How To Start A House-Flipping Business

How To Start A House-Flipping Business: Step-By-Step Guide For Beginners

real estate business Jun 27, 2024

House flipping is more popular today than ever, not just because HGTV romanticizes it but because it offers truly impressive returns. On average, house flippers earn $86,796 annually. To be clear, that’s an average, according to ZipRecruiter, and not representative of what everyone can expect to make. It is, however, a glimpse into the potential of the house-flipping industry.

It is worth noting that strategic processes that require hard work and dedication lie behind the financial gains and satisfying transformations. Therefore, if you intend to flip houses, you must also learn these processes.

Fortunately, you don't have to figure it out alone. This article will guide you through everything you need to know, from what it entails and how to start a house-flipping business to the challenges, potential risks, and legal considerations involved. Let’s get started with the following:

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What Is House Flipping?

House flipping is a real estate investing strategy that involves acquiring properties below market value and reselling them at a profit. It's also known as fix-and-flipping because most flippers target properties that need repairs at a lower price, fix them up, and sell (flip) them for a profit.

Rather than buying homes needing repairs, some flippers target quality properties in quickly growing markets, wait for the value to increase, and resell at the increased market value for a profit.

Whether through upgrades or market timing, house-flipping strategies emphasize buying low and selling high. And they're quite profitable; an ATTOM Data report shows that house flippers earned about $66,000 in gross profits in 2023. So, with a good strategy, house flipping can be very rewarding.

Read Also: How To Flip A House With No Experience: A First Timer's Guide

How To Start A House-Flipping Business In 10 Steps

Starting a house-flipping business from scratch can feel overwhelming, especially if it's your first foray into real estate investing. But as mentioned, you don't have to navigate the process alone. We've prepared a blueprint to guide you. It includes steps to flip a house, such as writing a business plan, building a network, and having scaling systems in place. Following these steps will significantly ease your house-flipping journey and increase your chances of success.

To start a house-flipping business, follow the steps below:

  1. Write A Business Plan
  2. Build A Personal Network
  3. Set Up A Business Entity
  4. Acquire All Of The Proper Documentation
  5. Establish Relationships With Suppliers & Contractors
  6. Build A Team Of Professionals
  7. Establish Relationships With Lenders
  8. Secure Your First Deal
  9. Post-Sale Review and Analysis
  10. Put Systems In Place To Scale Your Business

how to start a business flipping houses

Write A Business Plan

Starting a house-flipping business involves many factors that you need to consider. For example, you must decide whether to fix and flip or purchase homes in growing markets to sell when the value increases. You'll also need to decide the types of homes to pursue.

Given the many variants involved, step one in starting a house-flipping business isn't looking for properties to flip; it's writing a business plan.

A good business plan for flipping houses gives you clear direction and purpose, allowing you to stay organized and focused. It also allows you to identify and manage risks associated with your strategy, facilitating your success. Additionally, it serves as a benchmark for measuring your progress and performance. So, ensure you develop one before taking any other step. Your business plan should define:

  • Your preferred flipping strategy
  • Target properties and your budget
  • Available Capital
  • Profit projections
  • Short-term and long-term investing goals
  • Competition analysis

Every business plan starts with an executive summary, and learning how to start a house-flipping business is no different. The executive summary highlights the plan's main points, including the business's mission statement, product or service offerings, target market, financial projections, and key strategies for success. It serves as an introduction to the business plan, giving readers a concise snapshot of what the business is about and what it aims to achieve. The executive summary is crucial because it sets the tone for the rest of the document and can capture the interest of potential investors, partners, or stakeholders.

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Build A Personal Network

House flipping is a three-step process: finding, renovating, and reselling houses for a profit. While it may seem straightforward, each step comes with multiple requirements. For instance, finding properties requires leads, and renovating them requires capital and contractors. That's why networking is a crucial step when starting a house-flipping business.

By building good relationships with real estate agents and investors, they can furnish you with referrals and insider information on potentially profitable deals before they hit the market. On the other hand, cultivating good relations with lenders streamlines your access to the funding necessary to maximize these deals.

Networking with industry professionals like contractors and inspectors means you'll always have a reliable team to help you complete your projects efficiently. Connecting with other investors, such as wholesalers and landlords, allows you to create a market for your flips.

