House flipping is a popular form of real estate investing where people purchase distressed properties, renovate them, and sell them – hopefully for a profit. This is more likely when investors have a good fix and flip strategy in place.
This is an appealing business model, both for experienced investors and new entrepreneurs, as it offers the potential for substantial profits, provides the chance to add value to the housing market, and offers flexibility in terms of personal involvement and market adaptability.
Like any business, house flipping does come with risks. Proper planning, combined with an understanding of the local property market, can maximize your profit. We’re taking a look at how lucrative house flipping can be, and offering some tips for putting together your fix and flip strategy.
House Flipping for Profit: The Basics
At its most simple, house flipping involves buying a property and selling it for more than the original purchase price. The amount of effort you put in, as the investor, will depend on your business strategy. You might make a few cosmetic changes, like a coat of paint, for a quick flip or make extensive renovations to get an even better selling price.
How house flipping generates profit
A house-flipping investment strategy is based on selling a property for more than you originally bought it. The first crucial step is choosing an undervalued property. For example from foreclosure listings, where lenders are looking for a quick sale to recoup their losses.
Once you own the property, you can add value through repairs and renovations. Depending on the state of the property you’re buying, these costs could be high. It’s important to budget this into any plan. The 70% rule is useful here. This is where investors calculate the home’s after-repair value, and aim to spend no more than 70% of that on an investment property.
We talk more about this, and share other tips, in our article ‘How to evaluate a fix and flip property‘.
After refurbishment, the goal is to sell at a higher price point than you bought the property for. To generate a profit, the money you make from the sale needs to cover the cost of the renovation process as well as holding costs, like bills you had to pay between buying and selling.
How the market can impact your profit
If there’s high market demand for housing, your chances of selling quickly at a greater price point increase dramatically.
But, if there’s already lots of comparable properties sitting empty, you may end up holding the home for longer than you’d planned. This doesn’t have to mean disaster. In fact, fix and hold is a viable property investment strategy, too. We discuss the pros and cons in this article comparing fix and flip vs. buy and hold.
While there’s not much you can do about the state of the market, there are ways to use it to your advantage. Researching regional trends, and timing the market, can mean the difference between profitable sales and financial risk.
This is why a fix and flip strategy, complete with a market analysis, is so important.
Is House Flipping Really Lucrative?
While the popularity of house flipping has taken a dip this year, there is still a lot of opportunities to make money.
Profit potential
The potential profit you can make will depend on market conditions, your skill as a house flipper, and the location you choose to flip houses in.
Some markets are more lucrative than others. In the second quarter of 2024, the average return on investment for house flipping was 30.4%. Pittsburgh had one of the most profitable house flipping markets, with an average profit of 114%.
Challenges & risks
As with every renovation project, there’s a risk of cost overruns. Some jobs may take longer than originally estimated, resulting in paying higher contractor fees. In dilapidated properties, there’s also the chance that unexpected issues emerge.
Setting aside a contingency fund of 10-20% of the renovation budget should help you to tackle these issues without eating into your estimated profit too much.
You’ll be more prepared to handle these issues if you make a comprehensive plan and do your due diligence. Get in-depth surveys done on the property before buying, vet your contractors fully, and research every step of the renovation before starting.
As well as the cost of renovation, you’ll also need to think about outgoings like property taxes, transaction fees and holding fees. These can all eat into your bottom line, so make sure they’re accounted for in your budget from the beginning.
How to Maximize Your Profit While House Flipping
As long as you have a good real estate investment strategy, you can definitely make large profit margins in house flipping. These tips are the building blocks of a lucrative fix and flip strategy.
Step one: finding the right property
Choosing a potential property to flip isn’t just about buying the first place you see. You need to do your research first. Start by evaluating neighborhood trends and considering growth potential. Are house prices rising, or falling? Are exciting new businesses moving in, or are stores closing instead?
Next, look for undervalued or distressed properties in the area you’re considering. These usually fall under a few categories:
- Foreclosures – seized properties sold by the bank, at a discount, to recover the loan amount. You can find them at foreclosure auctions, or by searching foreclosure listings on property websites.
- Short sales – this is when the homeowner sells their property for less than their mortgage balance, with the lender’s approval. Some real estate agents specialize in this type of saleÂ
- REO (Real Estate Owned) properties – REO properties have gone through foreclosure, and are now owned by the mortgage lender. You can sometimes find them listed on bank websites, specialist real estate platforms, or by going through a dedicated REO agent.
- Off-market deals – reach out to homeowners in your target area and offer to purchase their property. You can do this using direct mail, or putting flyers through doors. While this is a bit of a “spray and pray” approach, it can result in direct sales with no competition from other potential investors.
