House Flipping: Where to Start
We bought a flip! We have been searching for the perfect flip project for a while so we are excited to bring you along for this ride of flip #3. For this project we had our sights set on Round Rock, Texas. Just 15 miles from downtown Austin, Round Rock was recently ranked as the 8th fastest growing city in the country. We will lovingly refer to this project as #FlippinBurshy as It is located in a very desirable neighborhood called Brushy Creek.
The market here in (the greater) Austin right now, like many other cities across the U.S., is just strange. So you may be wondering why we would want to even jump back into another flip project…
You have high interest rates, relatively low inventory, economic uncertainty. Buyers are also extremely picky right now because they have to really justify the purchase with high interest rates. Buyers are demanding remodeled homes, good school districts, and location location location. As much as prices have decreased due to these factors, sellers are not dropping prices as much as they should. About 50-60% of homeowners have mortgages with sub 4% mortgages and other 10% with no mortgages, so those homeowners and locked in and not selling (unless they have to).
While all of this sounds very grim for Austin real estate, ironically Austin is still considered one of the most attractive U.S. housing markets according to a recent report by personal finance website, Wallethub. In 2022, flippers in Austin earned an average of 26.9% in profits by fix and flip. While it is more expensive for borrowers to take out loans, the current market allows us to buy at relatively low prices and bank on the increase in home values and sales prices when interest rates come back down. All of these factors actually really make sense and work in our favor as flippers. Overall, we are feeling optimistic about the timing and the opportunity and excited for you to join in the fun.
Let’s talk numbers
It must be all the flipping shows on HGTV that made a lot of us think we should and can become flippers tomorrow too–easy peasey. While the latter is correct, the most successful flippers how locked down a very tight formula for their profit margins. On average flips in the U.S. net just over $50K. Your net will vary based on a few additional factors (some of which ARE in your control). The after repair value, or ARV, is often used by flippers to gauge how much value renovations will add to the house. For example, we know that new flooring is one of the most valuable updates to a buyer. If you instead allocated that repair budget to say an outdoor patio, you may not get as high of an ARV since backyard patio updates typically just do not command as high of a return on investment. The most lucrative flips are the result of budget efficiency and calculated repairs to optimize the ARV.
Many home flippers swear by the 70% rule which states that you should only pay 70% of the after repair value minus the home rehab costs.
Purchase price of home = After repair value x 0.7 – Rehab Costs
However, think it’s a common misconception (but also wouldn’t it be nice) that the net profit for a flip was as simple as resale – (purchase price + rehab). What we often forget to consider are:
- real estate commissions
- closing costs
- inspections
- gap loan (points + interest)
….will quickly eat away at our net profit. While you cannot control some of these variables that decrease your bottom line, there some strategies to hedge some of these hidden expenses.
Speaking of repairs, home inspections are also SO important. It may be tempting to waive home inspections to win the deal, but this is just something I would never advise for a flip. Houses with faulty structures for example can be very costly to repair to point the margins just aren’t going to work to turn any kind of profit. Repair estimates must be factored into the flip budget.
Another big expense are realtor fees. You can control your real estate commissions by negotiating lower fees with your agent OR get your own real estate license. Nick and I both hold our real estate licenses at a 100% commission brokerage so that has saved us quite a bit on buyside and sale side commissions. Acting as our own agents has also put us in control of discounts negotiated.
Running through the financials of our flip, the first step was to calculate the after repair value based on projected rehab costs. #FlippinBrushy is in a very family-friendly neighborhood within walking distances of great (highly ranked) schools. However, buyers moving into this neighborhood are looking for updated homes and there are just few and far between. So we worked through the required rehab expenses that would optimize our ARV.
Over the next series of posts I’m going to walk through the rehab plan in detail, but for now, the number we came up with for rehab cost was approximately $30,000. The purchase price of the home was $341,500 so that would give us a target ARV of $530,000 for a home-run house flip. Based on comparable homes, we do not think the house will quite sell for $530,000 but we should still be in the range of a healthy profit.
Flipping houses can be an exciting and potentially lucrative venture. The idea of buying a run down home, giving it a facelift and then selling it for a profit is appealing to many investors and DIYers like us. However, we all know this kind of venture is not without its risks and challenges. So as far as the numbers go, you should know we are not experts and risk assessments should not be a blueprint for your your own venture; we are here to take you along for the ride, sharing all the mood boards and tutorials. So while I’m usually all for transparency, we will stick with “a healthy profit” and withhold some of the numbers for now.
And with that, time to get to those mood boards and start tearing down walls! Coming next, a big juicy post with all the before pictures, a walkthrough, and the first semblance of a plan. But first, one quick teaser, the first before photo of #FlippinBrushy.
