Flipping a Home

Have you been watching HGTV and witnessed a $100,000+ gain from flipping a house? Maybe you also dream of buying a house for a good deal, fixing it up, and then selling it for a big profit in a matter of months.

Unfortunately, flipping a house isn’t as easy as it looks on television – especially in Hawaii’s tight housing market. However, with the right planning and calculated steps, investing in a home to flip is still possible – and great gains can, in fact, be made in Hawaii’s housing market.

Step 1: Know the local market.

With the median single-family Hawaii home being nearly $400,000 more than a home on the Mainland U.S., buying a home in the Hawaii housing market is not an easy endeavor. Median single-family home prices are around $650,000 in Hawaii, making it important for potential investors to carefully calculate finances.

Additionally, a potential investor needs to know the fluctuating prices between islands, cities, and neighborhoods. A house in Kaneohe, for example, will be much pricier than a house in Hilo.

Also, while the Hawaii market historically has not had as drastic housing dips as the Mainland, the local Hawaii market does ebb and flow between a buyers and sellers’ market.

Step 2: Find a house to flip.

What makes a property a potential flipper? With patience and a focus on these considerations, you might find the ideal home to flip.

• A cheap home in a good neighborhood. While the home may need some repairs, the home’s location can add to its value. A home with a view, also has added value.
• A structurally sound home. If a home has a cracking foundation or is a total fixer up, it will take a lot of time and money to get it ready for market. Mold, new pipes, or a new roof are expensive repairs that might make the flip difficult.
• A positive expected return on investment. Ask your real estate agent to give you a comparative market analysis to see what homes with the same number of bedrooms and bathrooms and similar land have been selling for. Then get an inspection and/or an estimate from a contractor about the amount that will be needed to fix up the place for resale. Will you spend less on the house and repairs than what you could sell it for? It could be a potential property to flip.

Step 3: Crunch the numbers.

A common formula for house flipping is the 70% Rule, which says you shouldn’t pay more than 70% of the after-repair value (ARV) of the home. Here is an example:

A home’s after-repair value (ARV) is $700,000.

It needs $100,000 of repairs.

$700,000 (ARV) + $100,000 = $800,000

$800,000 x 0.7 (70% Rule) = $560,000

Therefore, you should not pay more than $560,000 for this home.

Even in an expensive, competitive market like Hawaii, the 70% Rule is a great guide for flippers to follow. An investor should also include closing costs, repairs, holding costs (taxes, interest payments, utilities, etc.), and marketing in the number crunching.

Step 4: Finance the flip.

If you have cash, using it to finance your flip can minimize risk. Repairs or finding a buyer could take longer than expected, and with cash, you won’t have to pay interest on a mortgage or become desperate to take a lower price.

Of course, not everyone has mounds of cash, so financing options are available from lenders. Various loans are available for short-term real estate investors to purchase and renovate a property before flipping it for profit:

• Hard money loans. Also known as rehab loans, these loans are more focused on the property’s potential value than the borrower’s background. There are higher interest rates and lender fees; however loan processing is quick and often attractive to sellers in Hawaii’s competitive market.
• Cash-out refinance loan. If you have an existing property, you can replace its existing mortgage with a new loan for more than you owe on the house. The difference goes to you in cash and can be used to purchase or repair your flipper home.
• Home equity line of credit (HELOC). A HELOC is like a credit card, where you can take a maximum amount of money and pay interest on the amount borrowed. Your owner-occupied primary residence will have a first or second lien issued on it as a result of the HELOC.
• Investment property line of credit (LOC). A LOC is similar to a HELOC, but it can only be drawn from non-owner-occupied properties.
• Bridge loan. This is a temporary loan that is used to “bridge” the time between two real estate transactions. It could enable a purchase of a flipper property without having to sell another property first. However, a bridge loan cannot be utilized to finance rehabs.

Sep 5: Fix it up.

More money can be made in sweat equity, putting in your own work to clean, do flooring, paint, hang drywall, install a sink, and more. If you are a professional builder, flipping a home might be a profitable side job, and you can assure the repairs are done right.

However, if you are not too handy and don’t know the different between a Philips-head and flat-head screwdriver, then you might need to pay professionals to do the renovations. While hiring a contractor could be expensive, as they add on 10-20% of what their subcontractors charge, they can help to avoid expensive renovation errors and save a lot of time.

Step 6: Sell and see the returns.

Many Hawaii house flippers decide to use a real estate agent to sell the home. A real estate agent has sold multiple homes and has access to marketing tools, like the Multiple Listing Service (MLS).

Some investors choose to sell the flipped property themselves, opting to save the real estate professional’s commission for themselves. However, the investor will need to have time and marketing talents to assure they secure a solid sale.

Flipping a home in Hawaii is definitely a risk, with a lot of time, money, and more at stake. However, if you follow the proper plan and make calculated decisions, flipping a property could be very profitable.