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The goal of our flip investments is to rapidly add as much value as possible to a property and then sell it immediately.

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If your strategy involves finding distressed properties through direct mail campaigns or FSBO (For Sale by Owner) listings, an agent may not be necessary for acquiring the deal. For the best real estate information in San Antonio Danny Johnson knows his stuff. He has over 20 years experience real estate investing in San Antonio. The best part?

One of the biggest advantages of flipping houses is the level of freedom it provides. Professional flippers often follow the "70% rule"-never pay more than 70% of a property's after-repair value, minus renovation costs.

Investors who fail to properly analyze deals are at high risk of losing money. Investing is all about the numbers.

However, investors with less experience often take longer, especially if they encounter delays with renovations, permitting, or market fluctuations. Sometimes, a two-bedroom house can be converted into a three-bedroom, or a property with one bathroom can be reconfigured to include a second.

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We undertake extensive interior and exterior renovations of the main house. Instead of relying solely on online calculators, work through the numbers by hand to ensure you fully understand the math behind each deal. Aside from reviewing online listings, physically touring properties is invaluable.

Anyone considering house flipping should thoroughly understand the risks, financial requirements, and workload before diving into a project.\According to the Internal Revenue Service, tax regulations play a crucial role in real estate investments. Walk through as many homes as possible, ask plenty of questions, and pay close attention to renovation needs.

By remaining patient and sticking to a solid investment strategy, opportunities often present themselves. Flipping houses is a time-intensive endeavor.

An ADU (Accessory Dwelling Unit) is an additional living space built on a single-family property alongside the main house. However, after several months of price reductions, they might be able to secure the same property for an even better price-say $45,000.

How to Start Flipping Houses Step By Step

If you haven't read it thoroughly-taking notes along the way-you're not preparing enough.

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Understanding how to calculate costs, profits, and margins is the most important skill for any house flipper. While learning is essential, at some point, you must take the leap and start applying your knowledge.

House flipping is not a solo venture. Working with an investor-friendly real estate agent can be particularly beneficial, especially when evaluating properties, estimating renovation costs, and navigating the buying and selling process.

A skilled agent can provide access to off-market deals, write strong offers, analyze comparable sales, and guide you through negotiations. However, if you plan to purchase properties from the Multiple Listing Service (MLS), having a knowledgeable agent on your side is invaluable.

If an investor completes a flip every three months, they could potentially earn six figures. Some investors get lucky and find their first flip within weeks, while others search for months before identifying the perfect property.

How to Start Flipping Houses Step By Step
How Much Does Flipping Houses Cost? Gross and Net Profit

How Much Does Flipping Houses Cost? Gross and Net Profit

On average, it takes between four to six months from the purchase date to complete and sell a flipped home. Once your offer is submitted, the seller may accept, reject, or counter your proposal. Alternatively, hiring a real estate agent can streamline the process but comes with commission fees that reduce overall profits.

There are several ways to finance your house flip, and the best option depends on your financial situation, experience level, and investment goals. Their services as a buyer’s agent are typically free for you, as their commission is covered by the seller.

This knowledge is transferable to other investment strategies, such as rental property investing, real estate notes, and multifamily property investments. Investors can operate as their own boss, choose their projects, and work at their own pace.

It’s natural to feel excited when you find a potential flip, but that excitement shouldn’t override your financial analysis. Understanding these challenges—and learning how to navigate them—can make the difference between a successful flip and a costly misstep that takes you out of the game entirely.



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The Benefits of Investing in House Flips

Entering the real estate investment space does not require a degree, license, or formal training. Once you have a clear idea of your investment goals, communicate them to your real estate agent. Properties with ADUs are growing in popularity, particularly in expanding urban markets with housing shortages, such as Los Angeles.

This effectively transforms a single-family property into one with two separate homes, substantially increasing its value beyond a traditional house flip. Each investment listing provides detailed information about the specific property, including the address, financial breakdown, estimated timeframe, investment strategy, market comparables, and photos.

Major firms, including global investment company KKR, have begun funding flip-loan markets, making it even more challenging for individual investors to secure the best deals. The listing agent represents the seller and has a legal obligation to get them the highest possible price-this creates a conflict of interest.

