What You Need to Know Before Flipping a House

Do you love to binge home improvement shows? Then you’re probably familiar with the concept of flipping a house. And you’ve probably thought “Hey, I bet I could do an even better job!” And we believe you!

Admittedly, the shows you see on TV tend to over-simplify the process. And while house flipping can be a lucrative way to make income, it can also be an easy way to lose money too.

That’s why it’s important to be prepared before you go throwing down your life savings on a fixer upper. So, let’s go over some necessary tips that can save you time and money on your project.

What is House Flipping?

House flipping is the process of renovating a home with the intention of reselling. Usually, house flippers will buy homes in poorer conditions for below market price.  Many try to complete the flipping process as soon as possible to maximize their profits.

3 Things You Need Before House Flipping

1. Have good credit: Most of us can only buy a house with the assistance of a loan. For the best chances at a good loan with low interest rates, make sure your credit is strong before walking into your nearest bank.
2. Have a stable funding source: We already covered the fact that house flipping can be expensive. You shouldn’t be blowing your life savings on this stuff, so make sure you have enough money to work with before committing to the process. Perhaps even an investor or two!
3. Have a strong budget: One of the reasons why house flipping projects can lead to financial strain is because there isn’t a firm budget to follow. Budgets will help you make more careful financial decisions during the process. They also help prevent you from burning through money too quickly.

The Costs of Home Remodeling

If you’ve ever tried to do a DIY home renovation or remodel, you know it can come with a hefty price tag! Depending on how much work the home needs, you could be looking at anywhere from $1,000 to $40,000 worth of renovations. That’s a wide range in price, so let’s break down the costs a little bit:

Costs of Full Renovation

If you are dealing with a house that needs structural or foundational repairs, it can get pretty pricey. The total cost can range anywhere from $2,500 to $10,000.

If you’re looking at a house in really bad shape, you may need to consider a ‘gut renovation’ or full repair. These can cause the total cost of renovations to balloon over $50,000 in some cases.

Interior Renovation Costs

If the house has good bones and just needs a little polishing, you could focus on improving the interior. Depending on the size of the house, you could add a fresh coat of paint and install some trim for under $1,500. Flooring can usually run you a couple thousand dollars, as well.

Breaking Down the Cost by Room

While painting and flooring are one thing, each room comes with specific needs. For example, renovating a bathroom is going to cost way more than fixing up a bedroom.

Here is a break down of the average costs of home renovations by room, provided by Forbes Home:

Room	Average Renovation Cost
Single Bedroom	$3,600
Living Room	$6,900
Bathroom	$16,250
Kitchen	$27,000

 

Other House Flipping Cost Factors

We wish we could give you one universal price for flipping a house, but there are many factors that contribute to the final cost. Here are some key items to consider:

Size of the home: The bigger the house, the pricier the renovation costs. If you’re a newbie to the world of house flipping, consider starting off with smaller homes with less rooms.

Age of the home: While some old homes come with some impressive foundations, many come with wear and tear. Depending on the house, you could be looking at some serious renovations!

Location of the home: The location you buy the home can influence the price of labor and materials around you. In expensive and affluent areas, you’ll find that the prices for materials and labor increase. This is why many house flippers opt to buy homes in up-and-coming locations for competitive prices.

Labor: When working on a project like this, you need workers you can trust. The average cost of labor can range anywhere from $50-$200 an hour. The price depends on the experience of the workers and the scale of the project.

Permits: Paying and waiting for permits is one of the necessary evils of house flipping. If you have a good contractor, they should ideally handle this part for you! You don’t need permits for all renovations, but you’ll need permits for room additions, structural work, and plumbing or electrical projects.

Materials: Higher quality materials will cost more money. But these materials usually last longer over time. If you’re looking to save during a renovation project, consider finding affordable materials to work with.

How to Estimate Your Profits

Get an Inspection Before Purchasing

Before you commit to purchasing a home, you’ll need to get a thorough inspection done by a professional. Inspections can cost a few hundred dollars. But they’re necessary when it comes to making an informed purchase.

Calculate the Repair Value ARV

After you get the house inspected, you’ll have a better idea of how much repairs will cost. The best way to do this is by writing down every project you intend to do and the projected cost of labor and materials. Once you estimate the cost of renovations, you can calculate the After-Repair Value (ARV) of the house.

What is an ARV?

The ARV is a formula used to calculate how much you’ll spend on a house flip total. The formula will look like this:

Formula: Price of Home + Price of Renovation = ARV

Numerical Example: $170,000 + $40,000 = $210,000

The ARV of a home can fluctuate depending on the real estate market, so it’s important to do market research before carrying through with a house flip. It’s also helpful to consider the ARV before purchasing a fixer upper.

The math isn’t over! Once you have an ARV, it’ll be time to consider the 70% Rule.

What is the 70 Rule?

This is a popular formula used to help real estate investors come up with competitive offers for a home. Essentially, you don’t want to pay more than 70% of a property’s ARV. Here’s how to calculate it:

Formula: (ARV x .70) – Price of Renovation = Ideal Purchase Price

Numerical Example: ($210,000 x .70) – $40,000 = $107,000

For this example, you’d ideally purchase this property for $107,000. This way, you can make repairs and resell the property for a profit!

Keep in mind that negotiations will not always go your way. You may have to spend a little more and adjust your budget appropriately.

What is Sweat Equity?

Sweat equity is the price of your effort, time, and labor. You can find the total sweat equity by calculating how much of the home’s value is accounted by the work performed by the house flipper. You should subtract the cost of supplies, tools, and materials from this total.

For example, if the projected cost of a house flip is $40,000 and supplies run you about $10,000, then your total sweat equity would be $30,000.

Should I Try Flipping Houses?

Ultimately, flipping houses can come with significant financial risk. So, you should weigh your options carefully before jumping into it. But if it all works out, it’s a great way to make extra income and exercise your creativity. Before you get started, make sure you prepare carefully and don’t cut corners—you’ll thank yourself later!

House Flipping with U-Haul

Feeling inspired to get DIYing? We don’t blame you! Be sure to check out our articles about which home renovations you can tackle first before getting started. And remember, with a U-Box container you can have affordable and secure storage onsite. This can save you time and money on your home renovations.

Ready to get started?