As the owner of a house flipping business, it's important to know how to find houses to flip. Knowing what neighborhoods will have good houses to flip and how to identfy a them will come in handy.
Read on for the six key factors for evaluating homes and neighborhoods with the greatest real estate investment potential.
Recommended: Be sure to read our guide on How to Start a Real Estate Investing Business.
Finding the Best Neighborhoods for House Flipping
Houses with great flipping potential will have common features like a sale price under market value and a motivated seller, but beyond that, they are in neighborhoods with key characteristics of a good real estate investment location.
By narrowing the scope of your real estate investment search, your time and resources are focused on neighborhoods with the greatest house-flipping potential. Apply these steps to set yourself up for maximum return from your first house flip.
1. Build a Relationship With Local Real Estate Agents
The first step is to reach out to local real estate agents and start to build relationships. Most agents are happy to work with investors since they will make more quick purchases and sales than a typical homebuyer. More activity means more business, so this relationship is a win-win.
You will want to look for investor-friendly real estate agents. Some key characteristics include:
- Experience in real estate investing themselves or in helping real estate investors.
- Specialization in investment real estate rather than traditional homeownership.
- A deeper knowledge of the types of properties that are great for house flipping. These include pre-foreclosures, bank owned properties, hud homes, etc.
- The ability to provide you with information about on-market and off-market properties.
You can explain to the agents that you plan to start house flipping and that you would like to work with them at key stages in the process. They will be able to help you access the multiple listing service as well as provide you with other house-flipping leads.
Multiple Listing Service
A multiple listing service (MLS) is a comprehensive database that lists all the current real estate on the market as well as past transaction information. From MLS you can gain crucial information about houses in a neighborhood like the price per square foot, the length of time houses stay on the market, the year built, property taxes, amenities like garages or pools, and neighborhood schools.
MLS can be local or shared and also extend to national listings. Shared MLS is a better choice because they have the information you need including properties sold and price per square foot on a wide range of houses in a large area. You will want to speak to a real estate agent that can help you access a shared MLS.
The advantage of MLS is that regulations require the data to be updated within days of a house sale. For this reason, MLS is significantly more reliable than an internet search on Trulia, Zillow, or similar sites. The information on these sites is often outdated or inaccurate, making it difficult to get correct estimates about home sales, home prices, and price per square foot when targeting neighborhoods.
Access to MLS through a real estate agent will give you key insights and current market information as you narrow your search area. By building a good relationship with real estate agents now, you are setting yourself up for success from your first house flip.
2. Define Your Target Area
The common mantra when looking for a property is “location, location, location.” In real estate investment, location is everything. In house flipping, this is especially true because you want to find a location that maximizes your time and resources. With a well-defined target, you waste less time following up on unwanted leads and maximize your time on quality leads.
Defining your target neighborhoods is like setting your search criteria in Google. You filter out unwanted noise to make sure you have the best results in the shortest time.
How to Define Your Target Neighborhood
A good target neighborhood is one that facilitates a quick house flip. You’ll find houses at a great price and be able to quickly resell at a profit. This is not necessarily the hottest neighborhood. In fact, it is often a neighborhood that is currently growing but still off the radar.
Beyond the points listed below, you will want to make sure that your target neighborhood is insurable. You can check with insurers, but a simple indication is if other real estate investors are buying and flipping houses in the target neighborhood. This indicates that properties are being evaluated and sold in the area.
In some areas, you will need to reach a certain level of improvement before the house can be insured. If the whole area will not be insured, that is not a good target neighborhood. If you see a lot of real estate investment in a neighborhood, that is a first indication that the neighborhood is ripe with possibilities. Now it’s time to narrow your search.
Key points to keep in mind when selecting a target neighborhood include:
- Sales activity of homes in the area
- Selling price of the homes
- Ages of the homes
- Charm and desirability of the area
- Safety of the neighborhood
- Vicinity of your work and home
Why These Points Matter
Sales activity is the first factor to consider when choosing a target neighborhood. It will tell you in numbers how desirable a neighborhood is currently. For this step, you will need the help of a real estate agent who can access your city’s Multiple Listing Service (MLS).
Once you have access to the MLS, there are two main facts to note:
- How quickly homes are selling: The idea is to flip and sell, so your first criteria should be a neighborhood where homes sell within days or weeks, not months. You don’t want a neighborhood where nicely refinished homes sit on the market for months.
Some say the ideal time for a house flip is three weeks from purchase to resale. For this, a neighborhood with good sales activity is essential.
- The price per square foot: Here you are looking for a neighborhood with two or more price points. Suppose there is a group of houses in the neighborhood selling for around $120 per square foot and others selling for $250 per square foot. That means that one home of 1000 square feet would sell for $120,000, while another in the same neighborhood would sell for $250,000. This indicates investment potential.
Look into the difference in the homes. What are the features, finishes, or amenities in the homes at each price point?
Once you have determined that an upgrade will allow you to flip the home at a higher price point, you have clear investment potential. You can then purchase a home in the $120 per square foot price range, fix it up, and resell for the $250 per square foot price point.
Selling Price of the Homes
Now that you’ve determined that homes in the neighborhood are selling, you need to decide which overall price range to focus on.
Should you be looking for high-end luxury homes? What about low-end homes? While there are advantages and disadvantages to each, unless you are an experienced house flipper, it is wise to focus on mid-range homes and mid-priced neighborhoods. When buying to flip, a mid-priced home provides the ideal balance between risk and return and the greatest number of potential buyers.
High-End House Flips
High-end homes have the potential for a greater profit margin, but they also require greater upfront investment on high-end finishes. This makes the flip more challenging to finance and creates extra risk.
