How does Flipping properties work?
Flipping houses involves buying a property, renovating it, and selling it for a profit.
Some excellent tips on how to make money from flipping houses; however, it is not as easy as it seems. We will help you learn how to evaluate what a property is worth and the cost to flip it.
Flipping houses and making a tidy profit is possible; however, you need to do your research and get the costing right. Consider the cost of any borrowing in your calculations.
How to research flip houses for profit in the UK:
Finding an excellent location to flip a property. You need in-depth knowledge of the area you want to invest in.
Your research should include:
How much homes are selling for?
You should know the average sale price of homes in the location of your choice to identify projects that are perfect to flip for a profit. It would help if you also researched various types of the houses being sold in the location of your choice.
A two-bedroom flat may be cheaper higher demand and less expensive as opposed to a 4-bedroom Victorians house which may have less demand.
Calculate the Supply & Demand ratio
One method of how to calculate how quickly homes are selling in a location is to calculate the “months of supply.”
What is “Months of supply”? It is the number of months it would take to sell all the homes currently on the market in a specific location.
The month of supply is a fantastic way to work out if you are in a buyer’s or seller’s market for that location.
Months of supply is lower than six buyer’s market:
Months of supply is over six in order to find out the months of supply in your area. You will need to find out how many houses are currently on the market, as well as the number of homes sold each month.
By way of example, if there are 20 houses on the market and five sells each month, this means there are four months of supply on the market.
Remember you will be on the buying and the selling side in the same year, you will probably want to focus on location with less than six months of supply ideally. If not, your house might remain on the market longer than your finances permit.
Keep an eye on the market trends
Once you know the market reasonably well within the location of interest, you should ascertain the potential value of houses for the next 2 year.
Looking forward, to find the market trend, speak to local landlords, estate agents, read local newspapers, blogs including economist reports and press releases.
For example, perhaps there is a new hospital being built in a nearby area which will employ vast numbers of people. That may mean rental prices in the location are going up, which means prices are going up as well.
Having a good knowledge of the market in your area and in a few surrounding places will help you find a good deal.
Things like taxes, school, employment, university, and convenience stores all play a factor for end buyers. This would mean buying a house in a town with high employment opportunities.
Bad Locations vs High-Demand Locations
The crime rate may be an issue with the location. When it is time to sell, it might be hard finding buyers. This does not mean these areas are terrible investments.
For flipping houses, you need growing populations, substantial local investment, and diverse economies. When choosing a location within any market, house-flippers need to focus on those with a good school catchment area, access to transportation, and a good employment rate.
Find the Right House to Flip
Here are some key methods to find the right house to fix and flip:
The old saying it is not what you, but it is who you know is definitely true when flipping houses. Sourcing houses to flip can be made more accessible by networking with landlords, estate agents, solicitors, and other property traders.
The strategy that works for me with great ROI is by word-of-mouth referrals from people you know and already network with.
The property search portals
One source commonly used to find houses to flip is online property search portals like Rightmove, Zoopla and alike.
Search for houses that are listed incorrectly, in poor condition, or have a small number of bedrooms vs square footage. For example, a 7000 square foot 3-bedroom home can most likely be converted into a 5-bedroom house, delivering a much higher sales price.
Other than using estate agents, you can also use advertising to find houses to flip. Since you are looking for undervalued homes, this is not an easy task. However, they are out there if you are willing to put the effort in.
Here are some popular ways investors advertise:
If you have ever seen signs like “we buy houses”, it was probably in a location that is in a good for house flippers.
Bandit signs are used to find sellers who need to sell their house quickly. Desperate house owners call on bandit signs who are motivated to sell, which makes this practice an inexpensive method of acquiring properties good for flipping.
Assess the Property and the Deal
Once you find a house that seems to tick all the boxes for flipping, the next step is to schedule a viewing and check the property for flipping.
It might be a good idea to bring your builder with you. Together you assess the cost of any work required to improve the property ready for sale.
Be disciplined and do your homework
Golden 70% rule
The purpose of flipping houses is to sell the house for a price that is not only higher than the purchase price, but more than the:
- The purchase price
- +Refurbishment costs
- +Purchase, selling fees
To make money flipping houses; successful property flippers use the golden 70% rule.
Example: you pay 70% of the expected After Repair Value (ARV). So, to calculate a house with an ARV of £250,000 that requires £25,000 in refurbishment, multiply the ARV by 0.70 (70%).
Consider using a surveyor.
If in doubt, it may be worth instructing a surveyor, a survey may highlight potential problems with the house. Further, it will reduce your risk and give you a bargaining tool to beat down the price even further.
Funding for your property flip project
Working out how to finance and still make money flipping houses can be challenging for beginners. Most high street lenders will not lend on houses in poor condition, or to borrowers who do not have a reliable, independent income or fix and flip experience.
However, there are other options, and these are:
Hard cash Lenders
Hard cash lenders generally seem to be small private investors who lend money to house flippers. One of the reasons hard money lenders are preferred above others is because they care more about the “after repair value” (ARV) of the home than about the experience or qualifications of the borrower.
Property Crowdfunding Loans
Crowdfunding seems to be growing when it comes to property funding, and there are several options available when using this option.
What to look for in a lender
When flipping houses, you need to engage with the right lender for you. You need to consider three main things when looking for an appropriate lender:
- The rate of interest and fees
- how long the loan is for
- The speed you can get the funds
How to raise finance for flipping property
Now that you are aware of a few of the options available for financing your fix and flip project, here is a quick overview of how these loans work.
