There are many people who are interested in how to start a house flipping business, a profession that is gaining popularity in the United States. For enterprising investors who are not afraid of hard work, flipping a house is an exciting opportunity, especially for short-term investment.
However, there is also a lot of research to be done, plus financing and resources you need before you start a house flipping business of your own. House flipping is the process of purchasing valuable assets then reselling it, in order to gain huge amount of profit within a short period of time. House flipping has become a common and lucrative practice that is attracting the attention of Wall Street investors and first-time entrepreneurs alike.
If you are one of those enterprising investors who wants in, then you will need to know more about how to start a house-flipping business. This guide will help you develop a business strategy, plus determine and execute the optimal financing plan.
Getting started with your own house flipping business involves six steps. The first one begins with a solid business plan, which is the most crucial part for any business start-up cost. The second steps in the process is finding the right professionals or source, forming a holding company, obtaining financing and identifying great properties. And ultimate step is marketing or promoting and then selling your flips for a profit.
So, now that you have got a nutshell of the essential steps that are required in order to fulfill your business dream, let’s go ahead and find out in detail about each of these steps as an essential business tool for starting a house flipping business.
When you’re new to flip business then, you must have a business plan with definable and achievable goals, strategies, analyses and funding. This house flipping business plan assist you figuring out how many projects you must have to complete to achieve and attain your goals. It also encourages lenders to take you more seriously and puts your profit expectations and exit strategies on paper.
No wonder, your house flipping business is intended to make a profit, it’s important to know what you must need to add and include in your business plan. Investors and lenders read your business plan, so you have to make sure it should be easy to understand and includes information like a goal summary and lead generation plan.
Best business plan for flipping business must have these 6 following items
Lead generation is a real estate term for how you are going to locate properties that you can fix up and make a profit on. When you are just starting out, it is common to use free resources like Zillow and Realtor.com and have your local real estate agent search for leads that meet your parameters. Another source is FSBO.com, where motivated sellers sell their properties without using a real estate agent.
Once your company successfully running a flipping business with good amount of profit then, it may be time to implement an actual lead generation plan. These lead generation techniques must have to include sending out flyers and real estate postcards, putting up signs, or buying leads. Lead generation takes many forms and helps to make sure you are never short on potential flip projects.
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A market analysis includes
As part of your business plan, you need to decide if you are relying on cash savings or using financing sources. If you opt for financing, your carrying costs increase and so does your timeline. However, financing may enable you to buy and renovate more properties at once.
Having a great financing partner is also important for anyone starting a house flipping business. It is important to evaluate the trade-off between the costs of borrowing money and the leverage it provides you. Lenders charge points and interest and take more time to close on a property. However, by using them, it frees up your cash for other projects. It also allows you to purchase projects that you may not have been able to afford solely with cash.
Let’s say a flipper has $100,000 in savings. Consider that the flipper uses those savings to purchase and renovate a single home, and then flips it for $125,000. That person just made $25,000 (25 percent profit) and did not have any borrowing costs. Not bad right?
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Think that same flipper now decides to leverage that $100,000. Rather than paying cash for a single project, the flipper uses the savings to cover repairs and a small down payment on multiple properties while financing the rest. He or she does five flips just like the project described above. Each requires $20,000 savings in down payments and repairs, but the rest of the purchase is financed.
The costs of financing are about $6,000 per project ($30,000 total), which is more than the total profit in the example above. However, the profit before financing costs was $125,000. Even after the cost of financing is factored in, the flipper has made $95,000, nearly doubling his or her savings. Leverage let the flipper to make and achieve almost four times more than what savings alone itself allow.
If you want to have financial help for any of your fix-and-flip properties, then LendingHome is the place to go. Before your credit is even run, you are able to input your information and the property details online, and it gives you potential lending terms with rates starting as low as 6.99 percent.
The marketing ideas and sales plan covers up the things like how to promote and sell your rehabbed property, including if you are going to hire a real estate agent or sell on your own. Potential lenders and your partners look at it to check if your exit strategy is in order or not . And also add how you market the property and what steps you should take to sell the property to meet your ROI.
Business and personal biographies are included in a house flipping business plan to provide more insight into your qualifications and achievements. It also discusses what your business does. Each bio must have one or two well-thought-out paragraphs. It should also mention if your business is involved in any community service. Your personal bio should highlight your qualifications, education and industry expertise.
House flipping professional have attorneys or lawyers, accountants, real estate agents and contractors. You can get them through investor referrals, online searches and reviews and ultimately by investment groups. The right house flipping professionals help you better understand and realize how to get into house flipping, help prevent mistakes and ensure your business is following legal guidelines.
Not all of these professionals are needed right away and most of them are hired per project, instead of as an added payroll expense. If you have already started to work on a project, it is fine and okay to hire a general contractor first. If this isn’t the case, then it is recommended to make an attorney your first hire. A real estate agent can be hired when you start looking for houses and specialists like an architect only need to be hired when the project requires it.
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When hiring professionals, referrals are your best, most trusted source. If someone you know has had success with this person, it’s likely that you can as well but it is never a guarantee. Friends and family can offer referrals but the most valuable ones come from other investors and the investment groups that you join.
Make sure that the professional knows how to do the specific job you are hiring for. This saves you money in the long run. You do not want to pay to have the same job done twice if the first time is done poorly.
