Updated: Jun 2, 2020
You've seen it, read about it, or heard about it. The insane profits that house flippers make.
Flipping also appears to be so much fun. How can it not be? Hunting for a house, giving it a makeover, and selling it for a steep profit over and over again, is probably the best job in the world.
Wouldn't you love to quit your job and do this full-time? You've probably fantasised becoming a full-time and financially-free property flipper at least once in your life. Who wouldn't?
The only thing holding you back is fear of the unknown.
The market has ups and downs. In the last 5 years, it appears to have more downs. What if you buy a property that doesn't appreciate? What if the market crashes just after you buy to flip?
Given the investment size in a property, these fears are well-founded.
But your mind keeps going back to the profits that can be made. And the romanticised flipping career that so many property flippers on reality TV shows enjoy.
How do they do it?
You want to know, "how to flip a house for the first time?"
This post will lay it all down for you. It will help you flip a property for the first time with a good chance of doing it profitably.
Table of Contents
1. Flipping Houses for a Living: Can You?
2. How to Get Started Flipping Houses
3. 13 First-Time Flipper Mistakes to Avoid
4. Flipping Houses with No Money
5. The Best Teacher is Experience
Flipping Houses for a Living: Can You?
Some people successfully flip houses for a living. I’ve met them. The returns they can make are insane. I’ve had a taste of it.
You can do this as a serious part-time endeavor or full-time job.
However, you must know that successful flippers, like in any profession, are a small percentage of the total. Not all flippers make exorbitant profits.
Exactly how much does the average house flipper make? Unfortunately, we have no data for this statistic in Malaysia. My guess is between 30% to 40% in gross returns.
According to ATTOM Data Solutions, a property data provider, flippers in the U.S average a gross return of 40.6% or RM282,000 per flip. The returns have been dropping over the years.
This gross return does not include costs associated with the transaction and refurbishment of the house.
The net profit can be a lot lower. Due to this trend, the number of people flipping houses have been declining in many of the markets that ATTOM surveyed.
However, ATTOM also discovered that in some markets home flippers were doubling their money.
How were the creme de la creme doing this?
For the most part, flipping houses is speculative in nature. You’re anticipating that your property price appreciates. If you’re making predictions about the market, you could be gambling. No one builds consistent profits by gambling.
If you want to flip houses for a living, you must manage the speculative element of flipping.
You have to dedicate time. A lot of time.
You need to do research, find good deals, learn how to renovate, and build relationships with contractors, real estate agents, lawyers, bankers, auctioneers, and other successful flippers.
In short, flipping is like having a full time job. If you already have a full time job, the time commitment from flipping can be taxing. If you’re unwilling to or find it difficult to clock in the hours, you shouldn’t be flipping for a living.
What’s that? You’re prepared to clock in the hours? Let’s move on then.
How to Get Started Flipping Houses
Flipping houses is a huge time-investment.
For starters, you’ll find it near-to-impossible to find a good deal. It’s not as simple as visiting an online property portal and finding houses that are below market value the next minute.
You’ll have to build a network of reliable agents who keep an eye out for good deals on your behalf. You’ll need to regularly scan online property portals. You’ll basically have to go through hundreds if not thousands of listings before you find a good deal.
That translates to roughly 1,000 hours (42 full days with no sleep) of looking before the right deal comes along.
At this point, we’re not even considering other tasks like research, sourcing products, renovations, and sales and marketing.
Add it all together and you’re looking at a significant amount of your free time and weekends dedicated to a flipping project.
Still interested? Let’s get to the interesting stuff now.
How to Flip a House for the First Time
Flipping a house is capital intensive. Regardless of whether you acquire financing or not, you’ll need a lot of capital.
Your first goal should be to assess your finances. You want to address the following:
Cash flow requirements
Once you’ve assessed your finances, you’ll know what category of house you can afford to invest in.
The next step would be to choose the right property.
This is followed by renovations. You have to be cost-efficient with your renovation.
Finally, you must have a solid marketing approach to sell the house as fast as possible. Time is a cost and the sooner you can flip, the less your time-cost.
Let’s look at all this in detail now.
