House Flipping business in the United States has attained a separate interest base given it falls under the real estate business. House flipping is actually a purchase of a house generally at a lower price, renovating the house and then selling it to the interested party in order to make profit.
The cost price of the house will remain significantly lower than usual than the selling price. In case of a normal sell and purchase deal, the focus generally remains to purchase the house for own use or to sell the house in order to utilize the money for further purchase of a house for own use.
But in house flipping the idea is to purchase a house in order to renovate it and then sell it to a party interested just to make a profit. Old, weary, and cheap houses are purchased at a location in order to minimize the purchase price.
The same house is renovated in a standard way or as per the wish of the purchaser who will buy it and then selling the house to the purchaser. This business may look simple but isn’t that simple as in United States the same is regulated by law.
In order to start your own house flipping business you need to obtain a license of real estate contractor. The market since the last decade has seen immense growth and is quite competitive in nature. Therefore one needs to be prepared in order to survive in the market.
How House Flipping Business Works?
Although it sounds simple but it isn’t that simple. To be a successful house flipping businessman you need lots of understanding and knowledge regarding the business and how it works in reality on the ground.
It would be better for you to work closely with someone who is in this business for few months or a year. The whole process right from purchasing to renovating and then to selling has some complexities and you may face unprecedented situations. Therefore before going independent you should get some experience.
There are various steps that you need to take in order to setup your business and then proceed. Some of these steps are:
- Business Plan
- Setting Up your Business
- Market Structure and Research
- Funding for your Business
- Knowledge Expertise, Contacts and Resources
For this article our focus will remain entirely upon the first one that is business plan for house flipping business.
Business Plan for House Flipping Business:
The concept of a business plan arises from one simple point that is channelizing your floating thoughts into concrete ideas and plan in a brief way which makes it easy to implement.
Thus business plans need to be comprehensive in nature that contains all the necessary details required to open up a business and then proceed towards its working, execution and finally the profit making.
So what does a business plan contain? What details are necessary in order to prepare a comprehensive business plan? Here are the details.
- Opening Remarks regarding your business
- Aims and Objectives
- Execution Plan
- Resources and Utilities
- Capital Investment
- Knowledge Expertise, Contacts and Experience
- Return on Investment
- Progress Plans
Opening Remarks Regarding your Business: Executive Summary
Explain your business in detail in this heading. Why you have chosen to do this business? Mention the details about yourself, everything that is necessary to be revealed about yourself and your business.
Mention the fine details regarding the legal status of your business. Whether it’s a partnership firm or a LLC. The assets that your business own, who are the members of your business who are involved in decision making.
Write about them in detail in a separate paragraph, their worth, their status in the business, ownership and liability. Personal details including education, other jobs, etc. should also be mentioned.
The executive summary helps up building a face of your business. People involved in a business can come and go but the business remains more likely and therefore it is necessary that it should have its own face value.
Thus mentioning details about your business is necessary including the details of members, employees, assets, office details and address.
Aims and Objectives:
What is the reason for you to start this business? The reasons can be many and it can be a short term reason and long term reason. Mention about them in detail. Your reasons must be logical and backed with facts.
Without any concrete direction no business can go further. The aims of your business give directions in which your business will proceed. Write down about the aims that you have for your business.
Some of the common aims related to house flipping business can be:
- Just for the sake of earning money
- Earning money from this business can investing further
- Earning money from this business and then investing in some other business
- Just a part time business to earn money without any long term plan
- Want to make a place in house flipping market
Mention all these details it will help you in proceeding further. People who will engage with you will also be aware about your aims and objectives.
Business Execution Plan:
How will execute your whole plan? House flipping business though sounds simple but it isn’t that simple. It requires lots of expertise and experience along with guidance. Since this involves a good sum of money there is also risk involved.
A novice in this business may soon be outclassed by an expert in the business and your investment may go down without any significant return. There are various aspects and technicalities involved in house flipping business.
Some can be described in the following.
- You must have enough information and knowledge in understanding the real estate market. There is an art in getting good properties in cheap prices.
