Fix-and-Flip Investing FAQ
11 frequently asked questions about fix-and-flip investing: ARV, rehab estimation, hard money, profit margins, taxes, and how to make your first flip profitable.
How does fix-and-flip real estate investing work?
Fix-and-flip involves buying a distressed property below market value, renovating it to market-ready condition, and selling it for a profit. The investor earns the spread between their total cost (purchase + rehab + holding + selling costs) and the final sale price.
What is ARV and why does it matter for flipping?
ARV (After Repair Value) is the estimated market value of the property once all renovations are complete. It drives your entire underwriting: your maximum offer is tied to ARV (70% rule), your rehab budget determines whether you hit that ARV, and your exit price targets ARV.
How much money do I need to start flipping houses?
With hard money financing, plan for 10 to 20% of the purchase price as a down payment plus out-of-pocket rehab costs plus 3 to 6 months of holding cost reserves. On a $150,000 purchase with $40,000 in repairs, you might need $30,000 to $60,000 liquid depending on your lender's terms.
What is hard money and when should I use it for flipping?
Use it when the deal cannot wait or cannot qualify. Three situations: the property is uninhabitable, so no conventional or DSCR lender will fund it; you need to close in days rather than weeks to win the contract; or the rehab exceeds the cash you have, and the lender will advance draws against it. Because hard money is priced by the month, its true cost is the rate times the months you hold it, plus the points. Hold it for as few days as you can, and line up the exit financing before you take it.
How do I estimate rehab costs accurately?
For early underwriting use per-sqft estimates by scope level: cosmetic ($15 to $30/sqft), moderate ($35 to $60/sqft), full gut ($75 to $125+/sqft). Always walk the property with a licensed GC before finalizing any offer. Build a line-item scope of work and add a 10 to 15% contingency.
What is a good profit margin on a fix-and-flip?
Most active flippers target $25,000 to $50,000 net profit per deal, representing 15 to 25% ROI on an all-in basis. Deals returning less than 15% ROI often don't justify the risk and effort. Home runs (30%+ ROI) happen, especially on deeply discounted wholesale buys, but shouldn't be the baseline expectation.
How long does a typical flip take?
Light cosmetic flips: 2 to 4 months. Moderate rehabs: 4 to 6 months. Full gut renovations: 6 to 12 months. Every extra month adds holding costs (mortgage payments, taxes, insurance, utilities) that eat directly into your profit margin.
What are the main risks in fix-and-flip investing?
The five main risks: (1) Overpaying for the property. (2) Rehab cost blowouts. (3) Market timing, meaning values dropping during a long rehab. (4) Carrying cost overruns from project delays. (5) Overestimating ARV, the single most common flip mistake.
Do I need a contractor before making an offer?
Ideally yes. Walk the property with a GC or experienced rehabber before making your offer to get a real repair estimate. If you can't, use conservative per-sqft estimates and add a larger contingency. Never offer based on a best-case rehab scenario.
What taxes do I pay on a house flip?
Flips held under 12 months are taxed as ordinary income (not the lower long-term capital gains rate) plus self-employment tax if you flip regularly, and the effective total rate can reach 35 to 45%. Work with a CPA specializing in real estate to offset gains with business expenses and explore entity structuring.
Should I use an LLC for flipping houses?
Most active investors flip inside an LLC for liability protection. If something goes wrong on the rehab (contractor injury, buyer lawsuit), your personal assets are shielded. Hard money lenders routinely lend to LLCs. Consult a real estate attorney about the right entity structure for your state.