#1 Capital Requirements: You’ll Need More Money Than You Think
Before you think about how to start flipping houses, you need to know how much capital you have to raise, and if you can raise it. If you don’t get this right at the start, you’ll fail and could end up in serious financial trouble.
You must have enough cash to purchase the house, cover closing costs, and refurbish the house to above average standards. This requires that you have a deep understanding of the costs involved.
I’ve found that if you can get a mortgage of up to 90% of the value of the house, you’ll need to have at least 25% of the value of the house for the deposit, closing costs, and renovations.
As an example, if you’re buying a house for RM500,000 and can get a 90% mortgage, you’ll need to have about RM125,000 in cash. This is a rule of thumb but can vary by a lot.
Let me illustrate.
You’ll always have to come up with at least 10% of the value of the house, unless you do a mark-up purchase which I strongly discourage.
If you already own 2 houses, you’ll only be eligible for 70% financing on the next house you buy. This would mean you would need 30% excluding closing and renovation costs.
Closing costs are pretty much fixed in Malaysia and amount to roughly 5% of the purchase price. Closing costs include the legal fees, stamp duties, and valuation fees. You can get discounts from the lawyers and valuers if you ask.
Renovation costs are where you have the greatest flexibility. Since the deposit and closing costs are pretty much fixed and renovation is where the greatest variance is, you must develop a remarkable competency in this area.
On your first few flips, go for houses that do not require major renovations to keep your capital expenditure low. Get experts to inspect the house for you before you make a purchase. Things you need to be careful about include roofing, plumbing, electrical wiring, and structural integrity.
You must have a vision of what needs to be done with the house you’re going to buy. Have reliable people who can give you an estimate of what it would cost to implement your vision. This will help you estimate the amount of capital required.
Don’t rush this. Take your time to figure out the capital expenditure. If the deal slips through your fingers because you needed time to figure out the renovations costs, so be it. You can find another house. This is less of a headache than underestimating the costs.
My property investment calculator is a fantastic tool for helping you calculate your costs and cashflow. It will also help you project gross profit. It comes with my book, The Ultimate Guide to Buying Property, which you can download for free.
#2 Getting a Mortgage: Beware
Most people buy a house with a mortgage. And it’s a good thing. The less money you put into an investment property, the higher your potential returns. I’ve demonstrated this with calculations in previous posts.
However, if you’re flipping a house, a mortgage has 2 downsides.
First, most mortgages have a lock-in period. That means, if you pay off the entire mortgage before a stipulated time frame, you will be charged a penalty. This penalty can be as high as 5% of the loan amount and eats into your profits.
Second, you have to make monthly payments from the date the money is disbursed to you. That means, while you're renovating, and then while you’re trying to find a buyer, you have monthly payments to make to the bank. Your cashflow will be impacted..
You will be under a lot of pressure to find a buyer as soon as possible and if for some reason you cannot sell the house in the expected time frame, you could be having cashflow problems.
Therefore, when financing a buy-to-flip house, do the following:
Get a mortgage with no lock-in period. Such mortgages exist and you have to scout around.
Buy a house that is priced well below the loan amount you can qualify for. If you can qualify for a RM500,000 loan, buy a house that’s 30% below this price.
Personally, I prefer to flip without financing. The risk of defaulting on payments to the bank is eliminated. You can partner with friends to raise the cash. Bringing other partners in has its own set of problems though.
When you flip without financing, the returns in terms of a percentage is much lower because you have to raise more capital. However, the absolute returns are higher.
#3 Cashflow: The Net Cash Inflow or Outflow from Holding the Property
What are your recurring cash outflows to keep and maintain the house while you look for a buyer? Will you be earning any rent? These questions will help you determine your cashflow.
Your recurring outflows will include the following:
Monthly mortgage payments
Building maintenance and sinking fund fee
Taxes (annual property assessment tax, quit rent, and other taxes)
You have to be meticulous in calculating all your recurring costs and ensure you calculate them on a monthly basis. For example, your annual property assessment is billed to you on a yearly basis. You can divide it by 12 to get a monthly figure.
If you cannot afford the monthly cash outflow, you may have to consider purchasing a cheaper house or refrain from investing altogether.
The property investment calculator that comes with my book is the best way for you to find out your monthly cashflow. Use it to gain a close approximation.
