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The real estate buy and flip model is one of many investment strategies used by real estate investors. This strategy involves analyzing markets, placing offers, buying property, and making any necessary repairs (called rehabbing), then marketing and selling the property for profit.
Who is this business right for?
The buy and flip investor needs to spend a good amount of time working on each investment. Therefore, a good investor will be a committed and well-organized one. A solid understanding of the real estate market in your area will be crucial, as you need to understand what makes a property a good investment based on your goals and objectives.
What happens during a typical day at a house flipping business?
A buy and flip investor will need to learn the market value, buying process, rehab process, and marketing and selling process. Buy and flip investors spend a majority of their time in the rehab portion of projects, but there’s more to it. Here’s some of the activities that an investor might do:
- Search for properties that are available to purchase either on the multiple listing services or off-the-market properties
- Work with traditional lenders, private lenders, hard money lenders, etc. to secure financing for purchases
- Constantly build a list of real estate wholesalers and bird dogs
- Make offers on properties
- Close on offers
- Constantly establish a list of contractors
- Rehab properties, which includes, but is not limited to:
- Electrical repairs
- Structural repairs
- HVAC repairs
- Market the properties
- Establish a list of title companies to ensure title is valid and issue title insurance
- Find a real estate broker to help with the sale
- Sell the properties
Buy and flip investors will spend more time on different tasks depending on where they are in the investment process, but all of these tasks will be important.
What is the target market?
A buy and flip investor works with property owners/sellers on one end, and on the other end, sells the property to a buyer who wants to buy it as their primary residence. A good property owner/seller is one who is urgent in his/her need to sell their property. This urgency can be the result of a number of factors, like:
- Desire to move quickly
- Desire to get out of a mortgage
- Other factors that may be causing stress, typically financial
A buy and flip investor can offer sellers a mutually beneficial arrangement, whereby the investor acquires the property and the seller's stress is alleviated.
After purchasing and rehabbing a property, it is typically sold A good buyer-investor is someone who is very interested in purchasing the particular type of property the buy and flip investor has for sale. Buyers are most preferred when they are well-funded, as they can make stronger offers to the buy and flip investor.
Personal buyers are interested in purchasing properties to use as their personal residence or place of business. These customers may be great customers for buy and flip investors, as their personal attachment to properties may make them more willing to spend big to secure the property.
How does a house flipping business make money?
Buy and flip investors make their money when they sell the property in order to profit on their investments. A savvy investor will look for investment properties that are profitable without any market appreciation (the increase in the value of property). A buy and flip investor’s profit is calculated as follows:
Profit = Sale Price of Property - (Purchase Price of Property + Rehab Costs + Auxiliary Costs)
For example, if an investor purchases a home for $50,000, and rehab costs add up to $30,000, the investor will have put $80,000 into the property. If the investor sells the property for $150,000, the investor will have made $70,000 profit.
Most investors operate under a general rule: when flipping property, you make your money when you buy. That is to say, it is best practice not to buy properties with the expectation that rehab and/or an increase in market value will justify your investment. It is best to buy a property well under current market value, which will leave plenty of room for a return on investment after rehab and auxiliary costs (like marketing, commission, etc.) are factored in.
What is the growth potential for a house flipping business?
A real estate buy and flip business is only limited by the number of properties an investor can flip. Buy and flip investors can reinvest all or some of their profits into the purchase of more (or more expensive) properties to flip.
What are some skills and experiences that will help you build a successful house flipping business?
A buy and flip investor needs to be a good planner and a patient businessperson. Buying and flipping comes with big costs and can take a long time. As such, an investor needs to be okay waiting on an investment to pan out. An investor also needs to have a good understanding of the market in their area. Many buyers make the mistake of overpaying for a property. A savvy investor knows how to pick out a good deal to ensure that the investment is a successful one.
A good buy and flip investor also has a good group of contacts with which they can network. Networking is essential as buy and flip investors rely on many different people in the investment process. From wholesalers to electricians, real estate brokers to lenders, a buy and flip investor needs a reliable team.
It is also not a bad idea for a buy and flip investor to learn about building repairs. Repairs can be very costly and scheduling in a way that accommodates both parties can prove difficult. Knowing how to do a few repairs on your own can help you save money and get projects done in a pinch.
What are the costs involved in opening a house flipping business?
A buy and flip investor needs a considerable amount of capital to get started. Costs include funding for buying a property, rehabbing the property, paying a broker, and any other costs associated with the buy and flip process. An investor will also need to pay marketing costs and fees associated with maintaining a business.
What are the steps to start a house flipping business?
Once you're ready to start your house flipping business, follow these steps to ensure that your business is legally compliant and avoid wasting time and money as your business grows:
- Plan your business. A clear plan is essential for success as an entrepreneur. A few important topics to consider are your initial costs, your target market, and how long it will take you to break even.
- Form a legal entity. Establishing a legal business entity prevents you from being personally liable if your house flipping business is sued.
- Register for taxes. You will need to register for a variety of state and federal taxes before you can open for business.
