Updated: Feb 3
Understanding how to make money flipping houses isn’t as easy as it seems. You need to know how much the renovated property is worth and what it will cost to flip it. Profitable house flipping is possible if you do your research and understand the numbers. You also need to consider the cost of financing.
The first thing we advise is to find the Right Neighborhood to Invest In
One of the most important steps to learn how to make money flipping houses is having in-depth knowledge of the market you want to invest in. You can fix up a home, but you can’t fix up a neighborhood so keep that in mind when evaluating the neighborhood where you want to invest.
Here are a few things you need to research when looking for the right neighborhood:
How Much Homes are Selling For
If you’re interested in flipping houses for profit you need to know the average sale price of homes in the area to identify projects that have the potential to be flipped for a profit. You should also know the types of home being sold. For example, two bedroom ranches may be a dime a dozen, but three bedroom Victorians may command a premium.
If you’re a real estate agent, search your MLS for homes that sold in the past year. You can get a report quickly. If you’re a house flipper, you can work with a real estate agent to pull an MLS report for you or do online research on websites like CurbBook.com, Redfin or Zillow for recent sales.
Calculate the Months of Supply
One way to know how quickly homes are selling in a neighborhood is calculating the “months of supply.” Months of supply is the number of months it would take to sell all the homes currently on the market in a specific area. It also helps determine if you’re in a buyer’s or seller’s market.
Here’s how to determine if you’re in a seller’s or buyer’s market by using the months of supply:
Seller’s Market: Months of supply is lower than six
Buyer’s Market: Months of supply is over six
To find out the months of supply in your area, you need to find out how many homes are currently on the market, as well as the number of homes sold each month. For example, if there are 20 houses on the market and five sell each month, this means there are four months of supply on the market.
Keep in mind that since you’ll be on the buying selling side in the same year, you’ll probably want to focus on neighborhoods with less than six months of supply when possible. If not, your renovated home might stay on the market longer than your budget allows.
Research Market Trends That Will Affect Home Prices
Once you have a firm grasp on pricing in your local market, you need to dig a little deeper and figure out where prices are going to be over the next couple of years. In order to find market trends, you can read local newspapers, blogs, and national press.
For example, perhaps there’s a new hospital being built in a nearby area which will employ huge numbers of people. That may mean rental prices in the neighborhood are going up, which means that multifamily prices are going up as well. Knowing the market in your neighborhood and in a few surrounding neighborhoods will help you identify deals worth pursuing.
Distressed Neighborhoods vs High-Demand Neighborhoods
Your research may show a strong market with less than six months of inventory. However, this ignores the “shadow inventory” that may exist in the neighborhood. There may be a large number of REO (Real Estate Owned) or foreclosed homes in the area which can bring down housing prices. However, you can still make money flipping houses in distressed neighborhoods.
Crime rates could also be an issue with location. When it’s time to sell, it might be hard finding buyers. This doesn’t mean these areas are completely bad investments. Many investors choose distressed areas to revitalize and provide quality, affordable housing for moderate to low income families. Make sure the numbers work, the property can be resold, and understand turnover may take longer.
A more economical strategy is to find neighborhoods on the outskirts of high-demand neighborhoods. A house on an unattractive block in a great school district might do better than a house on a nice block in a mediocre school district.