How to Write a House Flipping Business Plan
To write a house flipping business plan, you need to consider the following:
- Executive Summary and Mission Statement
- Market Analysis
- Strategy, Timing and Financial Projections
- Organizational Description
- Exit Strategies and Backup Plans
Before making an offer on a property, you need to understand what your goals are for the project and how you're going to reach them. Rehabbing and flipping properties needs to be approached from an objective and quantifiable level, not an emotional one. As such, a business plan is essential. To make the process as easy as possible, we have created an editable house flipping business plan that you can downlaod, but we do encourage you to read the rest of this article first.
The house flipping business plan will do the following for you:
- It will force you to turn your vague ideas into concrete thoughts.
- It will force you to resolve lingering issues that you keep pushing off.
- It will force you to more fully understand what you are getting into and how to get out of it.
- It will force you to consider the time, money and emotional commitment needed and whether you are able to meet all of those commitments.
- It will force you to address your tolerance for risk.
- It will force you to think about your own strengths and weaknesses and identify areas where you may need assistance.
- It will show people who are working with you (lenders, lawyers, contractors etc.) that you are serious about the project.
Executive Summary and Mission Statement
What are you doing and why?
The executive summary is the elevator pitch version of your business plan. It should briefly cover all of the topics covered in the business plan, starting with your mission statement and a brief overview of the project goals. The mission statement is a one to three sentence synopsis of your project objectives and the underlying philosophies behind them. This statement says a lot about your central ideals and business culture, and it is very important when laying the foundations for your project.
Here's the point: If someone only has time to read one page of your house flipping business plan, this will be it. They should gain a basic understanding of the whole project, your ideals and what you bring to the table. It's often easiest to write this piece last, after all of your ideas from the other sections are established.
What is the economic environment surrounding your project?
Understanding the neighborhood where you are buying is essential to your success. Only when you have done your own due diligence can you be sure that you are getting a good deal. In the end, your planning and good sense should be rewarded with moving forward on a successful project.
Sites such as realtor.com, zillow.com and trulia.com are all free sites that can give you information on the property to be purchased and neighborhood value. These sites can show you the selling prices of nearby homes and the characteristics of the home (bedrooms, bathrooms, square footage, lot size etc.), allowing comparisons to be made between properties. These sites will also show you what is for sale in the neighborhood, so you will know what the competition is in the local market. In addition, you should go to as many open houses in the neighborhood as possible to get a real sense of size, finishes, configurations etc.
You may also want to work with a realtor to help you identify properties, join real estate investment groups to get education, align with a wholesaler, find lists on the Internet and review foreclosure sale lists. All of these tools may help you identify your best opportunities, but you must do the work yourself, and not rely on what others tell you. Also, be sure sure you describe your research and rationale within your business plan.
Write this section as an organized series of data points that explain the decisions that you are making with the choice of house and rehabbing decisions. The goal of this section is to show disconnected third party reader where the property and project fit in the current economic and regional real estate markets.
A house flipping business plan will force you to consider any difficulties that may arise.
Strategy, Timing & Financial Projections
How long will it take, how much will it cost and where will the time & money go?
Rehabbing and flipping always takes longer and costs more than you think it will. Make a timeline that you think is realistic and then add additional time to it to cover unexpected delays, which always occur. Next, "cost out" each month on your timeline. How much will you need to pay on the loan you have for the property? How much are insurance and taxes monthly? How much will you need to pay your contractor? How much are the monthly utility bills going to be? You need to make sure you have enough access to cash to sustain you through the project.
You will then need to show a budget and financial projection, which takes into account time and money. A projected cash flow through the whole project will help you to make sure you have the cash that you need to keep moving forward. Start with how much you are paying for the property, plus rehab costs, plus all possible expenses and then add an additional contingency expense for a total investment number. Then provide a realistic, supportable value for the sale of the property and deduct liquidations costs, such as realtor fees, transfer taxes, etc. to project your expected profit on the property. Make sure that your numbers are realistic, and do not rely on everything going right.
Personal and Organizational Description
How is your organization structured? Are you building a team or taking on responsibilities yourself?
First, you need to decide how you want to be organized. Do you want to borrow in your own name as a sole proprietor, or do you want to form a partnership, corporation, limited liability company? You may need to seek the advice of an attorney or accountant to fully understand the implications of each organization type. Be careful about this choice, because your selection can affect your ability to borrow money, mitigate your risk, attract investors, etc.
This is the place in your business plan to talk about yourself, specifically, a brief bio, your relevant experience and any other key members of your house flipping team. Make sure that the reader understands what you are doing and why you will be successful at it.
Exit Strategies and Backup Plans
Plan for getting out of the investment and contingencies in case of unforeseen circumstances.
Your house flipping business plan needs to address your exit strategy and contingencies in case the project don't go as planned. If you are planning to sell the property, what will you do if it does not sell? Will you use it as a rental? If so, show that the rental will pay the carrying expenses of the building. Do you plan to refinance the property and hold it as a rental? If so, show your plans for refinancing it, but also show what you will do if you cannot obtain the needed credit. Will you sell it? If so, for how much?
In addition, you will also need to know the rules related to your exit strategy. Do you plan to sell to an FHA buyer? If so, make sure you understand the anti-flipping regulations to make sure you aren't trying to sell too soon. Generally, you will need to hold the property for more than 90 days in an FHA situation.
A thorough, well written business plan can be an invaluable tool in helping you meet your house flipping goals. Time spent on planning at the beginning of the process will save you immeasurable time, money and worry during the process.