As a newbie, establishing connections with seasoned investors can be particularly valuable. They can provide mentorship to help you avoid the beginner mistakes they made for a smoother house-flipping career. So, prioritize networking with other REI players. Contact them directly, actively participate in local REI groups on social media, and attend real estate-related events and clubs to connect with them.

When learning how to start a house-flipping business, few things are more important than the people you surround yourself with. As a result, this step is invaluable and can pay dividends for years down the road.

Read Also: How To Build A Real Estate Network | Wholesaling & Flipping Houses

how to start a flipping house business

Set Up A Business Entity

While you can always run a flip-house business without setting it up as a formal real estate business, we highly recommend you take this step. Without an entity, you're automatically considered a sole proprietor, making you personally liable for any legal issues that might crop up. That puts your personal assets at risk should anyone sue your business.

Without an entity, you must report any income and expenses from flipping on your personal tax return; this will simplify the filing process but potentially increase your tax bracket, and you'll miss out on many business tax deductions.

Therefore, register your flipping house business as an entity, preferably an LLC. Besides protecting your assets and providing tax benefits, registering your flipping business as an entity demonstrates professionalism and enhances your credibility in the industry, making it easier to secure loans and attract investors.

how to start a flip house business

Acquire All Of The Proper Documentation

With your business officially recognized as an entity, now work on securing the documents you need to work as a house flipper. These include:

  • Employer Identification Number (EIN): This is like a business's social security number. It's necessary for tax purposes and employee hiring. You can apply for an EIN on the IRS website.
  • Business Licenses & Permits: These vary depending on your location in the US, so consider consulting a local real estate attorney to find out the licenses and permits you need.
  • Insurance: Get a general liability insurance policy to protect your home-flipping business from various liability. You should also consider property insurance to cover your investment property and workers' compensation insurance if you intend to hire employees (which is advisable, as you'll learn below).

How to start flipping houses

Establish Relationships With Suppliers & Contractors

As mentioned, building relationships with various professionals in the real estate industry can greatly benefit your house-flipping career.

In particular, forming connections with suppliers and contractors means you'll always have a ready team to provide the materials and skills needed to complete renovation projects efficiently; this lets you finish and resell properties quickly, enabling you to take on more deals.

Additionally, consistently working with the same suppliers can lead to discounts on labor and materials, expanding profit margins. A general contractor can provide valuable recommendations on remodeling projects, helping you improve the quality of your flips and, ultimately, attract more cash buyers.

When learning how to start a house-flipping business, cultivating relationships with suppliers and contractors streamlines your projects and enhances your house-flipping profitability.

flipping houses business

Build A Team of Professionals

As noted, each step in house flipping involves multiple variables. While you can handle most of these variables singlehandedly, you'll end up burned out. So, consider building a team to help you out. It should consist of:

  • Partners & Investors: Partnerships with seasoned wholesalers, house flippers, or other investors unlock access to the capital you need to fund property purchases and renovations. These individuals also bring diverse skills and knowledge to the table, enhancing the quality of your decisions. All these aspects help propel you to success, especially since you're a first-time flipper.
  • Realtors & Agents: These professionals boast in-depth knowledge of and have connections in the local market, and as such, can help you find the best deals, including off-market deals like foreclosures and pocket listing homeowners. They'll also educate you on current and emerging market trends, allowing you to formulate strategies that give you a competitive edge.
  • Attorneys: Having a professional real estate attorney protects you from legal issues. They ensure all fixer-upper transactions comply with local, state, and federal regulations. They'll also review house flipping contracts and documents to protect your interests.
  • Contractors: Building relationships with contractors takes project management off your shoulders and means all flipping renovations stay on schedule and within budget.
  • Accountants: These professionals will handle everything in finance, so you don't have to. They'll also advise you on tax planning and ensure IRS compliance.
  • Property Managers: Hiring property managers means you'll no longer need to worry about managing renovation projects.
  • Appraisers & Inspectors: Having these professionals on your team ensures you invest in profitable properties. They'll assess the property's condition and identify any issues that could affect profitability, thus allowing you to dodge problematic investments. Additionally, they provide accurate valuations, helping you price your flip correctly to attract buyers and avoid underpricing.
  • Marketers: Finally, consider hiring marketers. They'll create strategies to help you sell your flips quickly, enabling you to generate capital for other deals. Marketers also build brand awareness, establishing you as the go-to business for investors looking to buy or sell flipped properties.