If you have hands-on skills-such as drywall installation, flooring, roofing, or plumbing-you can significantly reduce costs and increase your profit margins. This is often one of the most nerve-wracking parts of the process, but with preparation, it becomes much easier.

The Benefits of Investing in House Flips
What is House Flipping?
What is House Flipping?

At minimum, you’ll need a lender to finance the deal and a real estate agent to assist with buying and selling the property. However, if you lack construction experience and need to outsource all renovation work, your expenses will rise, making it harder to achieve a profitable return. To solidify your understanding, try explaining key concepts to a friend or family member.

Choosing the right market is just as important as finding the right property. Running hypothetical flip scenarios will give you a better understanding of what to expect in real-world deals.

Negotiation is a standard part of the process, and it’s crucial to remain firm on your numbers. Successful flippers often expand into other areas of real estate to diversify their income and build long-term wealth.

Additionally, they may overestimate their own abilities, leading to costly miscalculations. By constructing an additional unit on the property from the ground up, we create two separate housing units.

Real estate makes up the largest asset class in the world. Much larger than bonds and stocks, which respectively rank second and third by total market cap.

Real estate investing involves the purchase, management and sale or rental of real estate for profit. Someone who actively or passively invests in real estate is called a real estate entrepreneur or a real estate investor. In contrast, real estate development is building, improving or renovating real estate.

History

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During the 1980s, real estate investment funds became increasingly involved in international real estate development. This shift led to real estate becoming a global asset class. Investing in real estate in foreign countries often requires specialized knowledge of the real estate market in that country. As international real estate investment became increasingly common in the early 21st century, the availability and quality of information regarding international real estate markets increased.[1] Real estate is one of the primary areas of investment in China, where an estimated 70% of household wealth is invested in real estate.[2]

Overview

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Types of real estate investments

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Real estate investing can be divided according to level of financial risk into core, value-added, and opportunistic.[3] Real estate is divided into several broad categories, including residential property, commercial property and industrial property.[4]

Valuation

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Real estate markets in most countries are not as organized or efficient as markets for other, more liquid investment instruments. Individual properties are unique to themselves and not directly interchangeable, which makes evaluating investments less certain. Unlike other investments, real estate is fixed in a specific location and derives much of its value from that location. With residential real estate, the perceived safety of a neighbourhood and the number of services or amenities nearby can increase the value of a property. For this reason, the economic and social situation in an area is often a major factor in determining the value of its real estate.[5]

Property valuation is often the preliminary step taken during a real estate investment. Information asymmetry is commonplace in real estate markets, where one party may have more accurate information regarding the actual value of the property. Real estate investors typically use a variety of real estate appraisal techniques to determine the value of properties before purchase. This typically includes gathering documents and information about the property, inspecting the physical property, and comparing it to the market value of similar properties.[6] A common method of valuing real estate is by dividing its net operating income by its capitalization rate, or CAP rate.[7]

Numerous national and international real estate appraisal associations exist to standardize property valuation. Some of the larger of these include the Appraisal Institute, the Royal Institution of Chartered Surveyors and the International Valuation Standards Council.[6]

Investment properties are often purchased from a variety of sources, including market listings, real estate agents or brokers, banks, government entities such as Fannie Mae, public auctions, sales by owners, and real estate investment trusts.

Financing

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Real estate assets are typically expensive, and investors will generally not pay the entire amount of the purchase price of a property in cash. Usually, a large portion of the purchase price will be financed using some sort of financial instrument or debt, such as a mortgage loan collateralized by the property itself. The amount of the purchase price financed by debt is referred to as leverage. The amount financed by the investor's own capital, through cash or other asset transfers, is referred to as equity. The ratio of leverage to total appraised value (often referred to as "LTV", or loan to value for a conventional mortgage) is one mathematical measure of the risk an investor is taking by using leverage to finance the purchase of a property. Investors usually seek to decrease their equity requirements and increase their leverage, so that their return on investment is maximized. Lenders and other financial institutions usually have minimum equity requirements for real estate investments they are being asked to finance, typically on the order of 20% of appraised value. Investors seeking low equity requirements may explore alternate financing arrangements as part of the purchase of a property (for instance, seller financing, seller subordination, private equity sources, etc.)

