What is the Potential for Profit When Flipping Houses?

 

 

Flipping houses sounds like a dream job, and you’ve probably heard stories about making “millions” by renovating and reselling homes. While this might be too good to be true, what’s the real deal regarding how much money you can make flipping houses? Good question.

A lot goes into house flipping profitability and how much you’ll make with each project. We’re here to help you dive into the details, answering the questions on how to accurately estimate your costs and profit margin before you invest in a flip. How much can you make flipping houses? It depends on how good you are at the economic aspect of the game.

 

House Flipping Profit Numbers

When you look up how much you can make from house flipping, a few important numbers rise to the surface. First, you’ll see estimates that house flippers can make over $86,000 a year. But it’s not exactly a salaried job, so that kind of answer isn’t really useful if you’re planning to flip houses one project at a time.

You may see that the average house flip earns about $60,000 per property. That’s a more useful number, but how is it reached? How do you achieve that goal?

Then there’s the 70% rule, which suggests that you never spend more than 70% of the home’s after-repair value (ARV) on renovations. That’s cool, but how do you know how much you’ll spend on renovations?

Let’s dive a little deeper into the process of price-planning a flip for profitability.

 

Buy Low, Renovate, Sell High

The core premise behind house flipping is to buy distressed houses at a drastically low price, invest in renovations, and then sell the house for more than the purchase price and renovation costs combined.

To do that, you’ll need a smart way to calculate the ARV or after-repair value. Houses that are shabby on the surface can go “shab to fab” with just a little strategic touching-up and a few modernized features. However, houses with foundation problems, structural water damage, and other more serious issues may cost too much to repair for a profitable flip.

Housing market also matters. If you can buy a distressed home for pennies (a few thousand) but a renovated home will benefit from the local housing market pressure, this can skyrocket your profit potential.

 

The 70% Rule in House Flipping

One of the best ways to ensure that you make a profit when house flipping is the 70% rule. Only spend 70% of the house’s ARV: its final resale value. That 70% is both your purchase and renovation budget, ensuring that you get somewhere around 30% profits for every house you flip — with a comfortable margin in case of extra expenses.

The 70% rule requires you to know your ARV, purchase cost, and the cost of repairs it will require to get the house selling for top dollar on the local housing market.

 

Calculating the ARV

The after-repair value of a flip is the most important number in your calculations. You need to first have a full understanding of what the house needs to re-enter the housing market.

Identify Distressed Properties

First, look for homes that are selling for less than their real value on the market. These might be homes that have been vacant for a while, inherited homes, forclosed-upon houses, and properties that were recently vandalized.

Not all distressed homes are good flips, but those with “good bones” will offer the best profit potential.

Bring Your Inspector

When estimating whether a house is a good flip, bring the housing inspector. Ask them to help you determine the full scope of repairs that each house requires. Have a good idea of what each type of repair costs and/or have a few contractors on-call to give you a quick stack of estimates.

This will give you a list of repairs and costs for each house. Skip over homes with serious problems and focus on homes that look bad, but would be easy to renovate with surface-level repairs. You may be able to price one or two major investment repairs, if it fits in the 70% ratio.

Price the Home As If It Were Repaired

Consider what the home will look like when it’s repaired. Count the square footage, bedrooms, bathrooms, and features that will exist when you’re done. Consider the neighborhood, housing market, and demand for homes to buy or rent in the area. Look up the recent selling price of homes that share similar size, features, and location of the house you want to flip.

These estimates will give you a ballpark estimate of the ARV – what the house could sell for when you’re done sprucing it up.

 

Subtract the Costs from the Selling Price

Once you have a realistic ARV, you can begin your profitability calculation.

  • What percentage of the ARV is the buying price?
  • What percentage of the ARV is the renovation cost?
  • How much of the ARV is left after purchasing and repair expenses?

The answer to the third question determines your potential for profits. Remember to leave room in your budget so that a few unforeseen costs during the flip don’t eat too deeply into your profit margin.

 

The Speed You Can Flip

If you’re looking for an annual income number, naturally, this depends both on the efficiency of each property you flip and how fast you can flip a property. Professional house flippers can flip a house every two to six months, but first-timers are more likely to take between one and two years.

The size of the house, the extent of your renovations, and how much you DIY vs hiring contractors (and how fast each of those options might take) will all play a role in determining your flipping pace, and how fast you are making those 30% profits.

When talking averages, if the average flip provides $60,000 in profits and flippers make an average of $86,000 a year, that suggests slightly less than 1.5 flips per year.

 

Long-Term Income Plans from House Flipping

Of course, once you flip a property, there’s no rule that you must immediately resell. If you’re looking to build a real estate portolio and amass an income from rental properties, flipping can be both a satisfying and profitable approach.

Flipping homes and then renting them can help you maximize your profits-over-time, especially in a high-demand rental market. You can even keep focusing on your flip renovations with the help of a property management company to look after your tenants. Explore the landlord route to flipping profitability with Leaf Management.