Simply put, having a team of professionals significantly eases house flipping. They'll handle the various aspects involved, allowing you to channel your energy into the most essential task: finding, closing, and reselling flips.

house flipping business

Establish Relationships With Lenders

Most lenders usually prefer working with experienced businesses; this makes securing funding for a new house-flipping business quite tricky. That is why you should also work on establishing good relations with lenders.

Join local real estate investment groups or clubs, and attend house flipping seminars, workshops, and networking events to meet and connect with lenders. When you do meet them, offer value in some way to demonstrate your commitment to investing. For instance, you may offer them equity in your projects as an added incentive.

When learning how to start a house-flipping business, keep in touch even when you don't need immediate funding to cultivate the relationship and show appreciation for their support.

Read Also: 6 Best Transactional Lenders For Real Estate Investors

house flipping business plan

Secure Your First Deal

Once you take the above steps, you're well on your way to successfully flipping your first property. The next step is to find a deal; this should be easy with real estate agents and Realtors on your team. They can offer you referrals and alert you of promising opportunities. But before you begin your search, identify your target market, the type of property you want to invest in, the scope of renovations you're willing to take on, and your target maximum allowable offer (MAO) to ensure you're well-equipped to purchase your first flip.

business plan for flipping houses

Post-Sale Review & Analysis

Have you just completed your first successful flip? Congratulations! However, there's always room for improvement before you find another one. So, analyze the completed processes and decisions to see what you can improve for better future outcomes.

Real estate flippers can improve future deals by examining previous ones. By analyzing past projects, they can identify what strategies worked well and which didn’t; this includes reviewing the accuracy of their initial cost estimates, timelines, and final sale prices compared to the projected figures. Evaluating their marketing tactics' effectiveness and responsiveness to market trends is also crucial. Learning from any mistakes or unforeseen issues encountered during renovations or negotiations helps refine their approach. Flippers can make better-informed decisions, optimize processes, and increase profitability in future deals by understanding these elements.

After you learn how to start a house-flipping business and complete your first deal, do not (under any circumstances) ignore this step.

how do i start a house-flipping business

Put Systems In Place To Scale Your Business

If your objective is to turn your house-flipping business into a dominant market player eventually, you must implement systematic processes across all aspects of operation. That means creating standardized processes for everything, from basic administrative tasks, inventory management, and customer relationships to property purchases. This step promotes team efficiency, risk, and financial management and creates a framework for sustainable growth, ultimately resulting in long-term success.

Systemizing everything in your house-flipping business is crucial for making success habitual. By establishing standardized processes for tasks like property acquisition, renovation, and sale, you ensure consistency, efficiency, and quality in every project. Systems help streamline operations, minimize errors, and save time, allowing you to focus on strategic decisions and growth.

Documenting procedures also makes delegating tasks and training team members easier, fostering a more scalable and sustainable business model. Ultimately, a systematic approach transforms flipping from a series of isolated projects into a reliable, repeatable process, driving consistent success and long-term profitability.

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House-Flipping Tips For Real Estate Entrepreneurs

Now that you know how to get into flipping houses, take a look at these additional house-flipping tips to achieve and maintain a successful house-flipping business:

  • See The Plan Through: Remember that house-flipping business plan you formulated? Keep following it. While it's okay to fine-tune your plan as needed, maintaining the core strategies, especially the short-term and long-term goals, plus core principles, prevents distractions and facilitates better risk management and financial discipline.
  • Never Stop Networking: You can never have too many contacts in real estate investing, particularly house flipping. So, always use every opportunity to build and maintain relationships with industry professionals, from investors to service and supply providers. A broad network enhances your credibility, positioning you as the top referral choice whenever house-flipping services are needed.
  • Always Budget For The Unexpected: Even with a meticulously crafted business plan, things don't always go as planned. For example, a well-planned house flip might require more repairs than anticipated. Therefore, always include extra money in your budget for house flipping to cover the unforeseen; this allows you to complete your projects as planned even when things don't go as you intended. It also prevents financial strain.
  • Don't Do It Alone: House flipping is a multifaceted business; no matter how capable you are, it's important not to go at it alone. Trying to handle it all alone will not only overwhelm you but make it so challenging you'll want to give up. So, collaborate with various professionals to make it more manageable. By collaborating with others, you can focus your energy on the most crucial task: finding and closing deals.
  • Don't Overextend Yourself: While taking on every potentially lucrative opportunity might be tempting, avoid investing in too many projects simultaneously. You'll only stretch yourself and your resources thin, leading to mistakes, financial strain, and, eventually, delays and losses in the profits you're chasing. Focus on the right property at a time so that each project you take on receives the attention it requires for successful completion and maximum profitability.

