Flipping properties has grown increasingly more popular over the past couple decades, especially with the rise of TV channels like HGTV, TLC and The Magnolia Network—and rightly so. Shows like ‘Property Brothers’ and ‘Love It or List It’ captivate viewers with a unique glimpse into the home flipping process that leaves many with a yearning to find their own fix-and-flip opportunities.
Another reason property flipping has become a fan favorite of both new and experienced real estate investors is the potential for substantial monetary gains. When done the right way, house flippers restore homes and neighborhoods, as well as build equity in communities. But all flips are not created equal. Knowing how much you stand to make is critical for deciding whether to go forward with the investment.
In this article I’ll go over how to tell the difference between properties worth flipping and those that aren’t. I’ll also touch on the after-repair value (ARV) and the 70% rule, both fundamental tools and calculations used by real estate investors for determining the value of potential projects.
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But First, What’s “A Flip”?
In real estate, a flip is a property that’s purchased with the goal of being renovated and then put back on the market to sell for a profit. Generally, flipping properties is done as quickly as possible because the longer the home is in your possession, the more it eats into your profits.
When flipping properties, the strategy is simple—find a house that’s selling for less than market value, increase the value by making the necessary repairs and improvements, and then sell it for a significant profit. For that reason, the property you’re purchasing is the most important part of the equation. If you can’t make money on a flip, it’s simply not worth doing.
How To Tell A Property Is Worth Flipping
There are plenty of things that should be on your radar when deciding whether or not a property is worth being flipped—and some of them can be deal breakers.
At the end of the day, house flipping is a business and numbers game that requires a savvy and thoughtful approach to make the best decisions.
Below are a few of the ways you can avoid mistakes and effectively tell if a property is worth flipping.
1: The Property Is Listed Below Market Value
A home or building that’s priced low for what you’re looking to do is the first type of property you should think about flipping. The goal is to make money, so naturally, the lower the cost, the better. However, a home that’s priced ridiculously under market value is a good sign that there is a lot of work that needs to be done. If it cuts into your profits, that’s a no-go.
2: The Property’s History Looks Good
When looking into viable property flips, make sure to go over the home’s history. What did it sell for in the past versus what it’s selling for now? Are there outstanding issues or tax liens? These are all important questions you need to know the answer to before signing the dotted line.
3: Needed Repairs Are Minor
Obviously, the less work a home or property needs, the less money you have to invest in renovations. Painting, installing new cabinets and flooring are all examples of minor repairs. If the property has structural, plumbing, roofing, or HVAC issues, those are considered major and depending on the scope of the work, could send your profits into the red.
4: The After-Repair Value (ARV) Indicates a Strong Profit
The after-repair value, known as the ARV, is the projected value of a property after any repairs or renovations. The formula is pretty straight forward:
ARV = property’s current value + cost of needed renovations
If a property has a high ARV that’s an excellent indicator that the property is worth flipping. In fact, the ARV is one of the most common formulas that real estate investors use for determining property valuations.
5: It Falls Under the 70% Rule
Once you understand the ARV, next is the 70% rule—another useful calculation for determining the maximum amount of money you should spend on a property flip. As a general rule of thumb, you should pay no more than 70% of a property’s ARV minus renovation and repair costs. Again, the formula is simple:
Maximum purchasing price = ARV x 0.70 – projected cost of renovations
The maximum purchasing price gives property flippers an idea of how much money they should put into a fix and flip. Going above that number could jeopardize your return on investment.
How To Tell A Property Is Not Worth Flipping
On the other hand, there are also some key ways to tell when a property is not worth investing in.
1: The Property Is Overpriced
If a home or property is listed way over market value or it’s out of your price range, it’s probably not conducive for making a profit. When you’re flipping a property, the idea is to make money. If you’re going all in on a house that’s overvalued, there’s a good chance you stand to lose money on the deal.
2: It Needs Major Renovations or Repairs
If a property needs major repair work or renovations, that’s a huge red flag for real estate investors to move on to other opportunities. Some repairs and updates are expected—especially in older flips, but if the home has a laundry list of problems, they’re going to take a decent chunk of change to remedy.
3: Expensive Overhead Costs
Even if a flip isn’t going to take a long time to renovate, it may still have excessive running costs. Homeowners Association (HOA) fees, property taxes, outstanding bills, utility bills all need to be considered when deciding whether a flip is worthwhile.
Learn How To Find, Fix, and Flip Properties
Flipping properties isn’t rocket science, but it does take a certain skill set and a considerable amount of know-how to do it successfully.
It’s a new year. Are you ready to take the leap into entrepreneurship with a fix and flip investment property? I can help. With over a decade in the real estate business, I’ve got all the tools and resources you need to become a successful property flipper.
Let’s build something together. Get started by contacting my team here.
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