You might have definitely thought of starting your own house flipping business after watching those HGTV shows. Especially, if you are someone who loves turning their design ideas into reality, house flipping is an exciting endeavor to undertake.
But hey, starting a house flipping business is a bit complicated. You need to figure out financial, logical, operational as well and legal aspects to buy, flip, rehab, and sell the property successfully.
Well, let’s address the complications and get you an answer to how to start a house flipping business in definite steps.
This detailed guide covers everything from market research to registration, marketing, and funding to start a business on solid foundational note.
Ready to get started? Let’s dive right in.
Steps to Start a House-Flipping Business
1. House flipping market research
The foundation of any business builds on good quality market research. Collect as much ground-level and secondary data to form strategies, processes, and outlines for your house flipping business.
Begin by identifying the state of the house flipping market in your locality and the state. Determine if there is a scope for house flippers and demand for them. Also, is the market competitive in your area or supportive of new flipping businesses?
Further, elaborate your research by diving deep into your local market. Get in touch with realtors and agents to help you identify hotcakes in the property market. And don’t forget to check the legalities surrounding house-flipping businesses.
Here are a few things you can try answering to make your research comprehensive:
- What type of properties will you flip?
- How much are people willing to pay for a property?
- How much does a property cost in your target area?
- What amenities are desired by your target market in a property?
- What defines a good neighborhood while searching for property?
- What are some structural issues to check when buying a property?
- What type of renovation adds value to the property?
- What type of properties yield higher returns?
Gather data and information from national publications, and local sources and strengthen your networking in the real-estate market.
2. Prepare your house flipping business plan
Before starting the house flipping process, pause and invest your time in writing a comprehensive business plan.
A business plan helps you form business strategies specific to your house flipping business and offers a roadmap guiding you to achieve the desired milestones.
A well-defined plan accounts for all sorts of casualties and helps you stay put on the path by clearly defining your objectives. From how many projects you can take to how much funding you will require, your house-flipping process, and much more- it outlines every single detail.
Well, writing a stellar plan is a skill quite to master. However, here are a few details you must consider adding to your plan:
- Executive summary
- Company Overview
- Market analysis
- Operations plan
- Marketing Plan
- House-flipping team
- Financial plan.
Does this feel overwhelming? Well, this step-by-step guide to writing your house flipping business plan will make your plan writing process much easier.
3. Register your business
Before you can officially start flipping houses, you need to register your business to make it legally compliant.
Select business entity
A business entity is the legal structure of your business. The chosen structure largely influences your liabilities, registration process, taxation, and other business aspects.
Now, flipping houses is induced to liabilities. So ideally an LLC (limited liability company) in partnership or corporation would make an apt choice.
Moreover, if you are planning to secure funding or get a loan, LLC is the most suited form of business structure.
Consider taking the opinion of legal counsel or a real estate agent to help you choose an ideal business structure.
Now, register your business after you finalize the name and DBA (Doing Business As) name of your business.
Apply for tax registration and get your EIN
Figure out the tax obligations applicable to your business and apply for tax registration with the state.
Also, get your EIN (Employer Identification Number) through an IRS (Internal Revenue System) portal. EIN is like a security number of your business that is essential while applying for business bank accounts and credit cards.
4. Acquire essential licenses and permits
Once the registration is completed, take further steps to ensure the overall compliance of your flipping houses business.
Identify the licenses and permits that will be required to operate your business legally. Now, depending on the scope of your operations and your area of work, you might require the following licenses:
- Real Estate License: Real Estate investor needs to acquire this license if they are going to engage themselves in the frequent purchase and sale of real estate properties.
- Contractor’s license: A contractor’s license is essential to undertake construction at any site. Ensure that the contractor on board with your house flipping business has his contractor’s license.
- Renovation permits: To undertake renovations and repairs at a real-estate site, get permits from local authorities sanctioning the same.
- Zoning and building permits: Get essential zoning permits and licenses for your office and the house-flipping sites.