- Not everyone is going to let you buy properties at cheap prices. For that you must be resourceful and you need to have good contacts.
- The time period that is involved in purchasing the property then renovating it and then selling it can be of 6 months to 1.5 years and it can go to two years. In that time the rate of that property will also rise along with the rate of other properties which you will buy after selling this one. There must be proper calculation.
- You must have brief idea regarding the estimate involved in renovation and the profit you will make from selling the property. It must be accurate to ensure that you remain in profit.
- In real estate business there are always possibilities of sudden crisis where property prices fall and rise. One wrong move at wrong time can take away all the hard earned money.
Thus your execution plan must address all the aspects of your house flipping business and how will you execute it. It should be all precise with the guidance of someone already experienced in this business.
Resources and Utilities:
Resources and utilities implies how will you manage to purchase the house at cheap price, renovate it and then sell it at profit. Whatever resources you will use in between this period can be termed as resources and utilities.
With your proper research and understanding of the business you will be able to locate all the necessary resources and utilities that you will need to run a successful house flipping business.
Knowledge of the business, experience, contacts and expertise can also be termed as resources that you will utilize during the whole process. You need to have full understanding of the resources and when to use what resources.
Contacts with contractors, brokers, real estate agents, experts, is necessary to utilize the full potential of the real estate market for your use. At present, data mining or business intelligence is used to determine the real estate market.
Use all these resources to your use perfectly to make the most profit. Real estate business is volatile business and therefore is very sensitive. One mistake can take a toll on you.
Capital is what that will set your business in motion. You will need money to make your first purchase no matter how cheap it may be. You may either use your own savings or you can take a loan.
Taking credit is not a bad choice given how easily you will get it. Many people don’t want to invest in real estate without due diligence. You have to be convincing and that is when you will need your business plan.
You can also invite other investors to invest in your business and you can make deal with them. The most viable option is to ask your colleague or a person who is already into this business to fund you at initial stage.
He would not only be investing but would also be helping you as guide or an expert. This can be learning experience and also a safe choice for you since his experience would probably not allow your business to fail.
Obviously the deal should be lucrative enough to make him invest in your business. You can also arrange money through your personal savings. The most important point in capital investment is that it should be strategic. Do not allow any single penny to flow out without any proper reason.
Return on Investment:
Return on Investment or RoI is simply what you will get in return out of your investment. It should be planned in advanced especially when you are writing your business plan.
There should always be a percentage of return fixed for every investment you make. It is generally 15-25% and it may deflect a bit. You should carve out a plan regarding your ROI.
Returns depends on how meticulously you have planned your investment and how have you executed your whole plan. Some deflections are human and possible but there should not be higher deflection.
Real Estate market is time sensitive and area sensitive. For some places that price sees greater changes and is highly volatile. This in simple terms means that you might lose much if your project runs out of time and you may gain much if it is finished on time.
Hire cost estimators who are professionals dealing with cost benefit analysis of your project and can determine the exact cost involved in renovating the purchased house. They will create a whole plan based on time and money requirements.
Expert advice is valuable in order to determine which real estate is worth purchasing, renovating and selling. They can tell you which project should be avoided, which should be purchased and sold.
They can also help you in determining the time when to buy and sell properties. Use their opinion wisely. Apart from them, contacts in real estate business, brokers and others will give you an edge in your business. Be good in it.
Future Prospects of your Business:
Your business plan must also contain the future of your business. Many investors look for a long term investment that is safe and smooth in flow. Future prospects of your business will also help you in carving out your own future.
Think in long terms for your business as your gradually progress into the business. Always be a multiplier of whatever you get. Invest what you have earned into something better that can give you better returns than the previous.
Thus your business plan should definitely have a future column defining what your business would be five years from here.
Risk Management and Exit Plans:
What if your plan fails? What is the plan B for your business? Though you should always be confident with your plan but there should always be some exit plans in case things do not work as planned.
This plan is also important for your investors as they need a concrete exit plan with respect to their investment. Nobody wants to lose their investment and there must be some plan to get the principle amount back if things fail.
So get your own exit plan and also draw your risk management strategy and that will complete your business plan.