Successful Fix and Flip

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7 Blunders to Avoid When Starting a House Flipping Business

There is no doubt that with the right skill, knowledge, and motivation, flipping houses can be a very lucrative business. However, as with any new business, mistakes in the early days can have detrimental effects. 

Therefore, as well as mastering all that you should be done correctly, it is essential to know what you must avoid when starting a house flipping business. After all, after flipping, you must sell the house fast to make a profit. 

7 Blunders to Avoid When Starting a House Flipping Business 

1. Not sticking to the 70% rule 

The first rule of thumb to live by from the very first property is the 70% rule. You should only ever spend 70% of the after-repair value (ARV) on the house, less the repairs. So, your first calculation is (AVR x 0.7) – repairs. For example, suppose there is an ARV of $100,000 on a house that needs $15,000 in repairs. In that case, you shouldn’t buy the property for more than $55,000. 

2. Overpaying for a property 

It would help if you had patience when starting a house-flipping business. When you can’t find the right property straight away, you start to get tempted to buy too high and ignoring the calculations. Another blunder to avoid is letting your emotions influence your purchase. Investors make the mistake of overpaying because they fall in love with a property. 

3. Forgetting to calculate all expenses 

House flipping shows are great at showing you the purchase price, cost of repairs, and the profit. However, they don’t show you the other expenses that need to be calculated into your budget. Specifically, this will be insurance, holding costs, and utilities while you are renovating. 

4. Taking on too big a project 

While you don’t want to overpay, you also don’t want to get too excited about the extremely cheap properties. Typically, these are the properties that need an extensive amount of work. Therefore, it is best to take on these projects when you have some experience under your belt and some savings, just in case. 

5. Spending too much on renovations 

The two main expenses when flipping a house are the materials and the contractors. You might have decided to do the bulk of the work yourself, but certain things will require licensed contractors, such as the electrics and plumbing. Look around for contractors and get different quotes. While you are talking to contractors, check the price of materials they use to make sure you don’t end up overpaying for materials. 

6. Not looking at comparables 

Enthusiasm can get the better of us. We imagine a new kitchen here, an on-suite there. The result might be stunning, but you may end up over-improving. To prevent this, look at comparables in the area. Then check out what fixtures and fittings are expected in the area. Finally, visit open houses and see what features are being highlighted. 

7. Ignoring your timeline 

Along with your contractors, you should have a strict yet realistic timeline, much like your budget. You might want to allow for a few days of leeway, but taking too long to renovate a house will lead to more significant expenses and, ultimately, less profit.

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How to Finance a House Flipping Business

Any successful business needs a plan for every aspect, especially for the finances. House flipping is precisely the same. A house flipping business is a smart way to invest your money, make a second income or primary income. Knowing how to finance a house flipping business is the first step to success. 

Before looking at various loans, you need to ensure that your budget is clearly set and you have crunched all of the numbers. It isn’t just the property that you may need the funds for. Include the cost of renovations, taxes, insurance, holding costs, and a little extra just if something unexpected comes up. Your credit rating may also impact the amount or type of loan you can apply for. Once you have collected all of this information, you are ready to look at financing options for your house flipping business. 

1.      A Traditional Bank Loan/Mortgage 

A traditional mortgage is the most sensible way to purchase a property that you intend to live in, but perhaps not for house flipping. While you can take advantage of lower interest rates, it can take between 45 days and three months to get the loan approval. This is because banks go through a lengthy and detailed financial check. They will also require inspections on the property and generally don’t like properties with issues. 

2.      Creative Funding 

At the complete opposite end of the scale, you have what people call creative funding for house flipping. Again, you might find this will take longer than other methods as it requires time to develop strong relationships. The real estate community is buzzing with activity and ideas. As you continue to network, you will meet people who have unique funding ideas and possibly even investors. 

3.      Home Equity Line of Credit 

If you are a homeowner and have equity, you might qualify for a HELOC (Home Equity Line of Credit). Many HELOCs can offer up to 85% of the value of your home, deducting what you have left to pay in the form of a line of credit. Interest rates are often lower than other types of loans and, in some cases, can be tax-deductible. Once you sell your flipped property, you can pay off the balance and have the funds available for another purchase. 

4.      Cash-out Refinancing 

This option may only be suitable for certain situations, but it is definitely one to consider. A cash-out refinance loan is a loan to pay off an existing loan, but for a more considerable amount than the balance. The additional money can be used as a down payment or for renovations. 

5.      Private Lenders 

Private lenders to finance your house flipping business are often a favored choice because of the greater flexibility. A private lender will focus their attention more on the investment property than on your financial situation. Their concern isn’t whether you can pay back the loan but whether they will be able to sell the property if problems come up. They will look at the ARV (after repair valve) to estimate the profit after sale. After some time and successful flips, you may find a private lender who will invest 100% of your flip and fix property funding.

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How to Start a House Flipping Business in Dallas

Last year, there was a fall in house flipping in Dallas—not surprising considering the global situation with COVID-19. That being said, profits on house flipping in Dallas increased. Now is a great time to start a house flipping business in Dallas. Your goal is to find someone who needs to sell their Dallas home fast, fix it up, and sell it on for a profit. 

So, let’s look at how to get started. 

1.      Create your business plan 

Nearly half of all small businesses will fail because of a lack of planning. Every business needs a business plan—house flipping included. Your business plan should begin with an executive summary, the who, what, and why. It would be best if you also contained market research regarding house flipping in Dallas. You also need financial statements, how much you have to invest, your expected profits, and growth. 

2.      Build a solid network 

Flipping houses requires many hats. You need to know the real estate market, your financial options, contractors, the cost of supplies, marketing, and so forth. The best way to learn as much as possible and fast is to create a network of professional contacts. You can start online but don’t forget the numerous real estate and house flipping events in Dallas. 

3.      Register your business 

This is another area that you may need advice from a professional. There is potential for things to not go your way in house flipping, so liability protection is crucial. Find out more about limited liability protection options like LLC or corporation. After you are registered, you can complete other legal requirements such as an EIN (employer identification number), insurance, and licenses/permits. 

4.      Put together your team 

Based on research, recommendations, and networking, you can start by finding reputable contractors and, if necessary, suppliers. Make sure your contractor can help you set realistic timeframes and budgets. You might also want to bring on a partner, someone with a different skill set to yours. While you may be the expert in renovations, a partner can have knowledge in real estate and Dallas laws. If you don’t want a partner, you should still find realtors and a real estate lawyer. 

5.      Get finance 

It could be that your partner has the finances for the investment. This is ideal because the first 12 months of house flipping can be challenging to get loans, though not impossible. You can also take advantage of your 401(k) if retirement isn’t on the horizon. You could also ask friends or family by presenting them with the opportunity in your business plan, and if need be, you can combine some of these options. 

6.      Find your investment properties 

The most important here is not to jump into anything until you are confident it’s the right investment for you. One common mistake is that house flippers look for properties they like—not to generate the best profit. Naturally, you will be looking for cheap properties. Still, it would be best to consider the cost and time of renovations and the ARV (after-repair value). 

You, like many house flippers in Dallas, will rely on the internet to search for amazing deals. Remember that you can also drive around certain areas, attend auctions and contact Dallas real estate wholesalers.