House flipping business operations have things like choosing an entity such as an LLC, registering your business, opening separate bank accounts and getting a business credit card. You can set these business operations up with the help of professionals like an attorney and an accountant. These business operations keep your business organised, efficient and legal.
House flipping business operations include
As we have discussed earlier, you and your accountant need to decide what type of business to set up. You may choose to form a business DBA, S Corporation, LLC or be a sole proprietor. This is important for tax reasons as well as limiting your liability. If someone slips and falls at your place of business you do not want them to be able to sue you personally, so you want to protect your personal assets separately from your business.
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After you have decided how your business is going to be set up, it is time to register your house flipping business with the IRS and get your business an employee identification number (EIN) or tax ID number, which identifies it as a business entity. Also, check with your state and local municipality for what other business licenses and permits you may need. These steps must be obeyed whether you are running your house flipping business from home or from an office.
Once you’ve gotten your EIN number, it is time to open a business bank account. This prevents commingling of personal and business money. It is important from day one because you are spending money on gas to look for properties. You also need this separate money to pay your newly hired attorney and accountant. It also helps you to eliminate auditing from the IRS and complications when your accountant does your taxes.
To keep your startup expenses low, check out Azlo, a free online business checking account that’s great for businesses that do not handle cash. Azlo’s mobile app allows you to deposit checks, make payments and schedule transfers. Open a free account online in minutes.
After you have a business bank account, we recommend applying for a business credit card as well as it will be required to purchase and buy building materials, buy office furniture and appliances. They do not have any upfront points and some of them offer advantages like cash back on select purchases or airline mileage points. Their biggest plus is that they can float expenses for 30 days without paying any interest.
After you have followed all of these steps, it is time to set up some marketing operations for your house flipping business. Business cards are a good place to start because they are inexpensive. You also need a business website and a business email address. Your website can serve as a portfolio of past projects for investors and lenders and can help with lead generation by stating the area you work in and the type of properties you have interest in. Following this guide of setting up business operations to ensure your business is legal and is presented in a professional manner.
Consulting and contacting Rocket Lawyer is an online legal technology company that can help you with the LLC paperwork, which cuts down on the time and money it would take to hire an attorney. It offers packages that may cost a few hundred dollars depending on the state you are in.
There are typically three ways you can finance your house flipping business, which are hard money loans, rehab loans and investment group loans. However, you probably want to use a hard money or rehab loan because they’re more prevalent and can close quickly.
Following are the most common and necessary ways to finance your flipping business
Hard money loans offer faster approval times and faster funding times than traditional mortgages. You can apply online, and they offer nationwide loans. Their borrower qualifications are more lenient than traditional loans, but their loan terms are for shorter time periods. They also have higher interest rates than traditional loan products.
Rehab loans include home equity lines of credit (HELOCs), which are equity lines in your current home. Depending on the lender, they can be used to fix up another project. HomeStyle renovation mortgages are Fannie Mae products to purchase and renovate a home within one loan. They include 15 and 30-year fixed and adjustable rate mortgages and offer competitive interest rates.
After joining the investment group, you can meet investors willing to put up some cash for your deals. This is especially likely if you have experience and qualification in construction or in real estate. These groups are local and you can find it via a Google search or on a meetup group for real estate investors.
If you know that you want to use some form of financing, but are not sure where to look, check out LendingHome. It offers loans specifically for fix-and-flip properties with competitive rates starting for prime borrowers. It funds up to 90 percent LTV and 75 percent ARV.
Once you have a business plan, a fix-and-flip team, operations set up and financing in place, it is time to start identifying the right properties to fix and flip for a profit. Make sure you properly know about your budget and timeline in mind and remember that no matter how good your business plan is, you still need to identify the right property to meet your ROI. The neighborhood should be your main focus because you can change the property but not the neighborhood.
You are now ready to buy, rehab, market and sell properties for a profit. Generally, it takes 15 to 30 days to close on a property using all cash or a hard money loan. Then, it may take about 30 to 120 days to rehab the property, depending on its condition. You should start marketing the property when the rehab is complete enough to take photos.
The property may be selling in a days and months, depending on pricing and the local market. Most house flippers initiate with free online sites and real estate agents to buy, market and sell their property.
A real estate agent is able to assist you with searching a house to buy, negotiating the sales price and helping you sell the house once rehabbing. Other ways and aspects to find properties to buy include bandit signs and yellow letters.
Now that you know how to find the property, you just need to rehab it, which is where your house flipping professionals can help.
Your general contractor rehabs the property, and it is important to work with him or her to stick to a timeline because every day that you have not sold the property is another day of paying carrying costs. The quickly you complete the renovation, the instantly you can market and sell the property, which means hopefully making a profit and keep property flipping.
Like with any business, there are some inevitable mistakes you make when you are learning how to start a house flipping business. However, the more mistakes you can avoid, the more money you can make so your ROI is higher. The less time you have to deal with correcting the mistakes, the shorter your timeline can be.
Mistakes and Glitch to avoid in order to flipping business
After becoming familiar with how to start a flipping houses, the next step is confirming it offers the best returns on your investments of time and money.
You can create a business plan and hire the right professionals. You can also set up the business operations, find financing sources, identify the right properties to fix and flip and learn how to market and sell the fixed-up properties.
To have a great financing partner is important for anyone starting a house flipping business. LendingHome can originate fix-and-flip loans in 15 days or less. Its rates are competitive, and it will lend up to 90 percent LTV and 75 percent ARV. Pre-qualifying online takes just a few minutes.