Remember, your cashflow is only effective until you sell the house. So, if you have negative cashflow, the faster you flip, the more profitable you’ll be.
#4 Choose the Right House
You’ve done the math and you know how much you can afford. Choosing the house is next. Do this carefully because you can’t go back on this one.
Let’s assume you have RM100,000 cash available for your first flip and that you can afford a cash outflow of RM2,200 every month for the next 1 year. You are eligible for a 90% mortgage.
If the RM100,000 is supposed to make up 25% of the value of the house, you can afford to purchase a house that costs RM400,000 (RM100,000 / 0.25).
However, using the property investment calculator, you’ll see that the monthly mortgage payments (30-year mortgage at 4% interest) plus other monthly expenses can bring the cash outflow to above RM2,200.
You’ll have to fine tune the price of the house and the other cost variables to ensure that your monthly outflow does not exceed RM2,200. After some fine tuning, you’ll discover that you can afford a house priced at RM300,000, which gives you an outflow of less than RM2,200.
You must now find houses at this price point.
All the houses you look at, must be below market value (BMV). Always remember, that you must sell the house you buy at a higher price. Your best chance of doing this is to buy BMV. How much BMV? You must use the “Rule of 70.” We’ll look into this in the next section.
Look for properties that need some fixing and beautification. They’re called “fix-me-upper” houses. Ensure no major structural, electrical, plumbing, and roofing problems exist. You want to keep your renovation costs low.
Get professionals to inspect the house for you. This is an extremely important step towards selecting the right house.
Also, ensure that the houses you look at are in good locations. Ideally, the house should have the following location attributes:
Within 500 meters of a public transportation node (bus stop, LRT, MRT, or monorail)
Within 500 meters of amenities like shops and restaurants
Within a 3KM radius of a school
Plenty of jobs available close by (look for offices, malls, business centers)
Don’t get too hung up on being close to LRT or MRT stations. Bus stops are as good.
#5 What is the 70% Rule in House Flipping?
The “Rule of 70” or the “70% rule” states that you should not pay more than 70% of the after-repair value (ARV) of the house, after deducting repair costs.
ARV refers to the value of the house after you perform all the renovations and repairs on the house. This is hard to calculate if you’re not a valuer. But you can arrive at a close approximation.
First, you must know the highest market value of the house. This is the highest value at which a bank would be willing to give a mortgage for the house. You’ll need to have a good banker or mortgage specialist to help you with this.
You want to know the highest bank value because your future buyer is most probably going to apply for a mortgage to buy your house. If banks are unwilling to provide a mortgage at your asking price, selling the property will be difficult.
Second, valuers usually allow 50% of your renovation costs to be included in the final value of the house. This is limited to repairs and beautifications on the house. It doesn’t include loose furniture. So built-in cabinets would count but a bed or sofa set wouldn’t.
Now, let’s say you find out that the bank value of a house is RM500,000. You’re also going to spend RM50,000 on renovations excluding loose furniture.
You could estimate the ARV of the house at RM525,000.
Therefore, the 70% rule would apply as follows:
Purchase Price = 70% x (ARV - Repair Costs)
= 70% x (RM525,000 - RM50,000)
= 70% x RM475,000
This is how much you can pay for this house. Finding a BMV house that conforms to the 70% rule is difficult.
That is why the search will take time. They do exist. But you have to patiently hunt. You can leverage real estate agents, bankers, and lawyers to find BMV properties. Another good place to look at is auctions. Attend as many auctions as you can.
Buying auction properties requires a different set of skills and is not recommended unless you understand how it works. My post on buying auction properties will give you some insight.
#6 Renovating the House: Basic Tips to Make an Impact
This is perhaps one of the most important areas of focus if you want to flip a house right on the first try.
You must aim to make the house look stunning at the cheapest cost. Your competency in this area has to be extraordinary. You should spend 70% of what the average person would spend to do the same renovation. In this way, you’re adding value for prospective buyers.
Fortunately, if you put in the effort, you can achieve this easily.
Your best bet is to find freelance tradesmen who are badass at their areas of specialty. You’ll need to find the following experts:
Builder / general workman
Freelance tradesmen are usually cheaper than a turnkey contractor.
