What is House Flipping, and How Does it Work in India?

In India, everyone wants to invest in property. But because of the high initial investment, only some people actually invest. Can You Become a Real Estate Investor with Low Capital? 

Indeed, you can become a real estate investor with little investment, too. There is a way called House flipping. Today, we will talk about how you can become a real estate investor with limited Capital and earn a good amount of money. 

Today we will talk about:

       •  What is House flipping?
       •  How Does It Work?
       •  How can you earn from house flipping?
       •  What are its success factors? 
       •  Why will sellers work for you?
       •  And the pros and cons for buyers

What is House Flipping?

Flipping houses meaning is! When you purchase a property for a short term, like 3 to 6 months, and then sell it when market prices increase. This property selling and buying practice is called House Flipping or Property Flipping.

In this practice, investors purchase a ready-to-move property from the market at a low value. Then, he starts to renovate the property to enhance its value and sells it. For example, Mr. Sumit is a real estate investor. He is fond of house flipping. He Bought a ready-to-move-in property from Ms. Harshita for two crores and renovated it to enhance its quality and value. 

After he did the renovation and all the property-related works, he waited for some months, like 3 to 6 months, as said before. The market value of that property went up from 2 cores to 2.5 cores. He then sold the property at the market price of 2.5 cr. Initially, he purchased the property for two crore and sold it for 2.5 crore. This means he booked an overall profit of 50 lakhs. The practice of flipping houses or property selling and buying within a short period of time, is called House flipping.

Difference Between House Flipping and Property Trading?

In the practice of property trading, investors purchase an under-construction property and hold it for some time; after the property's market price goes up, they sell it to book their profits. Such practice is known as Property Trading. However, in house flipping, investors invest in ready-to-move-in property for a short time, renovate it to enhance its value, and then sell it when the market price of that property goes up. Such a house-selling practice is called House Flipping or Property Flipping.

                                                   Characteristics Of House Flipping Model

Maths Of House Flipping

Now, let's assume Mr Sumit purchased the property for two crores, but because he is an investor, he needs to purchase that property at 5 to 10% less than the actual market price because he can only book a good profit. 

So, suppose he purchased the property of 2 cores at 10 percent less than the actual market cost, which means 

10 percent of 2 crore is 20 lakhs.

Means 20-200 lakhs = 180 lakhs (1.8 crore)

In a regular deal, a seller gets only 10 per cent from the buyer and the rest at the time of registration, and this process usually takes 2-3 months. But because you are practising property flipping, as an investor, you need more time, like 3 to 6 months, and the seller is giving you more time and property at a lower value than the actual market cost. 

So, he needs 20 to 50% advance payment.

Now, let's assume Mr Sumit paid the seller 25 per cent as an advance.

50 lakhs and spending 15 lakhs on renovation, renovation costs might be less as investors have good knowledge of how the property should be renovated, and their team can do it efficiently. 

Now, the Brokerage paid to Buy and Sell the property was around 1 per cent, which means two lakhs to sell and Purchase. So the total cost of the property comes to 1 crore 99 lakhs, and if he sells the property for two crore 15 lakhs, he earns a huge profit of 16 lakhs.

Now, investment duration such as:

       •  Two months for renovation 
       •  Two months to find buyers
       •  Two months of payment term

This means the total investment duration is six months, meaning an investor invested 69 lakhs rupees in 6 months. 

So he earned the ROI: Profit/Capital Invested. 

16/69 = 23 percent of profit in 6 months, and the annualised profit becomes 46 per cent.

No other investment can give you such a high ROI.

Why will the seller sell you at a lower value than the actual market price?

The first reason is that he needs money urgently. Always try to find sellers who want to sell property fast. Then, a seller can get 25 to 50 per cent payment in House or property flipping deals, which he cannot get in regular deals. 

Then, he needs to renovate the property, as its condition is not good, but he doesn't have enough money to initiate the renovation process. Sometimes, sellers get fed up with negotiations and regular visits to show their property, so they prefer to sell it to a regular investor. If the seller is not local and an NRI, he will have difficulty finding a good broker and will find negotiating with them highly complicated. In this case, he will always prefer to sell it to a regular investor. 

Now, the question arises of how to become a successful property flipper?

How To Become A Successful Property Flipper?

To become a successful property flipper, you need to focus on four things:

Build A Great And Experienced Team

A great team has different domain experts and can reduce your risk. You will have a good amount to invest in multiple properties, if you have multiple investors. A good team needs an experienced broker such Realty dart, a good interior designer, a CA or lawyer, or anyone with good real estate knowledge and enthusiasm to perform this role.  

An experienced broker can help you get the best deals and establish better connections, which is essential in real estate. Next, an investor with experience or knowledge of interior design can help you with renovation and all related work. A CA and LAWYER can help you with documentation.

Discover Right Market

You need to find a good, developed location where the majority of properties have been old. That location would be a great place to flip property. 

Identify the right property. 

Look for a property with NRI owners or someone who does not live in that locality. You can also find someone who needs to sell the property urgently.

How Much Value Can You Enhance?

Build a good network of brokers and contractors. They prefer to work with investors rather than individuals because they think investors can pay them timely and at the market rate. In the case of individual buyers, they need to negotiate a lot. 

Also, they can get recurring business from investors. So you need to pay them on time and build good relationships with them to strengthen your overall team.

How To Start?

You can start a property flipping business from your area or building. Build a team with your friends who are in real estate. Look for inventories in your area and tell your partners to ask their friends about inventories in their apartments; this will expand your inventory base. 

What is the process?

Make an MOU with the seller that includes the amount paid to the seller, payment terms, and other clauses. Always tell the seller that you are an investor, and that a buyer will come at the time of final registration, so there will be no doubts in the seller's mind regarding the deal.

How Much Money Do I Need To Flip A House?

You need approximately 70 lakhs to 1 cr to start house flipping. You can also tie up with different investors to increase your budget and reduce risk.

Summary

House flipping is a challenging task and requires good experience and knowledge to carry it out. However, with sufficient knowledge and experience, a good team can excel in this field.  This blog is written to educate you about house flipping and how you can start it. But the most important thing it needs is a great passion to earn and learn.