You also need to check that you or your hired professionals have special trade licenses to undertake plumbing, HVAC, and electrical installation tasks.
5. Get required insurance
While lucrative profit margins portray the bright side of owning a house-flipping business, you need to prepare yourself for unpredictable mishaps, accidents, and lawsuits that are regular in the house-flipping industry.
Now, a homeowner policy isn’t sufficient when the liabilities surrounding the business are of high stake. It’s better to develop relations with brokers and insurance agents right from the beginning and get tailored policies for your business and the properties you flip.
Now, it’s upon you to wage in the importance of different policies, but here are a few areas you must get covered while starting your own house-flipping business.
General liability insurance
While it is essential to get general liability insurance, it is also favorable to have one. It’s general insurance that offers coverage against bodily injuries, property damage, legal, and medical payments, and much more. If there is one insurance you must definitely get, it is this one.
Worker’s compensation fund
Again a mandatory one for companies who will be hiring employees. In case of employee injuries and health issues, this fund will offer coverage.
Commercial property insurance
This policy will reimburse you for property and asset damage, equipment breakdown, and tools and electronics mishaps.
Commercial auto insurance
Get your business vehicles insured especially if they are involved in regular transport of heavy construction materials.
Insurance for properties you flip
House flippers must get a builder’s risk policy to get coverage for damage caused during renovations. And also vacant home insurance on properties that are yet to be sold.
Get basic coverage while you start a house-flipping business. As you expand in real estate investing and increase the scope of your operations, consider getting an umbrella insurance protecting your business from a variety of risks.
6. Open a business bank account
No matter how small the scale of operations, it is better to keep the accounts of your real estate business separate from your personal accounts. This will help you manage the business expenses and will ease the tax filing process.
House flipping businesses or any business for that matter, can open their business bank account using their EIN. At this stage, you can also apply for a credit card as an extra credit line for your business.
7. Fund your business
Like every other business, you need money to start a house flipping business. The question is how do you plan to get that money on board?
Well, most of all the house flippers who are just starting, really don’t have the equity or savings to get started. In such cases, different types of startup loans are your only solution.
Depending on the interest rates and your suitability, choose a financing option that caters to your needs.
Hard money loans
Hard money lenders won’t look at your credit score or personal and business credits. Hence, it’s easier to acquire these loans. However, they are extremely short-term and are available for higher interest rates.
Business line of credit
You can get a consistent line of credit, once you start your business. This line of credit can help you pay for the properties, renovations, and operating expenses. Again, certain loans won’t require a credit check.
This is an ideal choice for house flippers who are slowly trying to establish their foothold in the market. The easy access to funds can help you seamlessly flow the operations.
Home equity loans and HELOCs
You can get a home equity loan or line of credit on home equity on your own home. With a low debt-to-income ratio and a good personal credit score, you become easily eligible for acquiring such loans.
Another option for people who are not planning retirement anytime soon is to acquire a loan on their 401K funds. The risk is higher as you may end up losing your potential savings if the business fails. However, with proper planning and allocation, you can recover your 401K balance by flipping properties.
Friends and families
There is nothing better, you can acquire personal loans from your friends and family. It’s easier with the terms and repayment. However, if your relatives are investing in your business, it is ideal to get that in agreement as soon as possible.
If you are wondering about taking a bank loan, you might mostly not be eligible. Banks won’t give loans unless you can offer proof showing the profitability of your business over time.
You can use one of these financing methods or a combination of many to get adequate capital for your startup. Take some time to evaluate your choices and the pros and cons of each.
8. Build your team
After completing your legal registration and funding, you can start a house flipping business without any hindrances. However, you need a talented team of people to complete a successful flip project. It’s a perfect time to start looking out for people who can contribute to your house flipping business.
Now here are a few stakeholders and employees you will require to build a successful house flipping business:
- General contractor: A general contractor with demonstrable work and an extensive portfolio is a worthy investment for house flippers.
- Real estate attorney: These expert attorneys will look after legal aspects ensuring compliance with local laws. Moreover, they will look after making legal contracts for your real estate investment company.