The house you buy should also require minimal major renovations. If you have to tear down a major portion of the house and reconstruct it, you’ll need more than the experts above.
Such renovations are complex and in all likelihood, you may not have the competency to execute a project of that magnitude with a group of freelancers. In such cases, you’ll need an architect and a contractor who can put everything together for you.
You also need to know the most effective way to renovate a house. Your focus must be on renovations that can bring the highest increase in value. Knowing exactly what you need to do to make your house a “hot piece of property” can help you lower costs and reduce production time.
The areas you want to focus on with renovations are as follows:
Painting - a skilled painter can do a fantastic job with painting and it is amazing how great a house looks simply with a fresh coat of painting. The colors you use must be aesthetically pleasing. Don’t have too many colors competing with each other.
Kitchen - a functional and beautiful kitchen is a big pull-factor for buyers.
Bathrooms - buyers usually prefer houses with renovated bathrooms.
Built-In wardrobes and cabinets - provide your prospective buyers with beautiful storage space, and they’ll find your house irresistible.
Lighting - good lighting can make your house look stunning during viewing presentations.
My book, The Ultimate Guide to Buying Property, provides details on how you can renovate like a pro without having to hire an interior designer.
#7 Selling the House: Time Is of the Essence
This is where the actual flip takes place. Ideally, as soon as the renovation for the house is completed, you find a buyer and the house is sold.
For this to happen, the house needs to be attractive, and your marketing has to be spectacular.
If you’ve planned and completed your renovation well, you should have a house that looks stunning. One that wows prospective buyers.
Remember, homebuyers have many options. They’re usually looking at more than just one house. Your offer must be irresistible. By irresistible, I don’t mean cheap. Prospective buyers should see a lot of value.
Think about this. You see 2 houses for sale - one priced at RM480,000 (House A) and the other priced at RM525,000 (House B).
House A requires about RM30,000 in renovations to make it look nice. You’ll have to fork out this money on your own as banks rarely finance renovations.
On the other hand, House B is gorgeous. You’re in love with how it looks. It’s in move-in condition. You don’t have to fork out any additional money for renovations. In fact, if you tried to renovate to the same specifications as House B, you may have to spend RM70,000. House B also has a bank value equal to its asking price.
The difference in monthly mortgage payments between House A and House B is only RM193. Which house would you be inclined towards?
Most people would be drawn to House B. It’s more expensive but it offers a lot in value.
Your marketing of the house also needs to be top notch. Presentation is vital when it comes to selling your house. You have to do the following in terms of presentation:
Hire a professional photographer to take great photos and distribute this to all your agents
Write a summary of the house with all the benefits it comes with. Highlight the quality of your renovation. Let prospective buyers know how much effort you put into the renovations. Prospective buyers should be aware that it would cost them more money to do what you’ve done to the house.
Ensure the house is always in showroom condition. It should be clean, looking stunning, and smelling great. Have the air-conditioning turned on before prospective buyers arrive. Turn on soothing music.
Your presentation must be supported by a good team of salespeople. Engage 5-7 competent agents to sell your house. Take each agent on a walk-through of your house, explaining all the benefits to them so they can sell better.
Follow up with your agents regularly. Replace those that are not performing.
Organise open houses with your agents. I’ve found that open houses are fantastic for sales.
Give yourself and your agents a deadline for the sale. Work towards meeting that deadline. Without a deadline, it is easy to overlook the urgency of time and time is a major cost when you’re flipping houses.
Flipping a House Checklist
Are you feeling overwhelmed by all the information and thinking “How do I flip my first house when I’ve so much to remember?”
Don’t worry. There are plenty of checklists online to help you. Instead of reinventing the wheel, I've gone through what's available online and found one that was very detailed and useful from Flipper Force.
Download the checklist and keep it close as you go through the entire process of flipping your first house. Use it in combination with this post.
13 First Time Flipper Mistakes to Avoid
So you know what needs to be done to flip a house. Let’s give you a stronger foundation to stand on by looking at the mistakes that can make house flipping a flop.
