Flipping Houses: Making Money in Any Market

The housing market, like the stock market, fluctuates. Home values can steam ahead, stay put, or spiral down out of control. You make your money when you buy a house at less than market value. By adjusting your purchase price based on market conditions, thus lowering your total investment in a property, you can make money in any market.

The following list offers some general guidelines for gauging your total investment in the three main types of housing markets:

• Increasing: When home values are rising, your total investment in the property, including the purchase price, closing costs, renovation costs, holding costs, and selling costs, shouldn't exceed 80 percent of its estimated resale value.

• Flat: When home values are steady, limit your total investment in the property to 70 to 75 percent of the estimated resale value.

• Decreasing: When homes in the area are decreasing in value, invest no more than 60 to 65 percent of the property's estimated resale value.

For example, to flip a house you expect to sell for $200,000 in a flat market, you may buy the house for $120,000, spend $20,000 fixing it up, and use $10,000 for other expenses (such as mortgage payments, insurance, utilities, selling costs, and unexpected bills). Your total investment is $150,000, which is 75 percent of the estimated resale value. In an increasing market, you can invest a maximum of $160,000 (80 percent of $200,000) in the property. In a decreasing market, you can invest a maximum of only $130,000 (65 percent of $200,000) in the property.

After you decide how much you can afford to invest overall, adjust the purchase price accordingly. Don't expect to make up the difference in your other expenses (including renovation and holding costs).

On the surface, these numbers suggest that you stand to make more in a declining market. You invest a maximum of $130,000 in the hopes of selling the house for $200,000, but in a declining market, you can't count on selling the house for $200,000. You may have to drop the price to $180,000 or less to price it competitively. By adjusting the total investment down in a down market, you simply reduce your exposure to risk.

In any market, you want to earn at least a 20 percent profit for your time and effort.

Don't let a slow market slow you down. If you see a gaggle of homes for sale with recently reduced asking prices, the market in that particular neighborhood may be starting to soften. This softening may signal a great buying opportunity, but you need to re-evaluate your resale estimate as well.