Flipping houses is a type of investing that involves purchasing a revenue-generating asset and quickly reselling it for a quick and lucrative profit, referred to as capital gains.
Generally, how it works is that investors purchase a house on the market that needs renovations or significant upgrades and will turn around and sell the home for a profit once the work is finished.
Despite the excellent potential for a significant ROI, the investor should have access to cash since it’s not always a quick and straightforward process to get approved for a short-term real estate loan.
Moreover, when there is a hot real estate deal on the market, often, it will attract flocks of investors who are financially prepared to bid the highest price. Therefore, being financially prepared by having the funds readily available at a moment’s notice is the smartest approach.
The California real estate market is generally pretty hot regarding earning potential on flipping houses. Still, it can be a long and complicated process, so we recommend that anybody interested in real estate does thorough research before jumping into it.
To help get you started, we created a guide to flipping houses in California.
- Who Can Flip Houses in California?
- What Do I Need to Start Flipping Houses in California?
- Why Should You Be Flipping Houses in California?
- Is Now a Good Time to Flip Houses in California?
- How To Flip Houses in California Using The 70% ARV Rule
- A Real-Life Example of The ARV Rule
- How To Secure Financing for Flipping Houses
- How To Find Cheap Houses to Flip in California?
- Best cities to flip houses in California
- Avoid flipping houses in these California cities
- Final Thoughts on Flipping Houses in California
Who Can Flip Houses in California?
In the State of California, anyone can purchase a property with the intent to flip it shortly after. So long as the taxed amount on capital gains is being paid to the State of California, there are no restrictions on who can and cannot purchase homes with the intent of earning a short-term profit.
What Do I Need to Start Flipping Houses in California?
If you have access to cash and your finances allow, the best way to start flipping is to invest with cash. Using cash will enable you to avoid paying any interest that accrues from taking out a loan.
If this isn’t an option, you can attempt to take out a traditional home loan. But something to keep in mind is that a home loan can take a while to close, and you will be required to pay closing costs. The longer a loan takes, the less likely your bid on the property will be completed and accepted.
If you don’t have the cash on hand, the safest and most reliable option would be to save enough money to fund the flip.
Why Should You Be Flipping Houses in California?
Suppose you’re wondering why one would invest in a state like California, where the housing market is one of the most expensive in the country. There are a few excellent and lucrative reasons you should consider it.
Currently, California is a very strong buyer’s market, making it competitive for real estate investors who have access to cash and other capital assets. So, if you’re a real estate investor or looking to maneuver into the house flipping industry, here are a few compelling reasons you should consider California.
Lucrative loan prospects
Since the average cost of a home in California is higher than the national average, private lenders are known to adjust their loan boundaries accordingly.
And that’s not all. A greater loan amount typically translates to higher profits for flippers. So, despite the high cost of housing, if you have intact credit and reliable income, you can cash in on the market when most other potential buyers can’t or are too risk-averse to try.
A buildup of foreclosures
The federal government put a program in place during the onset of the Covid-19 pandemic to pause millions of homeowners’ mortgage payments.
And since that program was lifted in late September 2021, there has been and is an anticipated wave of foreclosures across the nation due to homeowners lacking the ability to get caught up on bills.
As a result, many foreclosure properties are set to become available throughout California, and investors are lining up for the best deals.
A Buyer’s market
No matter how expensive it is to purchase a home, there will always be a backlog of homebuyers due to the beautiful life the state has to offer. And generally speaking, when the housing market increases, investors who have access to cash will always keep the investments flowing.
Is Now a Good Time to Flip Houses in California?
When it comes to flipping houses in California, the current market provides an excellent opportunity to start flipping. Despite the fact that the housing market average price is increasing, experts anticipate a flood of repossessed homes to saturate the market. If you have access to cash or can get approved for a home loan, you can join the many investors currently scouring the state for the best deals.
How To Flip Houses in California Using The 70% ARV Rule
For anyone unfamiliar with the 70% rule, let us break it down for you.
The 70% rule is a guide to help home flippers determine the maximum cost they should pay for a real estate investment property. As it states, investors should never spend more than 70% of the home’s after-repair value minus the costs of renovating the property.
The equation looks like this:
After-Repair Value (ARV) x (0.7) − Estimated Repair Costs = Maximum Buying Cost
Experts recommend that you never go over the maximum buying cost because anything over could threaten your profits.
If you’re an investor in California, the same rule applies if you’re interested in staying within the 70% margin of safety.
A Real-Life Example of The ARV Rule
Suppose you’re in the market right now and unsure of the maximum price you should pay for an investment property you intend on renovating and then reselling; here is an example to help you decide.
70% Rule Example
Let’s take a look at a property in Fresno, California, with an After Repair Value (ARV) of $280,000 and an expected renovation cost of $20,000.
