It won’t surprise you to find that more individuals than ever are curious about how to start a house-flipping business if you’ve recently watched HGTV. Flipping a house is a fantastic prospect for short-term investment and for beginning a new business for entrepreneurial individuals who aren’t frightened of hard labor. But before you can start your own house-flipping business, you need to conduct a lot of research and gather the necessary funding and tools.
So that everyone is clear, buying distressed, foreclosed, or otherwise desirable property to fix it up and sell at a higher price within a short period is known as home flipping.
You’ll need to learn more about how to launch a house-flipping business if you’re one of those adventurous investors who want in. To establish a business strategy and choose and carry out the best financing strategy, refer to this guide.
Eight steps to starting a house-flipping business
Here’s where to begin if you’re determined to invest in short-term real estate and flip a house:
First, draught a business plan.
Writing a business plan must be the first step in launching your house-flipping enterprise before taking any further action, financial or otherwise. A business plan is essential for keeping your venture on course, estimating profits, and attracting investors.
You should make sure to include a lot of information in your business plan, which should be rather detailed. You can either compose it from scratch or with the aid of a business plan template. Whatever you do, make sure to include the essential components of a business plan.
An executive summary that outlines the goal of your company, your vision for it, some high-level financial estimates, and a list of the key players in the company should come first. A section on the competition and the demand for your firm should be included in the remaining portions of the business plan. After all, you need to be certain that there is enough demand to support your house-flipping business—42 percent of small businesses fail due to a lack of customer demand. Simply because you didn’t complete your study before establishing your firm, you don’t want to be a member of that group.
You should utilize your business plan to detail exactly what your company will perform, how much it will cost, and how much money you anticipate making. You should describe your financial situation when house flipping, including the amount of money you have, the amount you estimate to need to buy and sell properties, and the amount you anticipate making back.
Step two: Expand your network
Flipping houses is a lot of labor, and you’ll need a tonne of resources to get each job done. Find the resources you already have to leverage your abilities to the fullest. The possession of a prospective property, real estate industry expertise, and access to a network of top-notch artisans are all advantages.
Consult with friends or family members who are active in real estate investing, especially in the neighborhood where you intend to purchase real estate. You may identify trustworthy wholesalers, contractors, and realtors to assist you to find and finishing work within your budget by using anecdotal evidence and word-of-mouth recommendations.
To locate contacts in the sector, use your personal or professional network, and reach out to professionals for mentoring and assistance. Join local real estate investment groups or look for your local REIClub chapter to meet others in the field.
Choose a business entity in step three.
You must select a business entity and register your company with the state in which you intend to do business to legally run your house-flipping venture. While there are many other business entity forms available, you should pick one that offers limited liability protection, such as an LLC or corporation.
Because there are so many potential pitfalls in the house-flipping industry, liability protection is crucial. Make sure your assets are secured in case your business is sued due to a problem with a property you flipped. Consult a business lawyer to assist you to analyze your alternatives if you’re not sure which entity is best for your company.
Step 4: Acquire an EIN, insurance, licenses, and permits
The first step in legally establishing your operation is to register your company, but there are still a few more procedures to follow before you can begin working as a house flipper. The first step is to apply for an employer identification number or EIN. Consider this the social security number for your company, which you will need when filing your taxes, applying for business loans, opening a business bank account, or applying for a business credit card. On the IRS website, an EIN application can be made.
The next thing you should do is research your possibilities for business insurance. You will require workers’ compensation, unemployment, and disability insurance if you hire staff. To further protect yourself, your company, and your properties, you should also consider the general liability and commercial property insurance.
Finally, you must have the necessary business licenses and permits to run your enterprise. You can anticipate needing several permits when working in the construction industry, though the number will vary on your state and the nature of the work you’re doing. Make sure you have all the necessary papers before you begin any work by checking with your neighborhood chamber of commerce and speaking with your business attorney.
Finding vendors and contractors is step five
Once your company has been legally incorporated, you should start looking for suppliers and contractors to help you launch your venture. Even if you intend to invest sweat equity in your house-flipping firm, you’ll likely require the services of extra contractors to finish a job successfully. Look for contractors who have a portfolio of examples of their work, references, and a good track record of client satisfaction.
