your business.
In addition to outlining your goals and how you’ll achieve them, a business plan is also necessary in most cases to obtain funding. Flipping houses requires capital — capital that you obtain from traditional lenders, investors, or other sources. Your business plan shows that you know what you’re doing, you’re familiar with the industry and your competition, and you have a good chance for success, all of which add up to a lower risk investment for lenders.
There are several ways to write a business plan. A traditional business plan spans several pages and is more complex, containing in-depth analyses of your market and competition, financial projections over the next three to five years, your business strategy, and information about the members of your team. However, more businesses are scaling back on these lengthy documents and opting to create a one-page business plan. A one-page business plan is a condensed version of the traditional plan, offering information such as your objectives, a financial summary, and your industry experience. Learn more about whether a one-page business plan is right for your business.
No matter which plan you choose, there should always be a few things you include about your house flipping business, such as basic timelines, projected budgets, your market, and the types of properties you plan to flip.
#2 Set Up Your Business
Once you’ve written your business plan, it’s time to set up your business. At a minimum, this includes choosing your legal structure, registering your business name, setting up a business bank account, and acquiring any required licenses or permits. Taking these steps allows you to legally operate your business, determines how you pay taxes, and gives you credibility with lenders and investors.
The first step is to choose your legal structure. As a quick summary, a legal structure for a business may take the form of one of the following:
- Sole Proprietorship: A sole proprietorship is the easiest and cheapest to set up. It does not require registration. Sole proprietors are taxed at the personal tax rate and file business earnings or losses on personal tax returns. This structure does not offer liability protections.
- Partnerships: A partnership is a structure for a business with two or more owners. Partners are taxed at the personal tax rate and file earnings or losses on personal tax returns. Limited partners have liability protections, whereas general partners do not.
- Corporations: A corporation is the most expensive to form and has the most requirements, such as annual meetings and a board of directors. Depending on the type of corporation, taxes may have to be filed using the corporate tax rate. Corporations can raise money through the sale of stock. There are also liability protections in place for owners.
- Limited Liability Company (LLC): An LLC offers features of several legal structures. There are no requirements, and owners can choose how they are taxed. There are liability protections under an LLC.
This is just a brief summary of each type of legal structure. To learn more and to help determine which is right for you, check out our in-depth guide on choosing your business structure.
Once you’ve determined your legal structure, you’ll need to register your business name with the state in which you’ll operate. Depending on the legal structure you select, additional fees and or paperwork may be required.
Next, you’ll need to find out the types of licenses you need to operate your business. If you’re operating in an office outside of your home, for example, you’ll need a general business license and business insurance. As a house flipper, you’ll also need permits and insurance on each house that you flip, so it’s best to establish a relationship with an insurance agency early in the game. Some house flippers opt to get their real estate license. While this isn’t a requirement for flipping houses, it can certainly help you along the way.
Finally, you’ll need to set up your business bank account. This is necessary for keeping your business and personal finances separate, which especially comes in handy when tax time rolls around. If you seek business funding, this account will also be where your funds are deposited.
#3 Know How To Find & Secure Funding
You’ve taken all the steps of setting up your business and your new bank account. Unfortunately, your new business bank account is probably looking pretty empty … and in most cases, there certainly isn’t enough cash to buy and flip a property. The good news, though, is that this isn’t uncommon for new house flippers — or new business owners in general. It’s rare to find someone with their own cash to start and fund their own business, so that’s why new business owners turn to lenders or investors to get capital they need to start and operate their businesses.
There are a few funding options for flipping houses. The type you select is based on a number of factors, including time in business and your credit history. Not all funding will be right for your business. For example, if you have a low credit score, hard money loans may be an option for you. Hard money lenders base lending on the deal itself — not your personal or business credit or lack thereof — but are usually very short-term and have high fees.
Once you’ve been in business for at least a few months, you may need a flexible funding option to purchase properties, pay for renovations, or cover operating costs. In this situation, you may qualify for a business line of credit. Even if you have a low personal credit score, you may still qualify with lenders that consider the performance of your business over credit history.
If you own your own home, you could use a home equity loan or home equity line of credit (HELOC) to fund your flips. If you have equity in your home, a low debt-to-income ratio, and a good personal credit score, you could qualify for one of those options, which come with low rates and favorable terms. If you have a retirement account, you could also consider a Rollovers as Business Startups plan (ROBS), which allows you to leverage your retirement funds without penalties.
For unexpected expenses or operational costs, consider applying for a business credit card. You can also get creative by bringing on a business partner or launching a crowdfunding campaign. Whether you’re new to the game, have some experience, or have credit challenges, there are options available to you. You just have to connect with lenders to find them.
No matter what type of funding you seek for your business, there are a few things to keep in mind. First, understand that borrowers with the highest credit scores typically qualify for more options that are also more affordable. So, one of the first things you want to do prior to submitting your application is pull your free credit score, access your credit report, and dispute any errors. You can also take steps to boost your credit score.
