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Tips for flipping an investment property

Flipping a house can be an effective and rewarding way to make money. Done right, it can also be a good investment. The goal is to buy an inexpensive property — typically one at auction or in need of renovation — make updates to increase its value, then rent it out or resell it quickly for a profit. How long it takes depends on the extent of the repairs you're tackling. Here are some tips for effective house flipping.

1. Make sure you have good credit

Successful house-flippers recommend dealing in cash only. For many people, however, this isn't possible. Unless you have enough cash to buy the house and complete the renovations, you're going to need a loan. And you’re going to need great credit to get a loan on a potentially risky house.

The first step is determining your credit score. You can check your credit report once a year for free through AnnualCreditReport.com or one of the three major credit reporting agencies: Equifax, Experian and TransUnion. This is a great way to check your credit health before applying for a loan.

A higher score not only improves your chances of getting a loan, but may also help you qualify for a lower interest rate.

If your credit score isn't as high as you'd like it to be, you can take steps to improve it, such as:

  • Paying off debts
  • Lowering your credit card balances
  • Paying bills on time

Similarly, avoid doing things that could potentially lower your score, such as opening new credit cards, before you apply for a loan.

2. Understand the market

It's important to buy in a favorable market and location. Start with the big picture: Buy in a city that's on the rise. Look for areas with positive job growth and decreasing unemployment rates.

Then look for a neighborhood that's in high demand or on its way there. While you can renovate a house, you can't fix a neighborhood. Consider things like:

  • Rising property sales and home values
  • Crime rates (check online crime mapping services as well as the National Sex Offender public website)
  • Local school system rankings

Avoid areas with lots of homes for sale. This could mean people are relocating due to crime rates, poor school systems or an impending development.

Also be smart about which house in a neighborhood you invest in. Aim for the worst house in a great subdivision, as its value is almost guaranteed to go up. People who are renting or buying in that neighborhood need to be able to afford the home.

A real estate agent in the area you're looking to invest in can help you find the best neighborhoods and determine the right types of renovations for your budget.

3. Create a budget and stick to it

Create a budget for both your purchase price and renovations before you buy a home. Make sure to have a professional inspector look over the home to identify any hidden costs such as mold, roof replacement or faulty wiring or plumbing. Then give a trusted contractor your renovation wish list to determine pricing and to prioritize projects. Also factor in the cost of building permits, if needed.

When calculating how much house you can afford, stick to the 70% rule. Don't pay more than 70% of the home's value after repairs, minus the estimated cost of those repairs. For example, if your home's post-renovation value is $180,000, and you plan to spend $20,000 in repairs, you should pay a maximum of $106,000 for the house. Here's how we came to this number:

$180,000 x 0.70 = $126,000 – $20,000 = $106,000

While this is a standard rule among seasoned house-flippers, depending on your desired repairs, financing, and turnaround time, you might be able to up this to 80%.

4. Only make worthwhile renovations

You could easily spend several months and tens of thousands of dollars renovating an investment property. Exercise restraint and focus on the quick repairs that'll give you the most return.

Rather than doing a complete bathroom or kitchen overhaul, consider refinishing the cabinets, replacing outdated appliances and light fixtures or installing new countertops. Weigh the benefits of green or energy-efficient appliances, even if they might be more expensive than traditional ones. Many of today's renters and buyers expect these features in a modern home.

Remember that small, cosmetic fixes can have a big impact. These less-expensive updates might include:

  • Fresh interior or exterior paint
  • New landscaping
  • New flooring
  • Fresh painted or stained decking
  • Power washing the exterior, patio or deck, driveway and sidewalks
  • Shelving in closets
  • Modern hardware on cabinets and doors
  • New interior or exterior light fixtures
  • Repainting the front door
  • Painting or adding shutters

You can save money by doing many of these projects yourself. More extensive ones might require a contractor's help. Hiring a licensed general contractor to oversee the renovations will cost more, but the job may get done faster than if you were to tackle it yourself. And when it comes to flipping an investment property, the faster you can turn it around, the better. If you sell it quickly, you'll make fewer mortgage payments and spend less on interest.

The quality of work done by a general contractor and their team might also be superior to your own. And they'll also save you time by securing building permits and making repairs that are up to code.

If you determine you don't need a contractor's help, it’s still a good idea to establish a trusted network of professionals such as landscapers, electricians and plumbers to aid in the flip. You'll appreciate not having to go it alone, especially if you work full time.

A successful house flip requires careful budgeting, smart financing decisions, great credit and finding the ideal home. And if you plan to work on or oversee repairs, it’s a good idea to choose one that's not too far away. This will help you stay on track so you can get the house updated and back on the market.