It can be tempting to try to buy a house in a high-end neighborhood because of the possibility of a greater return, but unless you have secured the financing and double-checked all costs, you could end up running out of funds before the upgrade is complete.
Low-End House Flips
On the other hand, a home on the low end of the housing market will have such a small profit margin that it is usually not worth the risk of investment, as you may spend most of your profit margin on the renovations.
For example, if the house is $30,000 and you plan to make $8,000 on the flip, a few extra expenses, or holding the house too long, could mean you lose your profit.
Median Price House Flips
A home that is in the median price range – neither too low nor too high – will give you the largest number of potential buyers and a great balance between risk and return. To minimize your risk and maximize your return, choose a target neighborhood with average or medium home prices.
With a house in the median price range, you’ll have a large target market, a comfortable profit margin, and manageable improvement costs to reach a desirable standard.
The median price range will vary by region. A median price in California cities may be over $800,000, while in the rural Midwest, it might be closer to $100,000. It is important to know your area. A local real estate agent can help you determine or confirm a good local median price range.
When selecting your target neighborhoods, you’ll want to look at the age of the homes in the area. Again, you are looking for the middle ground. A home that is too old could require very expensive and time-consuming repairs. A home that is new is unlikely to be priced enough under market value to make a good house flip.
You want something that has room for upgrades and improvements but without the need for major structural repairs.
Older, established neighborhoods are good targets because the owners tend to have greater equity in their homes. That means the owners have already paid off a substantial portion of their mortgages and have greater flexibility to consider selling below market value.
Homes that have been owned for decades by the same owner are often free of the need for major repairs like roofs or electrical wiring but could use a refresh and a modern update. This presents excellent investment potential. Just be sure to do your due diligence on an older home so you don’t find an expensive surprise.
Charm and Desirability of the Area
While we might want to deny it, looks matter. In real estate investment, curb appeal can mean a difference of thousands of dollars in profits. When choosing a neighborhood, you’ll want to drive through and observe the other houses in the area as well as the parks and the gathering spaces. Is the area charming? Would you want to live there?
Beyond looks, the desirability of a neighborhood is in amenities. This includes good schools, shopping, parks, recreational facilities, and lots of retail and office space. It also takes into account ease of commute to larger cities or major centers of employment, good public transport, low crime rate, and an established reputation.
Tip: Towns near universities or teaching hospitals are known to be good for real estate investment. You will also find many opportunities for house flipping just outside of large cities and major business centers.
Some of the questions you might ask yourself are: Is this a family friendly neighborhood? How are the schools? Do you see children out playing or families together? Are there great retail spaces or charming features? How is the commute? What about public transport? Is this a walkable neighborhood? Are there universities or business centers nearby?
When considering the safety of a neighborhood, think not only about the future buyer but also about yourself. You should select a location where you are comfortable working at night or in the dark. If you cannot safely work after dark, the risk usually outweighs the potential rewards.
You can get safety information from the local police, by asking locals, and of course, online. Use your common sense and observe your surroundings. Are there families out after dark? Does the area feel safe?
It is important for you to feel safe while spending a significant portion of your time in a neighborhood. Safety is also a significant factor that potential buyers will consider. If you don’t feel safe in the neighborhood, potential buyers probably won’t either.
Vicinity to Your Home and Work
The final factor to consider is how close the neighborhood is to your home and work. The ideal neighborhood is near your home, work, or between the two. With a neighborhood in your proximity, you can easily drive through scouting for new homes to flip.
You will also want to be able to stop in regularly to check on the progress of the renovation or meet with contractors. And of course, if you are doing the work yourself, you want to use your time renovating, not getting there.
While everyone will have a different acceptable driving distance, you should aim for the closest neighborhoods that meet the other criteria on this list. That will give you maximum access to check for new properties, visit your renovation projects, and connect with locals in the neighborhoods.
If there are no neighborhoods with good house flipping potential near you, you can still invest. Ideally, you will get someone in the target neighborhood to scout properties for you.
You can pay them a set fee upfront or a percentage commission once the house flip is complete. This person could be a bird dog, a wholesaler, or even a friend. They can help you search in neighborhoods that are further from you, potentially extending your reach and multiplying your efforts.
3. Select Your Target Neighborhoods
Now it is time to get out a local map. You are going to mark the places with the greatest investment potential near you. These will be your target neighborhoods.
- Start by putting a mark where you live and another mark where you work.
- Now circle the maximum driving distance you are comfortable with around your home and work.
- Start marking neighborhoods.
- Put stars on any neighborhoods that are older, have good sales activity, and more than one selling price.
- Add an extra star if their crime rate is relatively low and there are some other charming or desirable features.
Within the target neighborhoods, the houses with the greatest investment potential are the ones selling at the lower price point, usually older, that can be quickly renovated or updated to resell.
You will save time and money with target neighborhoods that focus your search and define your goals so you maximize house flipping opportunities. Narrowing the scope of your search increases your potential for success.
By targeting houses in these areas, you have done the research and know they have good house-flipping potential. These neighborhoods will stand out in five key areas and be located in proximity to where you live and work.
To do this, you will also build a relationship with local real estate agents. They will help you to study the MLS and locate the neighborhoods that meet your criteria.
Ideal target neighborhoods have the right balance for house flipping: sales activity, median or average home prices, the ages of the homes, charm and desirability, and safety.
When you find a target neighborhood that performs well in these key areas, you have a goldmine of real estate investment opportunities.
A firm foundation in understanding the local market and building local relationships will give you an advantage that will have a large pay-off.
For more details on how to evaluate house flipping potential once you’ve found a house in your target neighborhoods, check out our guide.