DISCLAIMER: This article is meant for educational purposes only and is not intended to be financial or legal advice. If you are considering flipping houses in California, HomeLight always encourages you to reach out to an advisor regarding your own situation.
Like many other areas in the U.S., the California housing market is seeing a decline in prices, and that decline will likely continue in 2023. According to the 2023 Housing Market Forecast put out by the California Association of Realtors, California’s median home price is predicted to go down 8.8 percent in 2023. Additionally, the population of California has seen a decline over the last few years, with a 0.3 percent decline from 2021 to 2022.
So, it might seem like a bad time to be flipping houses in California, but these conditions don’t add up to that. Oakland, California real estate agent Daniel Donate, who specializes in investment properties, says that flipping houses in the state is definitely profitable right now. It just takes a different strategy than it may have six months ago. “You’re probably going to try to be very conservative now,” he says.
Ready to figure out how to start flipping houses in California? Let’s get into the details of where and how you can become an experienced real estate investor in the Golden State.
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What is house flipping?
House flippers buy homes, hold them for a couple of months, and then sell them for a profit (that’s the flip part). Typically, they buy distressed properties — either short sales, foreclosures, or homes that need significant work — fix them up, and sell them for a profit. Sometimes flippers buy and sell homes to wholesalers without making any repairs or updates.
The goal is to buy low and sell for a high profit — one that covers both the home’s initial cost and any improvements.
“I would say the best advice would probably be to start off working with or helping another investor that already has experience, so that you can actually learn from them,” says Donate.
Is house flipping profitable in California?
House flipping is most certainly an attractive form of income for many professional real estate investors and side hustlers alike. However, making a profit on a flip isn’t as easy as it looks. And according to Attom Data, profit margins for flips in the U.S. dipped in the first quarter of 2022 to their lowest since 2009. So what are the profit outlooks for flipping in California?
Donate says that flippers can adjust to any type of housing market to be able to make a profit. “I think there’s always an opportunity, especially right now. You just have to adjust to the current market that there is,” he says.
How much do California flippers make?
The profit per flip in California may not be as high of a percentage as in some other states, but California flippers can still make a substantial profit. The average flipper in the state had a gross profit margin of about 16% and a profit of $92,500 in 2022. That’s not too shabby.
It’s important to note that your investment results can vary. Profits can also vary greatly from county to county, and even from city to city. Do your research on several areas before deciding on the best area to look for properties to flip.
Best places in California to flip a house
Fresno
Many cities in California have median home values that are on the higher end. However, Fresno home values aren’t quite so high, so this is a great city to look for homes to flip if your budget isn’t quite so big.
The city has seen some significant value growth in a year when many other areas have lost value. Additionally, home values are predicted to continue increasing in this city, so buying to flip can mean significant profits for savvy investors.
Year-over-year population growth: Up 1.16%
Median home value: $372,094
Year-over-year home value growth: Up 7.6%
Irvine
A planned community in Orange County, Irvine has lots of potential for real estate investors. With a healthy economy and low unemployment rates, the city sees continued population growth. Plus, home values have increased steadily over the past few years, which is a good sign for flippers.
Year-over-year population growth: Up 3.50%
Median home value: $1,295,877
Year-over-year home value growth: Up 12.4%
Los Angeles
Los Angeles is by far the largest city in California by population with a population of 3.9 million. Known for being the hotspot for fame, music, and movies, this city’s popularity isn’t going anywhere. Home prices are fairly high, but flips in this city also have a higher potential for profit. The average profit per flip in LA was $161,500 last year.
Year-over-year population growth: Up 0.23%
Median home value: $950,715
Year-over-year home value growth: Up 2.4%
Ventura
Looking for a lower median price point in California with even higher potential profit margins? Look no further than Ventura. This city saw typical profits of $180,000 per flip last year. The coastal town has amenities like beaches and cafes to attract buyers from all around.