A reliable general contractor may review your remodeling plans and budget forecasts to ensure they are accurate in terms of price and timeliness. Finding vendors who are trustworthy and willing to work within your budget is also crucial. To find some trustworthy options, use your network and conduct some research.
Step 6: Put together a team
If you want to accomplish a flip, you’ll need to assemble a team of qualified people, regardless of whether you want to work with a partner, hire outside contractors, or renovate each house yourself. Consider hiring for these positions, in particular, to help you stay organized and get the maximum return on your investment:
Partners in business or investors
An active private investor in your network or a real estate investor seeking a project manager could make an excellent potential partner. A good business partner contributes a talent or asset to the partnership, whether it is financial resources, skilled labor, sector knowledge, or just a strong work ethic and commitment to making an honest profit.
The benefit of having a business partner is the capacity to evaluate a purchase in various ways, claims Jamell Givens, a partner and real estate investor at Leave the Key Homebuyers. One partner might solely consider a home’s potential for profit, whilst the other may have local knowledge or connections to contractors.
Property owners or realtors
A real estate and property-owning history is a significant asset in the house-flipping industry. An expert partner can assist you in finding potential properties quickly, determining the upgrades that will add the most value in a particular location, and negotiating contracts and sales after the renovation are finished.
Or, owner or seller financing can be an option for you if you know a homeowner who wants to sell and is ready to lend you the money for the required fixes and improvements.
It’s a good idea to get legal counsel before entering into any financial arrangement or contractual commitment, especially if you’re thinking about making sizable investments or purchasing real estate.
Step 7: Find funding
You’ve done your research, found a partner, and perhaps even picked out the first house you want to flip. In other words, you’re prepared to finance the initial fix-and-flip in your real estate investing venture.
If you are just starting in the house-flipping business, you most likely won’t be approved for a conventional bank loan. Banks often only accept companies that have a long history of financial success. Time is money when flipping houses, too. The best fix-and-flip loans are therefore short-term financing options, typically lasting no longer than a year. Bank loans, on the other hand, often have repayment durations of five to seven years.
Having said that, you do have access to a range of fix-and-flip loans. You also have a strong chance as a startup company to use your own money or investments. Throwing your own money—or your nest egg—into the mix is a little dangerous, but your company likely lacks the revenue and financial stability that most lenders look for before approving you for a business loan.
As always, it’s a good idea to consider every one of your possibilities before choosing the loan that best meets your requirements. Start your search for new home-flipping enterprises with these possibilities:
A loan from family and friends
Many inexperienced real estate investors obtain personal loans from partners, acquaintances, or family members to finance their initial projects. This alternative to a bank or private loan might lessen some of the pressure of a typical loan and ensure some level of accountability if the amount is comfortably within the lender’s means.
Establishing the parameters of the agreement in writing as soon as you reach an agreement is a good idea if a friend or member of your family is an investor or partner in your house-flipping enterprise.
Draw from your 401(k)
One option for funding for first-time flippers with a retirement plan who do not intend to retire soon is taking out a loan from your 401(k) (k). The possibility of losing your nest egg exists with this choice, which is a terrifying thought. If you start your house-flipping business smartly, you can hopefully recover the money you invested and then some. However, for entrepreneurs just starting, financing a business using a 401(k) can be the only practical alternative.
There are two primary 401(k) loan options: The traditional 401(k) loan, in which the IRS permits you to borrow up to $50,000 or 50% of your vested balance, whichever is smaller; or a ROBS loan. Based on the size of your investment and your desire to access your retirement funds, you’ll decide which form of loan makes the most sense for you.
Financing in combination
Numerous financing options are successful for many seasoned short-term real estate investors while they are buying and renovating a home. You’ll likely employ a combination of financing options to fund your home flipping business, depending on your resources, those of a partner or investor, and those provided by outside lenders.
Step 8: Find a discount.
The local real estate market’s supply and demand, labor costs, and the increase in value of the improvements all play a major role in how successfully a home is flipped.
Choosing between a regular broker, an auction, or a real estate wholesaler for your project may be aided by knowing your target property market. A wholesale broker or auction will have a larger selection of properties accessible if you’re interested in distressed or foreclosure properties. If you’re unfamiliar with the real estate market or you need assistance locating a certain kind of home or structure, a traditional broker might be the best choice for you.
Considering the period and quantity of your fix-and-flip loan, decide the extent of repairs or rehabilitation you are capable of carrying out on a property.