Flipping Houses in Houston
Property investors buy houses to fix up and resell. The point is to buy cheap and sell high. This is a booming business, which takes a lot of thought and creative planning. To flip houses in Houston, you should learn when it's appropriate to flip and what steps to take, so that you don’t lose money in the end.
Pros and Cons of Flipping Houses
If you're on the fence about flipping houses, let's break down some pros and cons.
You will get paid faster when you flip houses. The average time frame to flip a house is around six months. You take a smaller risk because you only invest in the project for that short time period. You pay less tax rate because of the long-term capital gains rate, as long as you own the property for a year or more.
You don’t have to worry about dealing with any occupants since the home is vacant during flipping. The longer you own the property, the greater the property value will increase.
You don’t make a consistent income while flipping houses. The cost of repairs could be overwhelming, especially at first. You could end up paying a higher tax rate if you fix up the property too quickly.
You risk losing money if you’re unable to find renters or buyers. You may have to make some mortgage payments if it takes too long to sell.
Steps To Flipping Houses in Houston
Before you jump straight into the market, you should know the main steps to flipping houses in Houston.
1. Choose The Property
The first step to flipping houses in Houston is to find an eligible house to flip. Look for homes that are in foreclosure and that are older. These are cheaper to buy and quicker to sell once they’re fixed up.
Select a house that is at a lower price. This will be cheaper for you to renovate, and once renovations are complete, you can sell it for a higher price.
Learn the average value of other homes in the Houston area to help determine how much you should invest. Make sure you don’t invest in something that will depreciate after a certain period of time.
2. Use the 70 Percent Rule
The purpose of the 70% rule is to figure out the maximum sale price of a property without overpaying. You would use a formula to calculate how much to offer for flip houses in Houston. Your goal is to increase your profit by at least 30%.
- Compare the value of similar homes in the area and their selling prices. Use that to determine what your ARV (after repair value) will be.
- Estimate how much it will cost to make necessary repairs. Consider the additional costs, such as closing and holding costs, property taxes, loan repayments, insurance costs, and other expenses.
The formula for the 70% rule is this: ARV x 0.70 - repair costs = max offer price. You will profit from this rule if you are persistent. Stay within your budget and complete the work by the timeframe of the loan. Stay as close to the 70% figure as possible.
3. Find a Lender
If you can buy with cash, that’s the best way to go. You won’t have the stress of interest rates, debts, or strict deadlines. If you can’t buy with cash, look into borrowing the money from a reputable lender.
Find that lender. If you find a private lender who would like to invest in some property and has the funds to do so but doesn’t have the time or skills to fix up a house, you can borrow from him or her.
If you are an experienced investor who wants to flip with no money down, you can receive a hard money loan. With this loan, you borrow money at high-interest rates and pay extra points on top of that.
You will probably be able to borrow more than the average financial institution will lend. Hard money lenders often use the 70% rule to justify their lending amounts.
4. Renovate To Increase Property Value Without Loss
Plan ahead with a budget. Know what the property is worth, then be mindful of how much it will cost to make necessary renovations without losing in the end. You can fix up the home like new without going over budget.
Doing minor repairs, such as replacing countertops, re-flooring, repainting or hanging wallpaper, or upgrading appliances can still increase the home’s value. You can sell quicker and receive a nice profit.
5. Sell High
You are now ready to sell. You’ve already calculated your greatest asking price and you know the value of homes in the area, so set the sale price at the lowest end of the price range and use that as a starting bid.
Outlook for 2021 and Beyond
You can have a lucrative career flipping houses, but remember that there are other types of real estate investment strategies, such as wholesaling, passive income investing in rental properties, land development, and value add strategies. The most successful real estate investors are well versed in multiple strategies and can deploy any of them when the timing is right.
The Houston Real Estate Investment Association holds monthly training sessions, covering the full spectrum of investment strategies. Register for our next free session HERE.