Hi guys, Stefan Aarnio here, Flipping Houses, Tips for Beginners. Now if you’re watching this video you’re probably like so many people out there, you’ve seen the TV shows, maybe you’ve seen some people online, maybe you have a friend or you’ve heard about somebody who has made money flipping houses. The truth is there’s a ton of money in real estate and if you want to get into flipping houses you’re looking in the right place.
There’s a couple of tips I want to share with you before you get started. Now before we get started in this video, just so you know me, I’m Stefan Aarnio. Award-winning real estate investor, award-winning author, author of three books. I have flipped over hundreds of homes so I want to show you on this video some of the tips that you’re going to need to flip houses successfully.
The first major tip I want to share with you is you have to buy right. When you flip houses you’re going to make all sorts of mistakes. There’s human errors with construction, there’s errors with marketing, errors with selling. There’s design errors, there’s all sorts of problems. There’s all sorts of things that are going to happen somewhere along the way but if you buy right this is the only thing that cannot be corrected along the way when you are flipping houses.
Maybe your contractor does something wrong, maybe you picked the wrong counter top, maybe you picked the wrong tiles. Maybe something happens in the market, the only thing that you can’t fix is to buy right. Now the way I teach people all across Canada, the United States, is, we want to buy at 40 to 60 cents on the dollar. When you’re flipping houses, we’ve got something called the ARV. ARV stands for after repair value and we want to buy at 40% to 60% of what that house is going to be worth at the end.
Let’s take a look here for a second, let’s say our ARV is $200,000. This is a starter home somewhere in Canada, a $200,000 starter home. You need to buy at 40 to 60 cents on the dollar. Let’s just say we’re going to buy at 50 cents on the dollar, so that’s going to be $100,000. That’s what you need to buy at, 50 cents on the dollar, you need to buy at 40 to 60 cents on the dollar. Now you might want to know, “How much do I have to renovate that property to make money?” You need to fix the property to 70 cents on the dollar, so 70 cents of $200,000 is going to be $140,000. That means your rental budget is $40,000.
I’ve got another tip for you guys when it comes to renovating properties. There’s a magical number, $40,000 is a magical number. If your renovations are $40,000 or less you’ve got yourself an easy flip, that flip is easy. There’s three types of flips, easy, medium, and hard. You want to stick to the easy, easy flips because $40,000 is something that the average construction crew, the average truck and ladder guy, the average contractor can do. Maybe you can do this yourself. $40,000 is usually going to buy you a kitchen, a bath, flooring, and paint. Those are the main things that you want to invest into, these are the things that the retail buyer, the person who is going to buy your nice shiny new home really care about.
The kitchen, you’re going to see maybe a 3x return on your money. Maybe you spend five grand, the buyer is going to think it’s worth 15. Your bathroom, you might spend maybe another five grand and the buyer is going to think it’s worth 10, so you’re going to see a 2x on your money. Flooring, you’re going to see some sort of multiplier on because people always want to have a new floor, and paint, typically you see about $1000 a gallon. So you see some major lift. This is where the profit is made in flipping houses and you want to keep this to $40,000 or less. Keep it easy, that’s the main thing. The easier your deal is the less risk you have.
Right here, we’re going to buy at 50 cents on the dollar, renovate to 70 cents, that’s a $40,000 budget. Now we’re going to sell at 100 cents on the dollar, so that’s $200,000. You might be looking at this and you might say, “Hey Stefan, that sounds great but where can I buy a thing that’s worth $200,000 for $100,000?” Let me take you to over here. We’ve got three ways that we buy real estate at a discount, so this is called wholesale real estate over here. There’s two ways to buy real estate, there’s retail, which is probably from an agent or on the MLS. When you’re looking at homes online, when you’re looking at homes through ComFree, or through RE/MAX, or through Century21, or any of these brokerages, a lot of the homes are retail.
Retail is not where you need to be buying, you need to be buying at wholesale. Retail is typically, at a minimum, 8% to 10% higher than you can get wholesale. Wholesale would be direct from the seller usually. When you can cut out the agent and buy direct from the seller you’re probably going to save yourself anywhere from 8% to 10% of what you normally would’ve paid and your profit in this model is going to be about 10 cents on the dollar, so that’s your entire profit, is simply by going direct wholesale to the person who is selling it from you.
