Hoping to become the Donald Trump of the house flipping market without the Donald’s cash flow? You’re in luck. You can flip houses on a budget even if you’re missing the monster bank account or friends in the industry. Try these six steps:
- Ignore most advice about flipping houses,especially the “easy money” pitches. You’re going to need to work hard and find solid advice. Anything you read that’ll explain how to secure solid financing, great resale, or the perfect location are key. A great starting point is "No Money Down" by Robert Allen. Anything selling you on sitting next to a pool drinking margaritas while your hot girlfriend cleans the pool in a bikini isn’t credible. Not that anyone doubts your ability to score hot bikini girl.
- Contrary to what your girlfriend says, smaller is better when flipping houses. Remember that crazy housing slump? To avoid flushing money remember that smaller houses weather market downturns better than mansions. Why? People who purchase smaller houses generally make fewer purchase decisions based on the housing market or economy. A $90,000 house is likely to hold its value during a downturn. A $250,000 house might sell for $185,000. Even if both decline, in a 10% downturn you’re only out $9k with the small house but you’ve eaten $25k with the larger property. Ouch. Until you know what you’re doing, stick with small houses no matter how big a steal the mansion seems.
- You’ll need to find investors or a have a great credit rating and some down payment money. Here’s another reason to start small. A $60,000 house will require roughly $8,000 to purchase (10% down plus approximately $2,000 closing expenses and insurance). That doesn’t include refurbishment. Compare tons of banks before signing on the dotted line. Don’t let them run your credit report until you’re ready to deal (too many inquiries could affect your credit). Compare interest rates, but also factor additional fees, expenses and prepayment penalties. Remember, you’re going to want to exit this loan when the house sells, and hopefully that’s sooner rather than later. Get creative with investors. One house flipper in the Detroit market asks investors to purchase houses he’s identified. Then he refurbishes, finds the buyer and splits profits. The investor is happy (they only had to supply the money and avoided any real work). It’s a dream relationship for everyone. In this case the flipper didn’t need purchase money, only time and energy to find relationships by pitching financial advisors, mortgage professionals, and accountants on his project. Why? These pros are respected by many people with deep pockets…investors the flipper needs to know.
- Take foreclosure 101. There are tons of sources for this information. State rules differ, but generally learn how to buy at a sheriff sale and efficiently evict the previous owner. If you don’t understand the foreclosure business all it takes is the time to read and talk to people in the real estate business to learn the ropes.
- Learn refurbishment basics. Three areas of the home that quickly increase value are kitchen, bathroom, and landscaping. At first get your hands dirty and renovate yourself. It’ll take far more time than hiring contractors. However, once you understand how to repair and improve you’ll save thousands when you hire contractors because you can talk their language.
- A quirky, unique look sells a house as much as expensive furniture and pieces. Tour garage and estate sales to find “one of a kind” inexpensive pieces to show off your property. You should hire a professional stager one time to walk you through rooms and list improvements they recommend. Many pros will do this on an hourly basis if their only responsibility is to talk about what they’d improve while you record the discussion. This could cost as little as $50 or $100 and be invaluable learning.
Using these tips you’ll save money and learn enough to save countless dollars on house number two, twenty, and two hundred.