- ARV = $280,000
- Expected Renovation Costs: $20,000
- Maximum price = ARV x (0.70) – Repair Costs
- Maximum price = $280,000 x (0.70) – $20,000
- Maximum price = $176,000
In this example, the maximum allowable offer should be no more than $176,000, based on the expected ARV of $280,000 and the anticipated repair cost of $20,000.
Something to keep in mind is that the 70% rule assumes the property’s current value from a house flipping perspective.
The home could be listed at a much higher value, which means it will be your job to negotiate with the homeowner to reduce it to the maximum price you’re willing to pay. Not all prospective buyers are looking to flip properties, so they view the home expecting to put in a bid much closer to the asking price.
How To Secure Financing for Flipping Houses
While flipping properties can be lucrative, it takes much more money than what is required when purchasing a home to live in.
You need to secure a loan that covers the cost of the house, funds for renovations, property tax, utilities, and homeowner’s insurance from the day the sale closes until the day it sells. It can get costly very fast.
So how do you secure these funds? Well, if you don’t have access to this kind of cash, your next resort would be to apply for a loan.
Before we dive deeper into the types of loans you can get, we want to point out something important. Banks will not loan you money if you do not have a down deposit or existing home equity.
And if you’re an inexperienced flipper with little to no track record, you might face challenges that require you to present a larger down deposit.
Here are a few types of loans you should consider for flipping houses:
Hard Money Loan
Generally speaking, hard money loans have terms of less than one year, making them quite appealing to house flipping investors. Because the term is so short, they typically come with a higher interest rate than a standard home loan.
Hard money lenders specialize in lending money for the purpose of flipping, so they know precisely how to factor in the home’s ARV. If, for example, you and the lender determine the ARV is $320,000, chances are you’ll be applying for a maximum loan amount of $320,000, despite the actual asking price of the home likely being much greater than that.
Home Equity Line of Credit
A home equity line of credit (HELOC) is considered a second mortgage that allows you to borrow money against the equity you’ve accumulated in your current home. If you have equity built up, you have the option to acquire access to that money in the form of a line of credit.
Suppose your home equity has a balance equivalent to or greater than the ARV of the home you intend to flip; taking out a HELOC is a viable option.
Simply put, a cash-out refinance allows a homeowner to refinance their current mortgage to be replaced with a new one. The point of this is to get a larger second mortgage than what is owed on the current one.
The homeowner will then have access to excess funds, which can be withdrawn for use toward the purchase of a home they intend to flip.
Keep in mind that a cash-out refinance can potentially come with a higher interest rate than a traditional home mortgage loan.
How To Find Cheap Houses to Flip in California?
When looking for cheap properties to flip in California, you’ll want to find very inexpensive houses in attractive neighborhoods. The best way to do this is to narrow your search for flip properties located in cheaper areas.
Visit real estate listing websites and refine your search to flip properties with a maximum selling price.
Another option is to look for Real Estate Owned (REO) properties, which the lenders own because the borrowers have defaulted on their mortgage payments.
Best cities to flip houses in California
This city is competitive in the house flipping scene for a reason. It attracts many investors to the area because of how safe and clean the city is. Just know that it is one of the more expensive cities to be flipping in though. If you have or are able to obtain sufficient capital, it’ll have a good chance of paying off with a great ROI. Families who want a great environment for their kids along with great schools in the area will pay whatever it takes to secure housing here.
You may have heard of this city from the rapper Dr. Dre, and maybe you’ve got this idea that perhaps it’s not the safest city around. While that may have been true back then, it’s becoming gentrified. Whether you agree with it or not, house prices have been going up at a steady rate there, and flipping a house as an investment in Compton may be one of the more feasible options around.
The city’s great to flip in if you have the money. It’s similar to Irvine, except that it’s in the Los Angeles County rather than Orange County. Houses can cost $1M, but if you know what you’re doing and run the numbers correctly, you can quite easily resell the house for $1.5-2M. The reason for this is that there are plenty of foreign exchange students and families that love the area, and plenty of them have the money to secure one of these houses for themselves.
Avoid flipping houses in these California cities
We recommend not flipping in the following cities:
- San Bernardino
- Santa Maria
Generally, cities with higher-than-average poverty than the rest of the state, coupled with lagging economies in those cities that still need to recover, make it harder to invest in house flips.
You’ll have trouble finding buyers that are looking for a home when what many residents in those cities truly need are more affordable rents.
Final Thoughts on Flipping Houses in California
While flipping houses is an excellent entry point for any real estate investor, it comes with challenges and significant risks. But with the proper preparation, anyone can get into house flipping and start building wealth. The biggest takeaway here is that California, while it is one of the most expensive real estate markets in the United States, also has plenty of REO properties, making it an investor’s paradise.