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.