How to flip a house: A guide for first‑time investors

Key takeaways

• Flipping a home is a capital‑intensive strategy that requires investors to accurately assess their finances, risk tolerance and maximum allowable offer using a rough rule such as the 70% of after‑repair value formula.
• Financing a flip can be challenging through traditional lenders, leading many investors to rely on local banks or hard money loans, which are faster and more flexible but come with higher costs and often require the investor to contribute 10%- to 20% of their own money.
• Successful flips depend on buying below budget, tightly managing contractors and rehab timelines, completing a thorough punch‑out before listing and having backup plans such as refinancing or renting the property if it does not sell as expected.

Flipping a property is a high-risk strategy. A real estate investor must find a suitable property, get funding to purchase and fix it, hire contractors and buy materials for repairs, then sell hoping they won’t need to cut the price — and their potential profit.

To accomplish that, flippers must possess a range of skills: They must be able to find troubled properties with potential in neighborhoods that are on the rise; calculate repair costs and after-repair value of the home; manage budgets; hire and supervise contractors, and improve the home enough to draw a buyer but not too much as to lose money.

And all must be done on a tight timeline.

Here's how to get started.

Consider the neighborhoods that you want to target. Are you looking to rehab a home in a luxury neighborhood? Are you willing to consider a lower-priced neighborhood that's up and coming? Is price appreciation an important consideration? Knowing what you want can make your search more manageable.

There are many ways real estate investors go about hunting for properties to buy. They look for foreclosures and abandoned homes. They approach sellers who were unsuccessful in listing their homes. They contact divorce attorneys whose clients want to quickly get rid of their homes. And they look to estate lawyers and probate courts for inherited properties that the heirs don't want.

Some investors work with "birddogs" and wholesalers whom they pay to scout properties for them.

Real estate agents also are used to find properties — although they aren't always the first go-to.

If you opt to hire an agent, you might want to find one who specializes in investment properties. The National Association of Realtors offers a course and a certification for its members in Real Estate Investing. It includes coursework on developing strategies for flipping houses. It also covers other investment strategies, such as long-term rentals, which will be useful for you if you want to work with someone who can help you diversify your business.

A great place to start your search is on Homes.com’s agent directory. It contains information on an agent’s biography, the neighborhoods they are familiar with and how many houses they have sold.

Search for agents who have worked with investors. Find agents who are active in the neighborhood where you are investing. Read their reviews. An investor also should verify the agent’s background and disciplinary actions, if any.

The ability for flippers to make low maximum offers and the desire for some sellers to work directly with a buyer are reasons many investors don't use real estate agents to find properties.

"When you cut out the middleman, that’s usually where the better deals and motivated sellers are,” Tarek El Moussa, a real estate investor who hosts the HGTV show "Flipping 101 with Tarek El Moussa," told Homes.com News in an email. Finding the best deal “all comes down to consistency and hard work," El Moussa said. "If you’re starting with little to no budget, get on the phone and call, text and email ... homeowners directly, asking for deals. Build lists of expired listings, probate properties or tired landlords, and follow up regularly."

"But no matter how you’re finding leads, the most important thing is speed and speaking directly to the leads," El Moussa said. "If a motivated seller reaches out and you don’t call them back within five minutes, chances are someone else already did, and you’ve lost a potential deal.”

Early on, you should have a good idea how much you want to spend for the project. Your costs will include purchasing the property; paying closing costs on the buyer side, including property taxes; renovations, and selling the property, including agent's commission and closing costs on the seller side.

Flippers also must consider the holding costs of the property. The longer a house sits — the longer the renovations drag on or the longer the property languishes on the market without a buyer — the higher the carrying costs you are paying on a loan with no money coming in. Talking with an experienced investor or getting a mentor is a great way to deal with this uncertainty.

Getting a contractor to go through the property with you before purchasing is a good way to determine the extent of the work needed and costs. They can give you detailed quotes for the work. You’ll need to screen contractors anyway, and many give free estimates to get your business.

There’s a basic calculation that gives investors a rough estimate of how much they’ll profit from rehabbing a home. The formula isn’t perfect, but it gives investors a good idea if the project is worth doing.

Take 70% of the after-repair value of the home and subtract rehab costs. That number is the maximum amount of money you can offer and still make a reasonable profit. It accounts for renovation costs, builds in a reasonable amount to cover cost overruns/delays and the return for a reasonable profit.

Consider a rundown property in a neighborhood where similar homes sell for $400,000. Multiply $400,000 X 0.7, getting $280,000. You consult with a contractor, who says a fair estimate for repairs will be $150,000. Subtract that from $280,000 and you get $130,000. That is your maximum allowable offer.

Finding the money to buy and rehab a house isn’t easy. You can finance it through your own reserves or a mortgage. But many traditional lenders will not underwrite a flip because of the high risk it won’t succeed. Local lenders who have worked with local investors on properties may be more willing to finance.

If that fails, consider a hard money loan. These are from an investor, not a bank. They're called hard money because you get the hard cash for the project up front — there's little or no credit or background check.