Common Challenges & How To Overcome Them

flipping houses business plan

House flipping, like any other real estate investing strategy, comes with certain challenges. As a platform committed to your success, we not only highlighted these challenges but also strategies to address them below:

  1. Lack Of Funds
  2. Lack Of Time
  3. Lack Of Skill
  4. Lack Of Knowledge
  5. Lack Of Patience

Lack Of Funds

Many believe a lack of funds is a significant obstacle to flipping houses, but that's not true. Investors don’t need a large personal savings account to get started. By leveraging other people's money (OPM), they can finance their projects through private lenders, hard money loans, or partnerships with investors.

These funding sources provide the necessary capital for purchasing and renovating properties without tying up personal funds. Utilizing OPM not only makes house flipping accessible but also allows investors to scale their business more quickly, turning perceived financial limitations into opportunities for growth and success.

If you're strapped for the capital, consider taking a loan. Check out some financing options you can use to cover house flipping costs:

  • Home Equity Line Of Credit (HELOC): If you own and have equity in your home, you can tap into your HELOC to flip house capital. It's an excellent capital source since it allows immediate fund access, and the interest isn't as high as regular mortgage loans.
  • Renovation Loans: These loans, often offered by government agencies, cover the purchase price and renovation expenses. They're particularly suitable for beginner house flippers who need smooth financing.
  • Hard Money Loans: While the interest rates are high, hard money lenders don't require a down payment or perform credit checks, promoting quick capital access.
  • Private Money Loans: A private money loan is a type of financing provided by individual investors or private companies rather than traditional banks. These loans are typically used for real estate investments, offering faster approval and more flexible terms, but often come with higher interest rates.

Lack Of Time

House flipping is undeniably profitable but demands full-time participation. It can take months to generate property leads; once you find them, you must invest more time into rehab.

You must also schedule property inspections to ensure compliance with local building codes. If it doesn't comply, you'll need to take the necessary compliance steps, further extending project timelines. Marketing the property to attract buyers adds to the overall timeframe. On average, flipping a single home can take 4four to six months and sometimes even 12-18 months.

To minimize time spent, implement the strategies from our guide on how to start a flipping house business, such as networking and assembling a reliable team to help you. Our house-flipping tips, particularly budgeting on the unexpected and taking on a few projects, can also help reduce turnaround times for each flip.

Lack Of Skill

It's a common misconception that you need to know how to do contractors' work to flip a house. In reality, the key to successful house flipping is knowing how to hire the right contractors. Skilled contractors are experts in their field, providing quality work more efficiently than a novice; this ensures that renovations are completed to a high standard and within a reasonable timeframe.

By delegating renovation tasks to professionals, investors can focus their efforts on more critical aspects of their business, such as finding the next deal, securing financing, and managing project timelines. This division of labor not only maximizes the quality of the work done but also allows investors to leverage their time effectively, ultimately leading to more successful and profitable house flips.

Lack Of Knowledge

You don't need a license to flip houses, but if you're to be profitable, you must be strategic in every step. That means finding properties in desirable locations and at the right price to achieve a good ARV.

Unfortunately, the real estate market doesn't make this easy, as it's always highly volatile. Add in that with each flip comes varying tax and zoning laws, and flipping properties can be pretty challenging, especially for new investors, as they need to grasp both local and broader housing market trends.

Before diving into this industry, take the time to educate yourself about the house-flipping process. Our platform provides free training programs that cover various REI strategies, including house flipping. Sign up to equip yourself with the knowledge needed for success in house flipping.

Lack Of Patience

Lack of patience is yet another common challenge for new house flippers. They rush through the process, lowering profit margins by investing in unprofitable properties and unnecessary professional services. Avoid this mistake by approaching each step strategically. For instance, don't purchase the first property you find. Instead, thoroughly scout the market and conduct comprehensive research, including running real estate comps, to make an investment decision that’ll contribute to your success.

