House Flipping: Refurbishing a house for profit while still living in it.
I was a white-collar worker. Or at least I used to be. I studied science in college and made a successful career as a computer programmer. Younger me preferred the company of a Bunsen burner or computer monitor over a table saw.
Fresh out of college, I had no home improvement skills whatsoever. If you asked me how to start flipping houses, I would have been clueless.
But then, an ugly floor changed everything.
Before getting married, my future wife and I each had our own houses. Mine was better located, so we decided to sell hers. However, there was a problem: the kitchen floor.
The previous owners did a poor job installing linoleum tiles. The floor was peeling everywhere. We knew we had to replace the floor before putting the house on the market. My future father-in-law knew how to lay tile and offered to help.
Over a weekend, we ripped up the old linoleum and laid down beautiful ceramic tiles. I was terrified when it came time to lay the first tile. By the end of the weekend, though, I was fairly confident in my new skill and felt on top of the world.
Less than a month later, I started renovating our bathroom. I replaced the floor and the old pink tiles in the shower. The job looked great, but more importantly, I regained confidence and underwent a mindset shift.
From that point on, I was a changed man. I was no longer afraid to try. When things broke, I tried to fix them. My toilet started leaking, so I replaced the flapper valve. My bathtub faucet dripped, so I ordered a cartridge kit and fixed it. The water heater broke, and I replaced it.
I knew I could always call a professional if my work failed, but that never happened. I also knew that if I needed financial assistance for renovations, I could always apply for a home improvement loan.
$100,000 Profit (Tax-Free)
When we decided to move, we got to work flipping our house. Thanks to our improvements and a healthy real estate market, we ended up selling the house for a 100,000𝑝𝑟𝑜𝑓𝑖𝑡.𝑇ℎ𝑎𝑛𝑘𝑠𝑡𝑜𝑡ℎ𝑒𝐼𝑅𝑆𝑟𝑢𝑙𝑒𝑜𝑓2𝑦𝑒𝑎𝑟𝑠𝑤𝑖𝑡ℎ𝑖𝑛5,𝑡ℎ𝑎𝑡100,000 was entirely ours.
You heard that right, not a penny to the taxman. We were ecstatic and decided to try again. First, we set some basic requirements for the next flip (aka: How to Make Money Flipping Houses 101):
- We would buy in the best neighborhood we could afford.
- We would buy the ugliest house in that beautiful neighborhood. Our ideal home looked like this:
- Structurally sound, mechanically good: I don’t know how to replace a furnace or fix a foundation, so we thoroughly checked the house to ensure the issues matched our skill set.
- Ugly to us is beautiful: Pink toilet? Blue bathtub? Beat-up dark brown cabinets? 70s yellow tile? Yes to all. We knew how to lay tile. Replacing cabinets and removing old fixtures surely couldn’t be too hard.
Flip 2: 375,000−>405,000
This house was in a suburb of Chicago. Great neighborhood, but the bathrooms and kitchen were disasters. We didn’t get rich off this house, but we didn’t have to do much work either.
Flip 3: 260,000−>360,000
This house checked all our boxes. One bathroom did indeed have a pink toilet (the other had a blue one). We remodeled both bathrooms and the kitchen and laid tile in the foyer.
Flip 4: 530,000−>730,000
This deal could have set us up for life. It was a lakeside house in Wisconsin, superbly located. I knew we could sell it for $1 million. But it didn’t go that way.
Cue horror music: We bought it in 2006. Then came the Great Recession. Real estate took a hit. Luxury real estate took an even bigger hit. We didn’t lose money because we did the work ourselves, but it didn’t set us free either.
Flip 5: Current House: 175,000−>420,000 (estimated)
Now, to the present. We also picked a fixer-upper for our current house. We bought it in June 2013, intending to turn it into a rental.
However, we fell in love with the place, so we decided to make it our forever home. I added a small second floor and renovated the existing rooms.
My Best Home Renovation Tips
Embrace Living in a Fixer-Upper: Living in a construction zone can be tough, but if you can stick it out for 2 years, you don’t have to pay any capital gains. Drywall dust is annoying. However, the hefty profit at closing makes you easily forget about the dust.
Look for a Good Place to Invest: I love buying in emerging areas. In my hometown of Boulder County, the economy is very healthy. But I didn’t want to invest in Boulder itself because it was already nice. Instead, I chose a nearby community that I felt had more room for housing prices to rise.
Study the Market like You’re Studying for the Most Important Exam of Your Life: Once you pick an area, look at every new house on the market. If it looks even slightly interesting, go see the house (if you have a license, you can do this yourself).
Your goal is to know the market so well that you can decide in 30 seconds whether a house is worth buying. Once you identify the right fixer-upper candidates and your offer is accepted, hire a great home inspector to carefully check the mechanical and structural aspects of the house.
Get a Real Estate License: Agent transaction fees eat into your profits when you sell. My wife got her license through an online course for $700. Remember, you also get a commission on the buy side when you purchase fixer-uppers.
Another benefit of being an agent is that you can help friends with real estate transactions. Earlier this year, my wife represented a friend buying a house and made a $9,000 commission.
Over to You — How to Start Flipping Houses
Flipping houses can be a great strategy for building wealth. If you’ve ever wondered how to start flipping houses, why not take action instead of just dreaming?
If you’re willing to put in some work on weekends, why not buy an ugly duckling and turn it into a beautiful swan?
I love living in flips:
- Cheaper Prices: Most people choose a perfect turnkey property over one that needs some work. Ugly duckling properties come at a discount.
- Killer Skills: Since you can fix a toilet in 30 minutes for 10𝑎𝑡𝐻𝑜𝑚𝑒𝐷𝑒𝑝𝑜𝑡,𝑤ℎ𝑦𝑝𝑎𝑦𝑎𝑝𝑙𝑢𝑚𝑏𝑒𝑟200 to come out? The skills you gain from living in renovations will serve you for a lifetime. Be careful though; once neighbors know about your mad skills, they’ll come calling regularly for help.
- A Great Strategy When Rentals Don’t Work: In high-priced markets, you may not get a good return from buying rental properties. Flips can work in any market.
- Money, Sweet Money: Never forget those beautiful, tax-free capital gains.
My first job paid about 37,000𝑎𝑦𝑒𝑎𝑟𝑏𝑒𝑓𝑜𝑟𝑒𝑡𝑎𝑥𝑒𝑠.𝑀𝑒𝑎𝑛𝑤ℎ𝑖𝑙𝑒,𝐼𝑚𝑎𝑑𝑒100,000 on my first flip. I was convinced immediately.
Even now, I walk around my neighborhood, looking for houses with peeling paint or broken windows. If the homeowner happens to be outside, I casually mention that if he or she ever wants to sell the house, to contact me first. My hammer and drill are always ready.