The investor's loan is secured by the property being rehabbed. That's another reason they're called hard money: The flipper uses a hard money asset — the home — as collateral. These make the loans quicker and more customized to your investment than a traditional mortgage.

Hard money loans carry higher interest rates and fees than traditional mortgages to account for the risk. A typical hard loan charges a 12% interest rate and two percentage points of the loan amount, said real estate agent Patrick Mirzayan of eXp Realty in Stafford, Virginia.

Mirzayan has flipped 25 homes in the past four years. He found his first property on Facebook Marketplace. He only had 24 hours to make an offer. After consulting with his mentor and his wife, he made a bid and found himself the owner of a distressed home.

Mirzayan hadn't planned financing for his first flip. He called a friend in real estate and asked if he knew any investors willing to lend $260,000 for the purchase and rehab. To his surprise, the friend offered to loan it.

"The thing most people get scared of is calling people and asking them for money," he said. "You are calling about an investment with a return."

Hard money lenders often want investors to put 10%- to 20% of their own money into a flip. They also charge a flat amount each month like a percentage of the total loan in addition to interest, he said.

Mirzayan said he structures his loans so that he does not use his own money and does not pay a monthly fee. His preference is to pay a higher interest rate on the principal for a set period of time even if he finishes the project early.

Experts say start by purchasing a home that’s well below your maximum budget. You’ll have less risk, and it will be easier to get financing.

Also consider a property that doesn’t need a full rehab. Gutting a home to the studs forces you to hire more contractors, buy more materials and have more problems.

Mirzayan purchased a three-bedroom, three-and-a-half bathroom townhouse in Woodbridge, Virginia, for $350,000 with a private lender. It was in decent shape, and he only spent $22,000 on cosmetic renovations like painting it and building a new deck.

He paid $270,000 to purchase a second flip in Woodbridge — a four-bedroom, one-and-a-half bath rambler — and spent $50,000 from a private lender to renovate it.

Many investors build contractor relationships through referrals, repeat projects and networking with other investors. Experience matters, but reliability and communication matter even more, said Rich Kaul, owner of 702 Cash Buyers in Las Vegas, Nevada.

“A good contractor shows up when they say they will, communicates clearly and provides realistic timelines and pricing,” Kaul said.

Flippers usually pay contractors in draws. A flipper may pay one-third of the cost up front, so the contractor can buy supplies. To earn the second and third draws, a contractor finishes some of the work. They get the last third when they've finished all the work. Always set it up so the contractor has to ask you to get paid.

“Managing contractors is honestly one of the hardest parts of flipping homes, so finding the right people to work on your projects is critical to success," Kaul said.

Here are some tips for managing the work:

• Excessive renovating is an easy way to go over budget. Make sure your updates and trims fit the market segment you are targeting, whether it's affordable housing or luxury.
• Consider using a general contractor. They typically charge an extra 15% of the budget.
• One of the biggest mistakes new investors make is accepting the cheapest bid for the work. “That often becomes the most expensive decision later if work has to be redone or timelines slip,” Kaul said.
• It’s essential to hire contractors who are licensed and pull permits. You will need a home inspection by the local municipal government for a certificate of occupancy. Ask for referrals or look up a contractor’s reviews online.
• Contractors can hold up a project or force investors to replace them if they do a bad job, busting the budget. Investors must be vigilant, Kaul said.
• Never pay a contractor, other than an initial down payment, before they do the work. Contractors often delay one project to work on another, wreaking havoc with your timeline. If they need to work to get paid, they will make your job a much higher priority.
• A rehab isn’t complete until all the contractors have finished their work. There’s a term known as punch-out when you go through the home and make sure every little detail is complete before listing.

Some investors use agents only to sell their property after renovating it. Preparing for the closing is pretty much the same process as for a residential property. There's an appraisal, buyer's walk-through then signing papers.

There’s an adage among flippers: You make your money when you buy the home, not when you sell.

This is when investors find out if they bought the property at a price low enough to make a profit.

Mirzayan found early success with flipping. He earned a profit of $50,000 on the first flip and $120,000 on the second.

Anticipate multiple ways to profit from the flip in case it doesn't sell, said Mirzayan.

He once rehabbed a home that failed to sell after several months on the market and several price drops. He was losing more than $1,000 each month. So, he pulled it from the market, refinanced it to get his equity out and marketed the property as a rental. The home became an asset with $150,000 in equity and a source of tax deductions.

"It was kind of a blessing in disguise," he said. "There is a good and bad thing with a flip. You can get into accidental landlording."

What was the biggest lesson Mirzayan learned when he started flipping?

"It's not rocket science," he said. "I was a C student in school. My parents came from Iran, didn't speak English, lived in their car for two years, and built a jewelry business. I really grew up in the entrepreneurial mindset."

His advice to new investors? "Don't let the fear of failing stop you from trying."

More on this topic:

• How to choose your real estate investment strategy
• How to choose the right real estate investing program
• A 10-step guide for selling a distressed property