If the property requires substantial repair, traditional lenders like banks will often not lend on a property and the investor may be required to borrow from a private lender using a short-term bridge loan like a hard money loan. Hard money loans are usually short-term loans where the lender charges a much higher interest rate because of the higher-risk nature of the loan. Hard money loans are typically at a much lower loan-to-value ratio than conventional mortgages.

Some real estate investment organizations, such as real estate investment trusts (REITs) and some pension funds and hedge funds, have large enough capital reserves and investment strategies to allow 100% equity in the properties that they purchase. This minimizes the risk which comes from leverage but also limits potential return on investment.

By leveraging the purchase of an investment property, the required periodic payments to service the debt create an ongoing (and sometimes large) negative cash flow beginning from the time of purchase. This is sometimes referred to as the carry cost or "carry" of the investment. To be successful, real estate investors must manage their cash flows to create enough positive income from the property to at least offset the carry costs.[citation needed]

In the United States, with the signing of the JOBS Act in April 2012 by President Obama, there was an easing on investment solicitations. A newer method of raising equity in smaller amounts is through real estate crowdfunding which can pool accredited and non-accredited investors together in a special purpose vehicle for all or part of the equity capital needed for the acquisition. Fundrise was the first company to crowdfund a real estate investment in the United States.[8][9]

Sources of investment returns

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Real estate properties may generate revenue through a number of means, including net operating income, tax shelter offsets, equity build-up, and capital appreciation. Net operating income is the sum of all profits from rents and other sources of ordinary income generated by a property, minus the sum of ongoing expenses, such as maintenance, utilities, fees, taxes, and other expenses. Rent is one of the main sources of revenue in commercial real estate investment. Tenants pay an agreed upon sum to landlords in exchange for the use of real property, and may also pay a portion of upkeep or operating expenses on the property.[10]

Tax shelter offsets occur in one of three ways: depreciation (which may sometimes be accelerated), tax credits, and carryover losses which reduce tax liability charged against income from other sources for a period of 27.5 years. Some tax shelter benefits can be transferable, depending on the laws governing tax liability in the jurisdiction where the property is located. These can be sold to others for a cash return or other benefits.

Equity build-up is the increase in the investor's equity ratio as the portion of debt service payments devoted to principal accrue over time. Equity build-up counts as positive cash flow from the asset where the debt service payment is made out of income from the property, rather than from independent income sources.

Capital appreciation is the increase in the market value of the asset over time, realized as a cash flow when the property is sold. Capital appreciation can be very unpredictable unless it is part of a development and improvement strategy. The purchase of a property for which the majority of the projected cash flows are expected from capital appreciation (prices going up) rather than other sources is considered speculation rather than investment. Research results that found that real estate firms are more likely to take a smaller stake in larger assets when investing abroad (Mauck & Price, 2017).

Foreclosure investment

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Some individuals and companies focus their investment strategy on purchasing properties that are in some stage of foreclosure. A property is considered in pre-foreclosure when the homeowner has defaulted on their mortgage loan. Formal foreclosure processes vary by state and may be judicial or non-judicial, which affects the length of time the property is in the pre-foreclosure phase. Once the formal foreclosure processes are underway, these properties can be purchased at a public sale, usually called a foreclosure auction or sheriff's sale. If the property does not sell at the public auction, then ownership of the property is returned to the lender.[11] Properties at this phase are called Real Estate Owned, or REOs.

Once a property is sold at the foreclosure auction or as an REO, the lender may keep the proceeds to satisfy their mortgage and any legal costs that they incurred minus the costs of the sale and any outstanding tax obligations.

The foreclosing bank or lending institution has the right to continue to honor tenant leases (if there are tenants in the property) during the REO phase but usually, the bank wants the property vacant to sell it more easily.[12]

Buy, rehab, rent and refinance

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Buy, rehab, rent, refinance (BRRR)[13] is a real estate investment strategy, used by real estate investors who have experience renovating or rehabbing properties to "flip" houses.[14] BRRR is different from "flipping" houses. Flipping houses implies buying a property and quickly selling it for a profit, with or without repairs. BRRR is a long-term investment strategy that involves renting out a property and letting it appreciate in value before selling it. Renting out a BRRR property provides a stable passive income source that is used to cover mortgage payments while home price appreciation increases future capital gains.[15]