Year-over-year population growth: Up 0.24%
Median home value: $840,257
Year-over-year home value growth: Up 6.2%
San Diego
The number of homes for sale in San Diego is increasing. As of December 2022, the number of homes on the market in the area increased by 54.7% compared to last year. This makes San Diego a great place to find homes to flip. With a wide variety of neighborhood options, plenty of sunshine, and easy beach access, San Diego has a lot to offer. The city also has a thriving economy with a plethora of job opportunities. As of December 2022, San Diego County had a low unemployment rate of 2.9%.
Year-over-year population growth: Up 0.7%
Median home value: $946,026
Year-over-year home value growth: Up 7.6%
I wouldn’t get too involved in the actual remodel yourself. If you really want to get bigger in flipping, you have to be using your time and your resources to go out and look for the next project, instead of trying to save a few bucks and trying to do the work yourself.
Daniel Donate Real Estate Agent
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Daniel Donate Real Estate Agent at Cal Bay Realty
- Years of Experience 6
- Transactions 130
- Average Price Point $801k
- Single Family Homes 89
Step-by-step guide to flipping houses in California
Create your network and evaluate your skills
Unless you’re a licensed contractor, you’ll need a network of professionals to help you flip. Even if you’re handy around the house, evaluate your skills honestly. For some projects, particularly electrical and plumbing, you’ll need an expert.
Keep in mind that buyers may be wary of purchasing a flipped home if they can’t verify that permits were pulled, and the work was done by licensed professionals.
Put together a network of experienced, licensed professionals before you start scouting houses. In addition to people to perform the remodeling work, you’ll need an agent to find homes, a stager to help sell them, and possibly a lawyer to draw up legal documents.
“It’s not really worth you trying to take on more work yourself when you can be out there looking for another opportunity to flip,” says Donate. He recommends finding a team of experts to do the work so that you can spend most of your time looking for those opportunities. He adds, “I wouldn’t get too involved in the actual remodel yourself. If you really want to get bigger in flipping, you have to be using your time and your resources to go out and look for the next project, instead of trying to save a few bucks and trying to do the work yourself.”
Develop your budget
A budget that takes into account all repairs, fees, and the unexpected is a key piece to successfully flipping a home. But, how do you account for the unexpected? Since flippers don’t have a crystal ball to see the future, the industry has developed the 70% rule.
This rule states that you should never pay more than 70% of the after-repair-value or “ARV” of a property, less any repairs, that you’re flipping. The ARV is your estimate of the home’s worth after all repairs have been done.
For example, if the ARV of your flip is $300,000, and it needs $50,000 in repairs, you shouldn’t pay more than $175,000 to acquire the property. If all went well, you’d still have $75,000 in profit to cover other expenses (such as agent and stager fees). Even if something went wrong, you likely wouldn’t end up losing money.
Elements of your budget to pay attention to:
- Down payment and lender fees
- Home inspection fees
- Closing costs
- Mortgage payment, property taxes, and insurance fees for every month you’ll own the property
- Contractor fees
- Permit fees
- Utilities while you own
- Marketing fees, such as a stager and professional photographer
- Real estate agent fees to sell the property
Donate recommends that you definitely use the 70% rule, and these days, “If [the percentage] can be lower, make it lower,” he says.
Financing your flip in California
Purchasing a home to flip with cash is almost always going to be in your best interest — however, not all investors have that kind of funding. If you need to finance the home with a mortgage, there are a few options you should consider:
- Hard money loans: These are loans from private lenders for short periods of time — they can come with higher interest rates and can be risky for inexperienced investors.
- Fannie Mae’s HomeStyle Renovation loan: This is a kind of loan offered by certain lenders that will finance the purchase of the property as well as the costs of the renovations — all wrapped up into one mortgage.
- FHA 203K Mortgage: This option allows homeowners to finance up to $35,000 in repairs identified by an FHA home appraiser or inspector. This option, however, requires the homeowner to occupy the home as their primary residence after purchasing, so it will not be the right choice for many house flippers.
Disclaimer: As always, there are benefits and drawbacks to each financing option. HomeLight always recommends that you work with a financial advisor to find the best financing option for you.