- Open a business bank account. A dedicated checking account for your house flipping business keeps your finances organized and makes your business appear more professional to your customers.
- Set up business accounting. Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.
- Obtain necessary permits and licenses. Failure to acquire necessary permits and licenses can result in hefty fines, or even cause your business to be shut down.
- Get business insurance. Insurance is highly recommended for all business owners. If you hire employees, workers compensation insurance may be a legal requirement in your state.
- Define your brand. Your brand is what your company stands for, as well as how your business is perceived by the public. A strong brand will help your business stand out from competitors.
- Establish a web presence. A business website allows customers to learn more about your company and the products or services you offer. You can also use social media to attract new clients or customers.
Select your state below for an in-depth guide on completing each of these steps in your home state.
What are some insider tips for jump starting a house flipping business?
A successful buy and flip investor will flip multiple properties. Doing so, however, may open you up to potential personal liability. An LLC may give you added protection from personal liability.
Many real estate investors have taken the approach of forming an LLC for each property they will buy and flip. Each buy and flip property in an LLC creates a legal barrier, a legal separation, from one property to the next. Any lawsuits, claims, or matters challenging a buy and flip property is a contained matter for that LLC alone.
How to promote & market a house flipping business
A buy and flip investor may choose to use a wholesaler to find and negotiate deals on his/her behalf. If this is the case, the buy and flip investor will need to market their business to wholesalers who can help facilitate the purchasing process. This can be accomplished through traditional print marketing, digital marketing, he use of social media, and networking.
On the other hand, if a buy and flip investor is not a broker, he/she may want to enlist the services of a broker. A broker can advertise the investor’s properties on the multiple listing service (MLS), which is a great marketing tool for real estate properties (though it is not available to everyone).
Recommended: A website is essential for promoting your business and attracting customers. Weebly is a great tool.
How to keep customers coming back
Building up your reputation as a reliable flipper can make it easier to sell future homes. The more people know that they can depend on the longevity and quality of the work you do, the more likely it is your homes will sell for the asking price.
How and when to build a team
A good buy and flip investor will build a team of contacts to use in the long process of buy and flip investing. This team will include lenders or investor-partners (if the investor is not using personal money), wholesalers to help find leads, brokers to help sell the properties, and contractors. An investor doesn’t need to use the same contractors, but finding a group of reliable contractors can help you ensure your projects are done well and quickly.
State & Local Business Licensing Requirements
Certain state permits and licenses may be needed to operate a house flipping business. Learn more about licensing requirements in your state by visiting SBA’s reference to state licenses and permits.
Most businesses are required to collect sales tax on the goods or services they provide. To learn more about how sales tax will affect your business, check out our informative guide, Sales Tax for Small Businesses.
For information about local licenses and permits:
- Check with your town, city or county clerk’s office
- Get assistance from one of the local associations listed in US Small Business Associations directory of local business resources.
If you plan to sell your properties yourself, you may need a broker’s license. Requirements for obtaining a broker’s license vary by state. These requirements typically include the prior attainment of a real estate agent license, hours in the workforce, coursework, and the successful completion of a broker’s license exam.
For information about local licenses and permits:
- Check with your town, city or county clerk’s office
Get assistance from one of the local associations listed in US Small Business Associations directory of local business resources.
Real estate investing businesses should require customers to sign a services agreement before starting a new project. This agreement should clarify customer expectations and minimize risk of legal disputes by setting out payment terms and conditions, service level expectations, and eventual property ownership. Here is an example of one such services agreement.
How much can you charge customers?
The price that a buy and flip investor charges for a property is usually similar to the price other properties in the area are selling for. Of course, these prices are subject to change, and an investor can sell a property for more based on the buyer’s offer.
What are the ongoing expenses for a house flipping business?
Home flippers will typically need to pay closing costs, real estate fees, and title fees on top of ongoing renovation costs. Most financial benefits for home loans are for conventional buyers only. Home flippers will typically pay full interest rates as well as capital gains on the property they sell. Homes held for less than a year are taxed at the same rate as normal income. Homes held for longer than a year can range from 0% – 20%, based on the flipper’s total income.
The expenses of a buy and flip business typically include:
- Costs of buying properties
- Rehab costs
- Broker’s fees
- Marketing costs
- Costs of maintaining a business
How much profit can a house flipping business make?
A buy and flip business’ profit is linked directly to the number of properties it can sell and the profit the returns it makes on investments. Home flippers can make hundreds of thousands of dollars a year once they establish themselves in the business. Even a 20% profit on a $100,000 home is still $20,000. A flipper would only need to flip five homes a year at that rate to hit six figures.
How can you make your business more profitable?
A buy and flip investor makes more profit by buying properties at the lowest cost possible and flipping them for as much profit as they can. If the investor spends far less than he/she makes, he/she will see bigger profits.
Another smart way to increase profits is to consider holding properties for a little time before flipping them. If an investor holds a property and receives rent payments for a short to moderate period, he/she may then be able to flip the property and make even more money out of the investment.