The phrase was slightly updated in a 2022 Bloomberg News article noting that BiggerPockets added "Repeat" to the end, making it "BRRRR" to describe a real estate investing strategy of Buy, Rehab, Rent, Refinance, Repeat.[16]

Impact

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According to Lima et al. (2022), in Ireland, the financialization of rental housing, which includes the entry of institutional investors into urban rental housing markets, contributed to structural factors that create homelessness directly by worsening affordability and security in the private rental market, and indirectly by influencing state policy.[17][18] It was found that the history, politics, and geography of the REITs cause the collapse of Irelands market (Waldron, 2018).

See also

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References

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  1. ^ MacGregor, Bryan D.; Schulz, Rainer; Green, Richard K. (7 December 2018). Routledge Companion to Real Estate Investment. Routledge. ISBN 9781317687856.
  2. ^ Lau, Yvonne (2 December 2021). "China stores 70% of its wealth in real estate. Now, the property crisis is forcing investors to reconsider their favorite means of savings". Fortune.
  3. ^ Garay, Urbi, Investment Styles, Portfolio Allocation, and Real Estate Derivatives (2016). Garay, U. “Investment Styles, Portfolio Allocation, and Real Estate Derivatives.” In Kazemi, H.; Black, K.; and D. Chambers (Editors), Alternative Investments: CAIA Level II, Chapter 16, Wiley Finance, 3rd Edition, 2016, pp. 401–421.
  4. ^ Glickman, Edward (14 October 2013). An Introduction to Real Estate Finance. Academic Press. ISBN 978-0-12-378627-2.
  5. ^ Levy, Richard M. (5 November 2019). Introduction to Real Estate Development and Finance. Routledge. ISBN 978-0-429-89113-7.
  6. ^ a b Morri, Giacomo; Benedetto, Paolo (9 July 2019). "Introduction to Property Valuation". Commercial Property Valuation: Methods and Case Studies. John Wiley & Sons. ISBN 978-1-119-51215-8.
  7. ^ Glickman, Edward (14 October 2013). An Introduction to Real Estate Finance. Academic Press. p. 129. ISBN 978-0-12-378627-2.
  8. ^ "Fundrise Adds Big Name Investors Including Ratner, Elghanayan & Guggenheim: Funding Now at $38 Million". 26 September 2014.
  9. ^ Gage, Deborah (26 September 2014). "Renren-Backed Fundrise Bulks up in Real Estate Crowdfunding Sector". Wall Street Journal.
  10. ^ Glickman, Edward (14 October 2013). An Introduction to Real Estate Finance. Academic Press. pp. 95–107. ISBN 978-0-12-378627-2.
  11. ^ Lex Levinrad (17 December 2010). "Investing in Foreclosures For Beginners". Distressed Real Estate Institute. Archived from the original on 2 January 2013. Retrieved 31 December 2012.
  12. ^ Portman, Janet (7 February 2008). "Foreclosure causes heartache for renters". Inman News. Retrieved 24 February 2008.
  13. ^ Eisen, Ben (9 December 2018). "Housing Slowdown Unnerves the Fix-and-Flip Crowd". WSJ. Retrieved 15 October 2019.
  14. ^ "How young investors are chasing early retirement". Albany Business Review. Retrieved 15 October 2019.
  15. ^ Greene, David (16 May 2019). Buy, Rehab, Rent, Refinance, Repeat: The BRRRR Rental Property Investment Strategy Made Simple. pp. 13, 15.
  16. ^ Gopal, Prashant (25 March 2022). "Homeowners Spin Soaring Prices Into U.S. Real Estate Riches". Bloomberg.com. Retrieved 28 March 2023.
  17. ^ Lima, Valesca; Hearne, Rory; Murphy, Mary P. (11 May 2022). "Housing financialisation and the creation of homelessness in Ireland" (PDF). Housing Studies: 1–24. doi:10.1080/02673037.2022.2042493.
  18. ^ Lima, Valesca (2 January 2023). "The political frame of a housing crisis: Campaigning for the right to housing in Ireland" (PDF). Journal of Civil Society. 19 (1): 37–56. doi:10.1080/17448689.2023.2206158.