There are a number of ways to generate wealth. A quick Google search will reveal that you could invest in the stock market, buy bonds, own a business, or even invest in alternative assets like art and collectibles.
The most effective wealth-building vehicle of all is buying an investment property. The real estate industry can be daunting. It is vast and covers numerous asset classes, strategies, geographies, and styles - where should you even begin?
Fix and flip investing is a fantastic place to start.
According to ATTOM Data Solutions’ third-quarter 2022 U.S. Home Flipping Report, 92,422 single-family houses and condominiums were flipped in the third quarter of last year. The average gross profit was $62,000, translating to a return on investment (ROI) of about 25%. Though the profits might be enticing, there are a handful of steps you should consider before diving into the space.
If you want to learn how to flip houses in Pennsylvania, you’ve come to the right place. This state-specific guide will teach you everything you need to know about flipping homes in The Keystone State.
Flipping houses is the practice of purchasing a house at a markdown to its market price, performing renovations on the interior and/or exterior, and then reselling it for a profit.
The strategy, if done correctly, can be extremely lucrative.
Though the most common way to flip a house is with a single-family home, one can also flip a duplex, triplex, multi-family, or short-term rental. Across the United States, including Pennsylvania, there are various opportunities to purchase, renovate, and sell these houses.
According to the 2021 Pennsylvania census, there are 5,770,601 housing units across the state. Of those units, 69.2% are owner-occupied. This indicates a strong desire among individuals in Pennsylvania to be home buyers instead of renters.
With such a significant demand for housing in the state, there is potential for fix and flip investors to generate substantial profits through the purchase, renovation, and resale of these properties at a higher purchase price. And, that is exactly what has been happening.
According to ATTOM, the flipping activity in Pennsylvania has increased over the last ten years. In 2020, over 1,600 houses were flipped in Pennsylvania, with an average revenue of over $50,000 per house. Now, based on the Q3 2021 ATTOM report, Philadelphia alone - over the course of a three-month period - accounted for 1,265 Pennsylvania flips for a whopping $127,600 in average gross profit!
That is staggering growth. One of the other major reasons so many investors have flocked to Pennsylvania to operate their house-flipping business is the state’s above-average foreclosure rate.
According to SOFI, in February ‘23, Pennsylvania saw over 900 homes go into foreclosure. As you’ll learn later in the article, a disproportionately high foreclosure rate generally translates into a fruitful ground for investors to acquire below-market value homes.
Whether you are a seasoned real estate market investor or a completely new beginner, learning how to flip houses in Pennsylvania doesn’t need to be intimidating.
If you want to learn how to flip houses in Pennsylvania, consider the following step-by-step guide.
Having a mentor is crucial when it comes to identifying lucrative properties for fix-and-flip investments within the Pennsylvania real estate market.
To find a mentor, explore online investment clubs and social media forums found on Facebook, Twitter, LinkedIn, and Instagram. Consider also approaching brokers, bankers, and other professionals for referrals. You might also find success paying for courses and networking events to meet other like-minded real estate investors.
While these methods may require some financial and time commitment, securing the right mentor will certainly pay its dividends.
Read Also: How To Build A Real Estate Network | Wholesaling & Flipping Houses
Before diving into the Pennsylvania market, consider educating yourself on the various trends, licensing requirements, property taxes, and neighborhood attractions within the area. A great place to start could be glossing through the various educational content embedded within local realtor websites.
Here is a list of the realtor associations in some of the major Pennsylvania cities and counties:
Next, you’ll want to compile market data and determine various pricing trends available within the Pennsylvania submarkets. Check out these links:
Lastly, you’ll want to research Pennsylvania laws and licensing requirements applicable to local investors. Though getting a license is not required for flipping properties, getting one could be a great idea. As a licensed agent, you’ll have access to a number of resources (including the MLS) not readily available to other non-licensed investors.
One of the main components of house flipping is knowing how to crunch the numbers to ensure you’ve found an attractively priced, below-market distressed property.
For this part of the process, you should focus on three items: assessing the after-repair property value, estimating the rehab costs of the project, and determining your MAO.
The ARV is the after-repair value of the property. It represents the value of the home as compared to other nearby houses of similar configuration and similar quality. To calculate this figure, you should speak to local real estate professionals like real estate agents, general contractors, and lawyers. These professionals will have a good sense of your property’s potential value.
You can also gloss through websites such as Zillow and Redfin to see how similar houses are being priced in your investment’s neighborhood.
Once you calculate the ARV, you’ll need to estimate the rehab costs of the project.
We’ll dive a bit deeper later in the article about various rehab tactics, but, in a nutshell, your goal for this portion of the due diligence period should be to assess which renovations will drive the most value to your project.
Your goal as a house flipper should be to properly estimate the neighborhood’s demands when it comes to amenities. It’s always smart to add a contingency buffer of 10-15% to your initial rehab budget to prepare for the unexpected.