#1 The “Do or Die Flip”
Nothing will go according to plan. Every project I’ve worked on, without exception, has not gone according to plan. Flipping a house is impossible to plan perfectly because of how many variables are at play.
In such circumstances, if you’re “all in” with a flip, you could find yourself in deep trouble. Do or die is not a viable strategy.
If you cannot afford delays or if you’re using up all your money to do a flip, STOP.
Don’t turn what should be an exciting adventure into a horror story that causes you and your family pain and suffering.
Before you flip a house, ask yourself if you can afford to lose 50% of the money you put in? Ask yourself if you can afford the monthly cash outflow if you have to keep the house 24 months longer than expected. If the answer is no, then now is not the right time for you to get into this.
#2 Rushing to Buy a House
The search for the right house to flip will take time. It is a game of patience. Good deals exist, but they don’t come by easily and when they do, rest assured that others will be rushing to acquire it.
You will be tempted to pay the deposit as fast as possible to secure a house if you think you’ve found a good deal. Never do this.
Ensure that you do a thorough due diligence before putting down any money. If you miss out on what you think is a good deal because someone else acted faster than you, it’s alright. There’ll always be another good deal.
A seasoned property investor once told me that, “the deal of the century happens every week.”
Remember this, and take your time.
#3 Skimping on Professional Inspection
You view a house. It doesn’t look like it has any major problems. The owner tells you that she’s had this house for 20 years with no problems.
You may feel a professional inspection is not necessary with this particular house. Your gut tells you not to worry.
Don’t listen to your gut.
Do a professional inspection. The owner may mean well when she tells you that the house is problem-free, but she may not know of hidden problems that are yet to happen.
Bringing in inspectors may take up time and money but if it helps you detect problems, you’ll save a lot more.
#4 Underestimating the Budget
Get my property investment calculator. It’s a nifty tool to help you work out the budget and finances. It will help you forecast your gross profit as well.
You may feel like planning an attractive budget. But as I’ve pointed out earlier, nothing ever goes according to plan. So err on the side of caution.
If you’re not 100% certain of the exact cost, overestimate. Overestimate the time it will take you to flip the house.
Don’t make assumptions on the assessment tax and quit rent. Ask the vendor (seller) how much she’s paying. If it is a stratified property, find out how much the building maintenance charges and sinking fund fee are.
If you’re buying an auction stratified property, speak to the building management and find out if the property owner owes accrued fees. Many times, this can be substantial and you will be expected to bear this cost.
Leave no stone unturned in your budget. Plan for the worst-case scenario and hope for the best.
#5 Neglecting the 70% Rule
Never, ever, compromise on the 70% rule.
It may be tempting to compromise a little on this. Especially since houses that meet this criteria are elusive. You simply have to keep looking until you find one that adheres to the 70% rule.
This rule is in place for a reason. It will ensure you’re able to make a worthwhile profit. Remember that you're flipping houses for profit.
If you face difficulties in finding a house that meets the 70% rule, expand your network. Build relationships with agents, lawyers, bankers, and auction houses. The more friends you have from these professions, the better your likelihood of finding BMV houses that pass the 70% rule.
#6 Neglecting to Build a Team
Flipping houses requires multiple specialised skills. Skills you may not possess in its entirety. You must compensate for a lack of these skills with a good team.
Don’t make the mistake of trying to do everything on your own. Recognise that you have limitations.
You need a team of people to help you find BMV houses, inspect houses for you, get financing, close the purchase transaction, renovate at efficient costs, and finally sell the house.
You’ll need the following people:
Real estate agents
Bankers / Mortgage specialists
Inspection specialists / general contractors
Real estate lawyers
Renovation team (listed above)
#7 Overdoing Renovations
Beautification can enhance the value of a house only so much. If you spend RM200,000 to renovate a RM500,000 home, it’s unlikely that you’ll be able to sell it for RM700,000.
In this case, it will also be close to impossible to meet the 70% rule.
You’ll have to strike a balance between quality and cost and know how to renovate for maximum impact. Your end goal is to have a stunning property that impresses prospective buyers. The challenge is to do it at the lowest possible cost without compromising quality.
A big challenge but not impossible. This is where you add value and this is why you deserve to make a profit.
Never renovate without a budget, and don’t get carried away with renovations.