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Legal & Tax Considerations

Starting a house-flipping enterprise comes with tax and legal regulations like any other business. You must consider and comply with these regulations from the outset to avoid potential legal issues. Some of the most important legal and tax considerations to prioritize include:

  • Capital gains taxes
  • Tax deductions
  • 1031 exchange

Capital Gains Taxes

Capital gain taxes are usually paid on profits from selling assets like property. While house flipping properties are subject to capital gain taxes, there are special requirements. If you regularly buy and flip homes for a profit, the IRS classifies you as a dealer trader, not just a regular investor; this means that, in the eyes of the taxman, your flips are treated as inventory and not as regular investment properties. As a result, your profits are usually taxed as ordinary income. You may also have to pay self-employment tax on it.

Tax Deductions

Businesses often enjoy multiple tax deductions that help them recover some of the money they spend on business-related expenses. However, although house flipping comes with various expenses, you cannot deduct these from your tax immediately. Instead, you must add (capitalize) them to the property's original value.

In other words, this means you have to wait until you sell the flip to take advantage of these tax breaks. Why? Because the IRS views them as capital expenses (expenses that enhance the property's value or extend its useful life) rather than regular business expenses.

On the bright side, the range of expenses you can capitalize on in house flipping is quite significant, allowing you to recoup a substantial amount of money when the property sells. They include:

  • The cost of purchasing the property itself
  • Direct labor and supplies
  • Indirect labor
  • Equipment depreciation
  • Holding period utilities
  • Insurance
  • Rent where applicable
  • Real estate taxes allocated to each project

While house flippers generally need to capitalize most expenses, registering your flipping business as an entity, such as a limited liability company, can provide immediate tax benefits for certain types of expenses. For example, as an LLC, you can deduct marketing and operational expenses immediately; this can help you put some dough back into your pocket before you sell the property.

We recommend you consult a tax professional to fully understand house-flipping tax deductions and entity-related tax provisions (another reason networking and building a team featuring a professional accountant is a crucial step in starting a house-flipping business).

1031 Exchange

Although taxes work differently in house flipping, flippers can benefit from certain tax provisions that regular business owners cannot maximize. The 1031 Exchange is one such provision.

This provision, also known as the like-kind exchange, allows real estate investors, including house flippers, to defer capital gain taxes on an investment property if they reinvest the proceeds into a like-kind asset.

In simpler terms, with a 1031 exchange, you can postpone paying capital gain taxes on a flip if you reinvest the proceeds into another property of similar kind and value.

And since "like-kind" is pretty expansive in real estate, the replacement property doesn't have to be exactly the same as the one sold. For example, you could exchange a single-family residence for a multi-family or even a commercial one.

The best part is that there are no limits on how often you can use the 1031 exchange. That means as long as you do it right, you can continuously defer capital gain taxes on your flips.

So, what's the catch? You cannot directly receive the sale price proceeds. Instead, you must find a qualified intermediary to hold them in escrow as you find the replacement property. Additionally, you have 45 days from the original sale to find replacement properties and close on the new one within 180 days. So, maximize lead generation tools to speed up finding the next house-flipping deal.

Final Thoughts On Starting A House-Flipping Business

House flipping stands out as one of the most profitable real estate investment strategies in today's economy. If executed correctly, it can evolve into a lucrative career, offering significant financial gains. Beyond the monetary rewards, the process of transforming distressed properties into market-ready homes is immensely fulfilling. You can turn house-flipping into a consistent and rewarding venture by learning how to start a house-flipping business, including finding the right deals, leveraging other people's money, hiring skilled contractors, and systemizing your business processes. Start your journey today and unlock the potential of this dynamic and rewarding investment strategy.

Our step-by-step guide on how to start a business flipping houses covers the essential steps and complexities of this investment niche. While it is a great starting point, contact us today for personalized expert guidance to set you up for long-run house-flipping success.

*Disclosure: Real Estate Skills is not a law firm, and the information contained here does not constitute legal advice. You should consult with an attorney before making any legal conclusions. The information presented here is educational in nature. All investments involve risks, and the past performance of an investment, industry, sector, and/or market does not guarantee future returns or results. Investors are responsible for any investment decision they make. Such decisions should be based on an evaluation of their financial situation, investment objectives, risk tolerance, and liquidity needs.

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