Real estate can be an excellent investment that provides cash flow and appreciation.
One way to jumpstart your career in real estate investing is to start flipping houses.
Flipping refers to buying a house that needs work (often at a low purchase price), making repairs and renovations, and then selling the property at a profit.
With the right approach and access to funding, you can fix and flip your first house too.
If you’re wondering “How do I buy my first property to flip?” we’ve got you covered. Here are the steps to flipping a house and how to get financing.
What’s the first step to flipping a house?
Before you think about purchasing a fixer-upper, you need to get your finances in order.
You need to have enough money saved to make a down payment — at least 20% of the home’s purchase price — and your credit score must be at or above the lender’s minimum requirements.
But that's not all. You also need to pay closing costs, which are usually about 4-5% of the home price. Closing costs combined with your renovation budget add up to a substantial amount of cash.
For example, if you purchase a property for $200,000, you'll need $55,000 at closing. However, there are ways to finance even these costs.
Flipping a house: step-by-step process
Once you’re financially prepared, you’ll need to familiarize yourself with the process of flipping a house. It’s a big financial commitment, and you shouldn’t jump in without a plan.
Let’s break down the steps to buy your first property to flip.
- Set a budget: While it’s important to make sure you have enough money to fund the project, you also need to set a budget and not overspend. It’s easy to put more money than you expected into home renovations, but it doesn’t guarantee you’ll recoup the extra costs in the sale.
- Get financing: Before you get your heart set on a property, you’ll need to get funding for your flip. Luckily, you have several options to finance your purchase.
- Find an experienced real estate agent: Work with an agent who has experience with flipping houses. They understand the local market and can help you find the right as-is property to purchase within your budget. Your agent can also give you tips on where to spend your renovation dollars and offer advice when you go to sell.
- Research the local real estate market: Research the market and find areas where people want to live. Look for up-and-coming neighborhoods that are more affordable and sell more quickly than high-end homes. Your real estate agent can help you do a comparative market analysis (CMA) to get an understanding of prices and make sure you’re getting a good deal.
- Purchase a property: When you have your financing ready, you can start making offers on properties. Look at foreclosures, auctions, and short sales to find a property that matches your budget. Many real estate investors follow the 70% rule which states that the most you should pay for a property is 70% of the after-improved value of the home minus repair costs. This can help you decide what property is worth your time and effort.
- Rehab the property: After closing on the property, it’s time to get to work. If you aren’t doing the work yourself, you’ll need to hire a team to help you. Ask for referrals on reputable local contractors and vet each company to make sure it's a good fit.
- Sell the property for a profit: Once all renovations are complete, it’s time to market the property and sell for a profit. Hire a local real estate agent with experience selling flipped homes. The agent can give you advice on pricing and offer ways to boost the property’s curb appeal.
How do I get financing?
Real estate investors have several options when it comes to financing their investment property.
These loans can help you buy, fix up, and sell the home. Popular loans include:
- Fix and flip loan
- Hard money loan
- Home equity loan
- Private investor
- Seller financing
The requirements for each of these loans will vary by lender but will need to be met in order for you to qualify.
You’ll need a down payment of at least 20% of the purchase price (sometimes higher, depending on the loan and lender), money to pay closing costs, a credit score of at least 640, and provide documentation.
Typically, your lender will need:
- Bank statements
- LLC documents
- Articles of incorporation
- Title
- Insurance
- Appraisal
Again, this depends on the loan and the lender.
Do lenders accept first-time flippers?
Yes, lenders accept first-time flippers as long as you meet the minimum requirements for the loan. First-timers often need a down payment of at least 20%, but investors with more experience may only need to make a down payment of 10% of the purchase price.
If you’re successful in your first round of flipping, many lenders prefer to work with repeat investors who they know can get the job done.
How do I know if a property is a good candidate for a flip?
The best properties for a flip are structurally solid but require cosmetic-only updating.
Big issues — plumbing or electrical problems, mold, a cracked foundation — are expensive to repair and don’t necessarily add to resale value.
According to a 2023 Cost vs. Value Report, homeowners who do an electric HVAC conversion see the biggest return on their investment of 103.5%.
Homeowners who replace their garage door, install manufactured stone veneer and replace the entry door with a steel door and jambs also recoup over 100% of their initial investment.
But most projects offering the greatest returns in resale value are those that prioritize curb appeal, bathrooms, and kitchens.
Another piece of advice is to choose the least expensive home in the nicest neighborhood. Look for a safe community in a highly-rated school district. This is what everyone is looking for, so be prepared for some competition.
Are you ready for your first flip?
If you find yourself asking, "How do I buy my first property to flip?" remember that house flipping comes with risks, but you can mitigate this through planning and due diligence.
Half the battle is finding the right lender to work with. Let REInvestor Guide connect you.