- Handyperson: Will undertake smaller tasks to save you time and costs.
- Project manager: A skilled multitasker to oversee the completion of your house flipping projects.
Don’t make the mistake of doing everything on your own. While hiring people for your business venture may sound expensive, their expertise and skills will help you build a successful business comparatively sooner.
9. Marketing and branding activities
You need to work on upscaling the market value of your house flipping business. Branding and marketing are as important as defining your business operations after all, who will avail your services and products if people remain unaware of your existence?
First things first, define the branding elements of your business. This includes defining the type of properties you will flip and the location of those. Further, what type of design would your properties feature, and what would be your USP?
Further, dive into marketing to make your house flipping business recognizable amongst your target audience. Focus on simplicity instead of diving into the complex strategies right from the beginning.
Here are a few things that can help you generate new leads and market your existing house-flipping projects:
- Extensively market your newly flipped properties on social media channels, website, and through Emails.
- Create signboards and “for sale” boards with adequate contact information on flipped properties.
- Use print media to advertise your business of flipping houses and the flipped properties in the local area.
- Build a solid email marketing plan featuring your success stories, upcoming properties, new design elements, educational content, and much more.
- Offer a 360 view of your flipped properties to attract potential buyers.
- Network and collaborate with real estate investors, contractors, suppliers, legal counsel, and vendors to dive deep into the real estate market.
- Register yourself on platforms like Zillow, FSBO, and foreclosure to get in touch with house owners, real estate investors, and other house flippers. Strengthen your network and use these platforms to generate new leads for your business.
Experiment and assess different marketing strategies to find a suitable mix for your business.
10. Buy, rehab, and sell the properties
Once you determine the strategies of the house flipping business, you begin the cycle of buying, renovating, and selling the properties. The number of properties you flip at once depends on multiple aspects, however, having an understanding of the scale of your operation will help manage the resources optimally.
Once you find the property you like, the house flipping process goes as follows:
- Close the property after evaluating your financial standing and the lender’s terms. This takes anywhere from 15-45 days.
- Make renovation plans and start the work on it with a projected timeline.
- Market the property efficiently to your target audience.
- Get in touch with a real estate agent to get you buyers for the property. It’s ideal to close the sale as quickly as possible to get maximum returns.
Now, go ahead and get your hands on the first property and begin the fix and flip work on it.
That’s pretty much all the assorted information you need to start a house-flipping business. But let’s discuss a few common mistakes to avoid while you start this new venture.
Mistakes to avoid when starting a house flipping business
A lot of variables weigh in to write the success saga of your house flipping business. Well, you can consciously try to avoid these mistakes and increase the chances of your success:
Not building a strong team
Building a team can be costly, but not having a team is going to cost you more in terms of efficiency, project completion, and productivity. Don’t try to fit in multiple shoes while running a business.
Besides, don’t overestimate your capabilities. Get an experienced contractor on board to help you pick properties that can be flipped easily for a profit.
Not having a budget
Clearly define your financial capabilities before undertaking a renovation project. Overspending more than what the people would be willing to pay will result in losses.
Not making room for casualties
You have to be prepared for unexpected events and make room for them financially in your budget. Despite micro planning, things will go wrong, and having a calm demeanor can help you complete a flip successfully.
Not having an understanding of numbers
The success of a flip project lies in quickly closing a property, flipping it, and making a sale to maximize its ROI. Understanding costs, budget, profits, percentage returns, and other financial terms is essential to make a quick decision. If you fail to decide at a moment’s notice, you are likely to lose a stellar deal on properties.
Lastly, don’t try to spread your wings in every region all at once. Start with a locality, grow your business there, and then eventually start flipping properties in other regions and localities.
Ready to get started? Now that you are fairly aware of how to start a house flipping business, let’s take the first step and write a stellar business plan for your business.
A well-defined house flipping business plan acts as a roadmap guiding you to achieve your desired milestones and objectives. Source inspiration from sample business plans online and use them as a reference point to build your stellar plan.