#8 Working Without a Realistic Deadline
So you’ve found a fix-me-upper house. If your plan is to close the deal within a week, renovate, and have the house sold in a month, you’re standing on flimsy ground.
First, in Malaysia it takes about 4 months on average to close a house purchase transaction.
Second, I’ve never met a contractor who could keep to his own renovation schedule.
Third, you have to be extremely lucky to sell your house in under 2 weeks.
Working with unrealistic deadlines will skew your costs and have the consequence of projecting higher profits than possible. Miscalculations like this can cost you dearly.
No matter how fast your lawyer says he can close the deal, work with the average time of 4 months for vacant possession.
Speak to your team of renovators before you purchase the house. Have them inspect and give you their estimated schedule to complete renovations. Add in a buffer to their estimates.
I usually add in a 30% buffer. So if my renovators tell me they need 45 days in total, I’ll add another 14 days.
Find out from local agents how long houses remain for sale in the market. If it generally takes 1 month to sell a good house in the location that you’re buying in, then work with that timeframe.
#9 Overlooking RPGT
Real Property Gains Tax is substantial in some countries and especially in Malaysia. In 2014, the government raised this tax to curb speculation. If you’re flipping a property within a year from purchasing it, your RPGT would be 30%.
That is a significant chunk of your profits. Overlooking this can cause you a lot of disappointment when you see your net profit.
You may also pay more in RPGT if you’re not tracking your costs. These cost elements can usually be deducted from the computation of profit for RPGT.
So keep all those receipts! Including fees you pay to real estate agents and lawyers. They’re all deductible.
If you’re flipping for a living, you may be able to avoid RPGT and pay an income tax which could be lower. You should speak to a tax specialist about this.
#10 Not Factoring Agent Fees
Another cost element that is often overlooked when computing profits is the agent fee. In Malaysia, real estate agents are paid a commission by the vendor not the purchaser.
You won’t be paying agency fees when purchasing your house but you will pay when you’re selling it. Agent fees are usually anywhere between 2% to 3% of the property’s transacted price. If your house is sold for RM525,000, you’ll be paying at least RM10,500 in agent fees.
Like RPGT, neglecting to factor the agent fee into your profit calculation can cause you to overestimate profits by a significant amount.
#11 Disconnect with Bank Value
Almost all houses are bought with a mortgage. A significant number of these purchases are made with the highest margin of financing. That means, most people will be applying for a 90% mortgage.
If your asking price is RM525,000 but the bank values your house at RM400,000, a 90% mortgage would mean the bank will only finance RM360,000 of the purchase. The purchaser will have to raise an additional RM165,000 on her own.
That is about 31% of the value of the home. The closing costs will bring the total the purchaser needs to come up with to 36% of the purchase price. This makes the house unaffordable for most people.
And that means you will find it tough to flip the house.
From the start, you should know what the bank value is for the house and how much the value can be increased with beautifications and renovations. Having a good relationship with valuers who advise banks will be extremely helpful.
#12 Poor Understanding of the Market
If you don’t understand the market, you’ll face problems selling your house for a profit. To understand the market is to be well acquainted with the supply and demand dynamics.
I can illustrate this with a real life example. Some years ago, as a real estate negotiator, I worked with an investor to sell his house in Taman Desa. The house was a beautiful 3-storey semi detached house but it was difficult to flip.
The market value of this house was RM3.4 million. The price tag for the property was not suitable for the location and the attributes of the property. It was a leasehold property, located in an area that didn't captivate affluent buyers. After one year of intensive efforts, the house remained unsold.
At the same time, I had another client with a link house, half the size, with an asking price of RM1.7 million. I was able to sell this house in about 1 week. This property was located in Mutiara Damansara, an affluent neighborhood where this price tag was normal. The house had a freehold title. Demand for this property was good.
Understanding the market requires some research and thought. You want to be able to answer this question: is the house you’re buying, a good fit for the target buyer?
If it is a good fit, it will be easier to flip.
#13 Poor Presentation
You’ve done everything right. You bought a house that complies with the 70% rule. You’ve renovated the house at the best cost-value ratio. It sits on a location that is attractive to prospective buyers.
