How To Start a House Flipping Business in Five Steps

The first step a house flipper should take is to create a business plan outlining their goals and what they need to establish a successful house flipping business.

A business plan helps secure financing options. Lenders will want to see the business plan before extending credit. Among other things, they will want to know:

• Who is running the business? Will you be doing this full-time?

• What are your costs and projected revenue? What profit margins will you have?

• What is your experience in project management or construction? Do you understand the business?

You can develop your own business plan or seek help drafting one from the U.S. Small Business Administration (SBA).

If banks are not interested in lending money, consider a hard money loan. This type of loan is a short-term loan, secured by real property, and more expensive than a traditional bank loan. The hard money lenders may be individuals or companies using your real estate as collateral.

It would help if you also put together a team for your business. Can you fix it yourself, or do you need to hire contractors? Are you a licensed real estate agent, or do you need to work with a realtor? A real estate agent can be helpful in understanding property values and the housing market in your area. Also develop a relationship with a real estate attorney to help with purchases, sales, and zoning issues.

You may be a first-time house flipper or part of a group. You should first think about how to separate the debts and liabilities of your real estate business from your personal assets. If a homeowner were to sue you for an injury, you don’t want them going after your home, car, and personal property. Many entrepreneurs form a business entity such as a corporation, limited partnership, or limited liability company (LLC) to keep their personal assets shielded from their business activities.

LLCs are very popular with single business owners or partners because they provide protection from liability and allow the members of the LLC to report their share of business profits or losses on their personal income tax returns.

You should run all your house flipping transactions through a business bank account. Once you set up your business, you can apply for an Employment Identification Number (EIN) with the IRS and open a bank account in your business name.

Your business should have the necessary licenses and permits to operate. Since you are renovating a property, special permits may be required. Contact your state and local jurisdictions to find out the licenses and permits needed for your business.

It is a good idea to also look into what business insurance you need to protect your investment.

If you have already identified a property, estimate how much money you need for a down payment and factor in the interest rate of the loan or the home equity line of credit (HELOC) in your costs. Once you have enough cash flow, you can flip properties and purchase new ones with cash.

Estimate the renovation costs for each property, factoring in whether you have to hire a general contractor or other tradespeople.

The “buy low, sell high” strategy holds true for investment properties, but there is a special 70% rule to determine a purchase price. The rule is that you should not pay more than 70% of the after-repair value (ARV) of the home. For example, you may identify a property that could sell for $400,000 after the renovations, and you estimate a renovation cost of $70,000. You first calculate that 70% of $400,000 is $280,000. You then deduct the renovation costs from the ARV, arriving at $210,000. You should not pay more than $210,000 for the property. While foreclosures are a popular way to find low-cost homes, ensure that the renovation costs and upgrades won’t cause you to exceed your budget.