To get a loan for a fix and flip project, you will need to complete a loan application. Supply an overview of the project to the lender.
How much you can borrow:
Most lenders offer between 65% and 80% (this is changing due to COVID-19) of the After-Repair Value (ARV) of the home. For example, if you are looking at homes with an ARV of £200,000, you will likely get a loan for around £140,000.
Fix, and flip lenders usually lend from one to 12 months. This is because house flippers buy typically, renovate, and sell a house usually well within one year.
For fix and flip lending, interest rates can range anything from 4.5%-12.5% depending on your credit score, ARV of the house. You will also probably need to pay a setup fee including a survey fee too.
Putting together a team of trustworthy contractors
Even if you do not have a house lined up, offering to buy a general contractor a meal in exchange for picking their brain can help educate you on the process.
To flip houses, you need an experienced contractor that is affordable. A contractor that sticks to your deadline and is easy to work with.
3 things to consider when choosing your contractor:
- You need to be trustworthy.
- They need to do quality work.
- Their charges need to work with your budget.
You will probably need a few contractors for different jobs. A skilled plumber, a qualified electrician, a plasterer, and a professional general contractor may all be required depending on the size and scope of the project.
If you have ever had work done on your own home, you probably know that finding great, affordable contractors can be difficult.
One-man band contractor may be less expensive (or not) but might not be able to do the job to your satisfaction. Good contractors are costly and very busy, but they can contribute to your goal of flipping houses for a profit.
How to Find the Right Contractor for the Job
Consider choosing a contractor by getting referrals from other investors. Ask each tradesperson for referrals to the people they like to work with. For example, ask the plumber for a good electrician.
They tend to do many projects with different contractors. They can usually point you toward the best ones.
Here are some tips for working with contractors:
Contractors & DIY
Keep in regular contact with your contractor; ask for the task by task updates. Also, check-in periodically to make sure work is getting done according to your specification and schedule.
If you are going to do some of the work yourself, make sure to discuss your plan and routine with your contractor beforehand. This way, you will not interrupt his or her work.
Pay Your Contractors
It is prudent to pay your contractor an initial deposit, then another payment halfway through. The final payment when the project is finished, and you have thoroughly checked the work.
Some investors pay contractors weekly; however, in my opinion, it is best to pay on what tasks they have completed. What you do not want is to pay your contractor all the money and not have the job completed.
Top Three Renovation Ideas to Maximise ROI
- Houses with an open concept are attractive to buyers but try not to focus on the current aesthetics of the house when you see it in person. Instead, it would be best if you were looking for a potential room for improvement.
The ROI on a new kitchen varies depending on the scope of the renovation. The benefit of a new kitchen is its ability to attract potential buyers so you can sell the property quickly.
Selling the house fast
Selling your newly renovated home is precisely like selling any other house. The only difference is that time is money, especially when you are learning how to make money flipping houses.
The longer the house is on the market, the more it is going to cost you hence, which means less profit.
The best advice I can give to new house flippers is to take the first or second offer you get on each property. Time is all-important when flipping a house, and if you get an offer that gives you a profit, take it and move on.
Flipping houses FAQ
How do you make money from flipping a property?
Quite simply, if you buy a house for £150,000, spend £20,000 doing it up and sell it for £200,000 you have made a profit of £30,000. This might sound idealistic, but it can be achieved in a three to four-month period provided everything goes well.
However, there are a lot of costs and fees involved that you need to factor in and a few variables that might not work as you wish.
It would be best if you had a keen eye on what a house could sell for in a particular location. It is of no use buying a three-bed semi for £150,000 if £20,000 spent doing it up Is not going to increase its value any more than the £20,000 spent.
Some properties in certain locations will always stay stagnant, stay away from these areas.
On the other hand the desirability of the location and the reason why properties that are perfect for flipping are so few and far between.
What are the risks and rewards of flipping a property?
Any house purchase does involve an element of risk, more so if you intend to flip the house. Flipping a house is risky because you are attempting to leverage healthy profit quickly. Financial and time factors are a challenging combination when so much is out of your control.
How to Flip a House with No Money?
Flipping houses without money will involve using other people’s money. A lender offers a loan for you to purchase the property, you repay them the initial loan amount plus interest. However, UK banks and lenders rarely offer funding to cover both the property and refurbishment costs too.
How to improve the value of a property before flipping
This needs to be assessed before buying a house. You will need to evaluate to see how and if you can improve the value of the property.
Speaking to various contractors, estate agents, and interior designers, including architects, will give you a good insight on what is cost-effective. The cost and the specification of similar properties in the area on Rightmove or Zoopla may give you some ideas too.
So, what work does the property need? Externally the garden might need tidying or some decking in the garden. Fascia replaced can enhance the external visual appeal of the house too.
Inside, the house might need rewiring or re-plumbing, you might need to fit a new kitchen or bathroom. Things like this all add value to your project.
Is Flipping a house a good investment?
Flipping houses in the UK may sound simple, but it is not as easy as it looks. Let us be real: A house flip can either be a money-making exercise or a financial disaster. Ensure you have good people around you who can help and advise you through the process.
Find a good ambitious estate agent to sell your house.
A house flip can be an excellent opportunity to make a quick profit. Provided you make smart renovations you can sell the house for much more than you paid for it. But it can quickly go wrong and end up costing you thousands if mistakes are made.
It is important you engage an excellent, ambitious estate agent who will work hard to promote and sell your property fast and at a good price. You need to sell the property as quick as possible so you can move on to a new project.
Source: The British Landlords Association
Author: Amanda Goldsmith [email protected]
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date: 10th of October 2020