There’s three reasons why people sell real estate at a discount when you’re buying wholesale. Here’s the three reasons why people sell for less. Right here we’ve got the three D’s. Death, we’ve got divorcee, and we’ve got downsizing. Those are the three reasons why people will sell a $200,000 house for $100,000. You might say, “Oh but I don’t want to take advantage of people,” “I don’t want to hurt people.” “I don’t want to take their money.” Here’s the thing guys, when people die, they died anyways. When they’re having a divorce, they’re having a divorce anyways. When they lost their job, they lost their job anyways.
You didn’t cause any of these things, you are simply providing a service. You’re providing liquidity to these people. You’re buying the home off these people for what they’re willing to take today. Now these are the three motivators, the motivators of what makes people motivated to sell their real estate for less. My offices do in between one to two deals like this every single week and this is how people get motivated to sell. With downsizing, you might be getting a bank foreclosure. Some people might say, “Oh, but there’s no bank foreclosures in Canada.” There are a lot of foreclosures, there are a ton of foreclosures in Canada but you have to be trained to find them, so bank foreclosures do happen.
Divorce, this is a real on-trend thing, roughly 50% of couples are getting divorced. Death, we have people dying every day so there is deals happening every day but if you’re not getting them it’s because you are not trained to see them. We’re going to buy at 40 to 60 cents on the dollar, we’re going to renovate for the magical $40,000, $40,000 or less. You’re going to be in it for $140,000, we’re going to sell at $200,000, and the cost to sell, now it’s going to cost us something to sell. Over here, the cost to sell is going to be about 10% of the ARV. It’s going to cost us roughly $20,000 … I’m going to do some erasing over here … It’s going to cost us roughly $20,000 to sell.
Let me break that down for you guys. So $20,000 is cost to sell, that’s roughly 10%, now that 10% cost to sell breaks down into about four categories. You’ve got 4%, this is your realtor commissions. You might say, “Oh, but my realtor gets five,” or, “In my market we pay seven and three,” or some other thing. This is your budget for realtor commissions, that’s what you’re going to pay. If the realtor wants five you can say, “No problem, I guess I’ll hire another realtor. Do you want to take four?” Many realtors all across the country will take a 4% commission. It’s a very fair commission. 3% is for discounts and staging.
Discounts and staging, you cannot ever plan on selling your home for full price so you need to build in a discount. The discount is there so that maybe you sell at $195,000, you’re still on budget. Maybe you sell at $194,000, you’re still on budget. You have a 3% discount built in plus you have your staging costs. I stage all my homes, I also own a staging company so I make sure that I put staging right into the deal, make everything look fantastic. Staged homes sell for more.
The final thing here is 3% per transactional costs. Transactional costs, this includes … I’m going to come over here … Transactional costs includes a couple of things. We’ve got lawyers, so you’re going to have to pay lawyers on two ends, that’s your buying lawyer and your selling lawyer. You’re going to have your heat, you’re going to have hydro, you’re going to have water. Now heat, hydro, and water are all pretty minimal on this kind of deal because nobody lives in the house. You’re going to have your insurance you have to pay, you’re going to have your property taxes.
Insurance, you’re going to need vacancy insurance. You’re not going to buy normal homeowner insurance because you don’t live there. Vacancy insurance is roughly two times what normal home owner insurance is, so you’re going to buy a special type of insurance. You’re going to have property taxes. So you’ve got a couple of things here to pay, roughly for a six month budget, which is for how long the average flip takes, six months. You’re going to have about a 3% of ARV price built into what you’re doing.
You’re going to have, after you do this, we buy at 40 to 60 cents on the dollar, we fix to 70 cents on the dollar. We’re going to sell at 100 cents on the dollar, cost to sell is 10 cents. We’re going to make, down here, 20 cents on the dollar. So 20 cents on the dollar of $200,000, you’re going to make about $40,000. I don’t know about you but I live in Canada, I live I Winnipeg, Manitoba. Average personal income in Winnipeg is about $35,000 a year. To make $40,000 on one deal is absolutely fantastic, this is how much profit is generated.
I’m going to say that you’re going to get somebody else to front all the money because I don’t like to do with all my own money. Let’s say we split it with a money partner, you take half, you take home $20,000 for flipping a house. $20,000 in a six to nine month time period, to get a property bought, fixed and sold, I think is a very good profit. This is a little overview, Flipping Houses, Tips for Beginners. I just gave you the entire business from beginning to end. This is exactly the numbers, this is how you have to do it, this is a great way to get started. These numbers work, these percentages work all over Canada and all over the US.
I’m Stefan Aarnio, Respect The Grind. Like, share, comment, subscribe to my channel. We’ll see you on the next video.