The MAO stands for the maximum allowable offer and it is a formula used when calculating what price you should pay for a distressed property. This formula ensures the investor makes a profit in all market conditions, irrespective of the many moving variables associated with the flipping business.
The 70% Rule is simply an extension of the MAO. When calculated correctly, it ensures the investor makes at least a 30% profit on the flip. Here is what the equation looks like:
(ARV x 70%) - Renovation Cost = Maximum Allowable Offer (MAO)
After learning the back-of-the-napkin formulas and tricks associated with the flipping business, it’s time to put in the work and actually find and analyze as many deals as you can. To be successful in this business, you’ll need to constantly be on the lookout for distressed properties in attractive neighborhoods.
Consider checking out Pittsburgh or Philadelphia - two great up-and-coming communities worth considering.
After you’ve found the right deal, it’s time to raise the capital from the right source. A few options include hard money, bank financing, private money, or joint venture capital.
Hard money loans are flip loans from non-bank lenders. Usually, these lenders can close very quickly and with more leverage than a typical bank. Keep in mind, though, interest rates on these loans can be as high as 15%.
Bank financing is a great way to raise capital if you aren’t in a hurry. Because of country-wide regulations, the lending process can sometimes be pretty tedious. Expect a 45-day close (at least) and usually more modest leverage terms as compared to a hard money loan.
If you are looking to buy and hold the property - instead of flip it - a bank loan might be a good option. For flips, however, since the homes are generally in a less-than-ideal condition, they might not be eligible for bank financing.
A private loan or an equity infusion from a joint venture (JV) partnership is a great way to raise capital. This capital base generally comes from a family member, friend, or mentor and comes with a great deal of flexibility.
These capital sources are usually easier to fund than hard money or bank loans because they are - for the most part - conducted as an unofficial I-O-U or equity share agreement, rather than a more tedious process with a mortgage note and lien on the property.
Once you’ve sourced the right capital, it’s time to close on the house.
For this part of the process, you’ll either work by yourself, with an attorney, or with an agent. Pennsylvania is what’s called an “all-inclusive” state. Meaning, the title insurance charge includes the cost of the search, the examination, escrow and settlement services, and the insurance risk assumed by the title insurer. It’s also important to note that, unlike many other states, Pennsylvania does not require an attorney to facilitate the closing.
Typically, what you’ll do is send the earnest money over to a third party and follow standard closing costs like getting an inspection and an appraisal. Then, after about 21 - 60 days, you’ll close on the property and begin your renovation.
When renovating the property, the ultimate guide should be to maximize your profit potential while simultaneously minimizing your downside exposure. The best way to do this is by researching the area to determine which renovations are crucial to your project and which can be avoided. Each item should then be scrutinized thoroughly to determine if its cost will generate an outsized Return on Investment (ROI).
Upgrades that are too extravagant will put the project over budget, and improvements that don’t separate the home from the rest of the competition will relegate the asset to mediocrity and ultimately hurt the sales price.
Consider the following list of high ROI capital expenditures for the Middle Atlantic region of the United States compiled by Remodeling Magazine:
Once you’ve completed your renovation, it’s time to continue your real estate investing and resell the house.
The majority of residential fix and flip investors typically renovate and sell the house to owner-occupied homeowners. These buyers are typically the most motivated and aggressive.
There are a number of ways to find houses to flip in the state of Pennsylvania. Some options include: sifting through live listings on Zillow and the MLS, leveraging wholesale networks, and working with real estate agents.
You could also perform direct seller marketing tactics like sending postcards, making cold calls, and going door-to-door to see if people would be receptive to fielding offers. Many investors also work alongside banks and auction sites to find upcoming foreclosures coming on the market.
Whichever strategy you employ, be sure to stay on top of the latest tactics, trends, and opportunities. The more houses you sift through, the better chances you’ll have of success as a flipper.
No, you don’t need a license to flip houses in Pennsylvania, but it might be a good idea to get one anyway.
If you plan on flipping a number of houses within the state, you’ll end up paying a pretty penny to your real estate agent when he or she markets and sells the property on your behalf.
Getting a license will not only help you avoid these fees, but it’ll also give you access to additional resources (like the MLS) not readily available to other investors.
Read Also: How To Get MLS Access: The (Ultimate) Guide
Don’t have any money to flip your house? No problem at all! Here are some strategies and funding sources you should consider with no money down:
Pennsylvania is a very diverse state, with so many attributes and attractive cities. When deciding which place you should invest, you should consider the rate of growth, population, and median house price. According to Redfin, here are the fastest-growing cities in Pennsylvania:
Flipping houses is a fun and lucrative investment strategy. Pennsylvania, specifically, has a lot to offer investors when it comes to attractively priced houses, engaging residents, and desirable neighborhoods.
Do your research, learn from your mentor, engage in open dialogue with local brokers, and analyze every deal that comes across your desk. You might not believe it, but before you know it, you’ll be flipping multiple houses a year generating thousands of dollars in income.
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