- Tax deed sales – when homeowners fail to pay property taxes, the government can foreclose on the property and sell it off at tax deed sales. These are often auctions, sometimes online and often in-person.
Step two: budgeting and financial planning
Before purchasing a property, you’ll need a detailed and realistic budget. It should account for the purchase price, renovation costs, and any unexpected issues that could happen during the project. Use the 70% rule to work out if a property is worth the investment, and remember to add 10-20% of your overall budget for emergencies.
When you’re putting together your budget, you’ll need to:
- Conduct a thorough home inspection. This will help to identify necessary repairs and improvements., and hopefully avoid unpleasant surprises later on
- Accurately estimate repair costs. Get quotes from a few trusted contractors for each part of the renovation, including materials and labor costs
- Find out which permit fees are required. These can vary based on local regulations and the extent of the renovations.
- Account for hidden costs. Legal fees, title insurance, and taxes (such as property taxes or capital gains tax when you sell) should also be included in the financial plan.
Considering these various costs is vital for maintaining your profit margins. To simplify and refine this process, our free Fix and Flip Calculator is designed to give you a quick estimate of your loan requirements to help you accurately map out your financing needs.
Step three: Financing the flip
There are a few financing options for a house flip, and each has its own advantages.
Cash: if you have a lot of liquid capital, buying a property with cash means you don’t need to worry about interest payments and gives you more negotiating power with sellers.
Traditional mortgages: these offer lower interest rates and longer terms, but require more time for approval and stricter lending criteria.
Hard money loans: these short-term loans are easier to apply for than a mortgage, and provide quicker access to cash. For example, Express Capital Financing fix and flip loans are available with approval in 24 hours, and closing in as little as five days.
While rates are higher than a traditional mortgage, and the repayment period is shorter, hard money loans can be perfect for this type of renovation project. Learn more about our fix and flip loans.
Step four: Make strategic renovations
To maximize profits on a flip, focus on renovations that provide the highest return on investment (ROI).
Upgrade kitchens and bathrooms. This typically delivers the best value, as these are the rooms buyers prioritize the most. Modernizing fixtures, cabinets, and countertops in these areas can significantly increase a home’s appeal and market value.
Enhance curb appeal. Landscaping, fresh paint, or a new front door—these all create a positive first impression that can attract buyers and justify a higher asking price.
Avoid over-improvement. Every neighborhood will have a ‘ceiling price’ that buyers are unlikely to go over. Your goal is to make sure every dollar spent translates into a higher selling price, without wasting any money by going over target.
Step five: Time the sale
Keep an eye on local market trends and economic conditions to identify the best moment to list.
In most markets, spring and summer are the best times to list, as buyer activity is at its highest. Families especially prefer to move during these months to avoid disrupting the school year.
Listing your property when demand is high can lead to faster sales and potentially multiple offers, driving up the final sale price.
Tips for Long-Term Success in House Flipping
Once you’ve made your first lucrative house flip, and have a tried-and-tested fix and flip strategy, it’s likely you’ll want to continue.
- Network with the right people. Spending time around real estate professionals can help you to stay in the know about market trends and suitable properties. You’ll also want to build a reliable team of contractors, inspectors and private lenders so that you’re ready to go when you find the perfect property for a flip project.
- Managing multiple flips. When you have more experience, scaling up is a good way to increase your profits even more. It’s important to treat it like a business and minimize risk as much as possible. There’s a higher financial risk due to the larger initial investment, more complexity in managing multiple properties, and difficulty in maintaining quality control. Go slowly, and never over-extend.
- Learn from common mistakes. Networking with other house flippers can help you to learn from mistakes that your peers have made. Any mistakes you make should also be taken as a lesson. It’s important to be flexible, and open to learning new things no matter how experienced an investor you become.
Are You Ready to Flip?
House flipping holds the promise of substantial rewards, but the real secret lies in smart, strategic planning. To unlock the potential of your investments, you must scour the market with a keen eye and establish a rock-solid business plan underpinning each venture.
Knowledge is power in real estate. Teaming up with a network of seasoned realtors, astute lawyers, skilled contractors, and—crucially—expert financial partners like Express Capital Financing can make all the difference. They stand ready to support your flipping dreams with swift, flexible financing solutions that align with your goals.
While it’s wise to tread carefully, particularly on your initial flip, equipping yourself with an effective fix and flip strategy enhances your odds of turning a healthy profit. Are you prepared to dive into the flipping market with a partner that prioritizes your success? Explore our Fix & Flip loans to get started, and let’s set the stage for your profitable flipping journey.