But you neglect presenting the house with flair. Your agents use lousy photos to market the house on online platforms. Their descriptions are awful.
You neglect staging the house before every viewing. The house has not been cleaned to showroom standards after the renovations.
It will be harder to flip the house fast.
I’ve seen this happen many times. Houses that have not been tenanted or sold for months but after some effort on presentation, they’re taken within days.
Sales gurus will tell you, “sell the sizzle, not the steak.” This is particularly true for flipping. Give your house some “sizzle” by way of a fantastic presentation. It will sell faster.
Now, this list is not a comprehensive list of mistakes new house flippers make. It underlines the most common mistakes. You’ll fare a lot better by avoiding these mistakes but it doesn’t guarantee you’ll not make any blunders.
Mistakes are part of the learning process and you’ll probably commit more than a few in your first house flip. What’s important is that you learn from those mistakes and improve. That’s essentially how you get good at anything.
Flipping Houses with No Money
This is a common aspiration. Can you really flip houses with no money?
But it comes with a higher element of risk.
To flip a house with no money you’ll need to have a partner who is a renovation contractor. The contractor will renovate the house you find to flip but gets paid after the flip with a small share of the profit.
Your value add in this proposition is finding the right property that adheres to the 70% rule and negotiating a joint venture with the owner.
The terms of the JV should be as follows:
The owner agrees to a BMV sale price.
You offer to renovate and fix the property so that it can be sold at a higher price.
You will also market the property and sell it at the higher price.
Upon a sale, the owner receives the agreed price with a small share of net profit and you pocket the difference after paying your partner contractor.
Look at an example of how this works.
You find a house that has an ARV of RM525,000. The owner agrees to sell the house at RM340,000. The cost to fix up this house is RM40,000.
The numbers are in accordance with the 70% rule.
You convince the owner to enter into a joint-venture agreement with you. You’ll renovate the house and market it for RM525,000. You also offer the owner a further 25% share of the net profits.
Upon conclusion of the sale, the owner gets RM340,000 and you receive RM185,000.
From the RM185,000 you receive, you pay RM40,000 to your renovation contractor. Assuming you have to pay some legal fees amounting to RM5,000, your net profit is RM140,000.
You pay the owner 25% from this net profit. You also share a further 25% with the renovation contractor (your partner). This leaves you with RM70,000.
The risk in this whole proposition is the owner reneging on paying you or choosing not to sell the property after it has been renovated. The entire sale will need to go through the consent of the owner. If the owner withholds consent, no sale can happen.
You can get a power of attorney on the property but it would be extremely difficult to convince an owner for this.
You should definitely get the owner to use your lawyer for the sale. Money from the sale will be disbursed to the lawyer, who will then pay the owner and you according to the agreed proportion.
Concluding a flip under these circumstances is not easy. You have to find a renovation partner who agrees to front the renovation cost and an owner who agrees to a JV. But if you can pull it off, the reward is high.
The Best Teacher is Experience
Flipping a house is no walk in the park. Due to the quantum of the investment, the risk is high. You MUST mitigate these risks as much as possible.
The theory on how to flip a house for the first time may appear rather easy because no post will be able to capture the full gamut of details involved. This post covers preparation, strategy, and mistakes to avoid, but putting it all together cohesively, is an art form that you’ll get better at by doing.
You have to take the leap and attempt your first flip if you ever want to get good at it.
When doing a flip, ask yourself if you can afford to hold on to the house you buy for longer than planned. As an example, if you plan to flip in 6 months, ask yourself if you can afford to hold the property for 2 years. Can you handle the negative cashflow during that period?
If you cannot afford it, find a cheaper house to invest in or don’t get into flipping at all. Wait until you can afford it.
Planning your capital expenditure, your cashflow, and potential profit is the most important first step. I highly recommend that you download the property investment calculator that comes with my book and use it to help you with the math.
Never forget the 70% rule.
Knowing how to renovate for maximum impact and at the lowest cost will largely determine your profits. Build your competency in this area.
I’ve said this earlier and I’ll repeat this again, in the words of Maya Angelou, “hoping for the best, prepared for the worst, and unsurprised by anything in between.”
Let this quote guide your overall strategy.
Good luck with your first flip!