Once you apply for funding, make sure that you fully understand the terms, fees, and interest rates associated with your financial product. Don’t be afraid to shop around your options if you aren’t happy with a lender’s offer.
If you do secure funding, make sure to always pay as agreed and meet all conditions put in place by the lender. By doing so, you can not only raise your credit score, but you can also establish lasting relationships with lenders and investors that will serve you well as you build your business.
Unsure of which funding option to choose? Learn more about the best loan products for your house flipping business.
#4 Connect With Contractors & Other Professionals
In addition to lenders, you’ll also need to establish relationships with contractors and other professionals that will help contribute to the success of your business. Even if you plan to get hands-on with the renovation of your properties, you’ll still need a team of contractors to help with the work, particularly when distressed properties are involved. Not only will a contractor complete the work required to flip a house for profit, but a good contractor will know about licenses, permits, and other local requirements. You can also discuss your timelines and budgets with your contractors so you don’t have extended timelines or unnecessary expenses cutting into your profits.
When seeking contractors, don’t be afraid to ask for references or a portfolio. Also, don’t forget to shop around your options to find a reputable contractor that works with your budget. If you’re new to the industry, developing a working relationship with a reputable contractor can even help you score hard money loans from investors.
Another professional that you need on your team is a real estate agent. If you opt not to get your real estate license, a realtor has access to resources that will be essential for your business. This includes access to properties on the multiple listing service (MLS), as well as prospective homeowners that could be interested in purchasing your properties. A realtor can also help market and sell your renovated properties.
Someone else to keep on your speed dial is an attorney, and not just any attorney — one that specializes in real estate. There are some legalities of flipping houses that you don’t want to overlook, so it’s wise to have a real estate attorney on your team. An attorney is especially critical during your first flip. Overlooking important legal details, errors in contracts, and other issues could not only derail your deal but could also damage your reputation in the industry.
Over time, there may be additional professionals you’d like to have in your corner, such as an accountant and investors. For now, though, focus on finding the right contractors, attorneys, and realtors for your house flipping team.
#5 Understand The Importance Of Market Research
Knowing your market is key to maximizing profits as a house flipper. Buying the wrong property in the wrong neighborhood could result in a low profit that’s not worth the time invested in the property, or worse, a loss.
Working with a realtor can really help when it comes to knowing your market. Realtors have the inside scoop on the hottest neighborhoods, information on recently sold properties, and other data that can help you find the right homes for flipping. You can also take advantage of the vast amount of information you can find on the internet, where you can do a lot of your market research for free.
With market research, you’ll soon learn where buyers are buying, how much they’re paying, and what they’re looking for. While there are some variances depending on where you live, there are a few markets that are always hot, including neighborhoods with great schools, neighborhoods with homes that are at least 20 years old, areas with low crime rates, and houses that are close to amenities. Once you understand the market, you can begin further narrowing down the areas you wish to target and begin preparing for the next step: buying and flipping a property!
#6 Buy, Renovate, & Sell Your First Property
You’ve set up your business. You’ve connected with a team of reputable professionals. You’ve found and secured funding, or are at least aware of a few potential options. You know your market, you’ve researched recent selling prices, and there are properties on your radar. Now, it’s time to pick a property, buy it for the right price, renovate it, and then flip it for a profit.
This is where your team will really come in handy. For instance, your realtor may have information on properties before they hit the market, giving you an early edge over other flippers and buyers. Your attorney can help with the paperwork and walk you through the steps of purchasing and flipping a house — think, walk-throughs, insurance requirements, and negotiating contracts.
Once you’ve purchased the property, it’s time to start your renovations. Work through your budget and timeline with your contractors, and put the research you did earlier to good use. Look at comparable properties when determining what renovations need to be completed. For example, if recently sold houses in the same neighborhood have updated granite counter tops, add granite counter tops to your “to-do” list. Finally, be prepared for the unexpected. Deadlines may be missed, or there may be additional expenses that weren’t accounted for in the budget. It happens to even the most experienced flippers — the key is learning to roll with the punches.
After the renovations are complete, it’s time to put your house on the market. Your realtor will be a valuable asset by listing the property and helping you market it to buyers. Then, once a buyer is interested, work with your attorney to make sure all of the i’s are dotted and t’s are crossed. Once the property is sold, any amount that exceeds what you’ve put into the house is pure profit.
Let’s make one thing clear: flipping houses isn’t easy, no matter how simple it looks on TV. But if you’re ready to put in the work, you’ll find that house flipping is extremely rewarding. As you flip your first few houses and begin to find your groove, you’ll find that the process gets easier, just as it does with any other business.
You don’t have to go at it completely alone, though. We have a load of great small business resources right here, so check them out and get ready to build your business. Good luck!