Donate recommends a hard money loan as the top financing strategy for flippers.
Research your market
One of the biggest factors that will affect your return on investment will be the market conditions in the area you are looking to flip homes in. Flipping houses requires a delicate balance of availability of homes at discounted prices, making cost-effective renovations, and buyer demand for when you go to sell. Here are some signs that a particular area in California will yield opportunities for profitable house flipping:
Economic growth
A strong job market and an increasing population generally translate to increased demand for housing — look into areas with recent influxes in residents as well as low unemployment rates.
While California saw a decrease in population by 0.3% between January 2021 and January 2022, the rate of decrease is slowing which may indicate that an increase is on the way. And within the state, many are moving from the coastal towns toward more inland regions, presenting opportunities in the housing markets there.
Additionally, the state currently has historically low unemployment rates. There are many opportunities for employment in the state with booming tech, film, and music industries within California’s borders. December 2022 represented the 15th consecutive month for non-farm job growth in the state.
Steady home value appreciation
One of the keys to maximizing return on real estate investments is paying attention to home value appreciation in the areas in which you are investing. Steady home price growth over the last few years can help you predict how much your investment might appreciate in value when you go to sell — this can also help inform your strategy.
Nationwide, home prices have fallen from their peaks in 2021 and early 2022. However, economists are currently predicting that the market correction we are seeing in the form of falling home prices will be short lived — Wells Fargo’s economists are predicting that prices are going to rebound in 2024 with a 3.3% increase by the end of the year. This is good news for investors currently worried about home prices falling and losing money on their investments.
Donate says flippers eyeing California markets with declining home values should analyze where things could potentially stand in six months, explaining that “you’re probably going to try to be very conservative now, preparing for what if the prices drop another ten percent, another fifteen percent, and if that number still gives you profit, then that’s probably going to be a deal that you would want to take on.”
Partner with a top real estate agent in California
A real estate agent helps with identifying current trends and popular home upgrades. When it’s time to sell your flip, they’ll sell and market it. But they can also help you find houses to flip.
Due to the high demand for housing in some markets, and the fact that some sellers list on the open market and sell without repairing or remodeling, it’s become harder for flippers to identify potential homes.
On whether working with an experienced agent is important or not, Donate says, “It’s very important because they’re the ones that know the activity of what’s going on.” He adds, “Maybe, nobody is showing up to open houses now. Maybe you’re getting two or three groups into open houses instead of the 100 groups over a weekend that you were getting six months ago. You’re not gonna know that information unless you were working with a real estate agent.”
Find a home to flip
Once you’ve got an agent keeping an eye out for you, alerts set up on real estate websites, and are scouring the multiple listing service (MLS), it’s time to find a home to flip. It could take several months, and you might have to make several offers on available homes before you’re successful. Be patient!
“I would say the best opportunities will be the well-maintained, outdated homes because those may require the least amount of work or budget to be put into the home remodel,” says Donate.
Once you win your bid, it’s absolutely crucial that you get a home inspection and an appraisal. When you walked through the home, you could probably tell you’d need to remodel the bathroom to sell. But a home inspection will reveal any hidden issues beneath the surface, such as a rotted subfloor in that bathroom, which you might have to replace to safely and successfully flip the home.
An appraisal is an estimate of the home’s current market value. If you’re using hard money or a mortgage to finance the flip, the lender will likely require it. The appraisal tells you what the home is worth now — which is valuable information if you’re concerned that you’re paying too much.
Renovation time
Line up the contractors, plumbers, electricians, and anyone else you might need to begin work the day after the closing. Check licenses and references before signing any contracts. Once the property is yours, there’s no time to waste!
According to the National Association of Realtors remodeling impact report for 2022, high ROI renovations to consider include a bathroom remodel with a 71% return on investment, a kitchen renovation, which has a 75% return on investment, and refinishing hardwood flooring with a whopping 147% return on investment!
“I would probably avoid going too detailed in areas where the value of the home doesn’t really support it,” says Donate. “There is going to be a cap in certain neighborhoods on what people are willing to pay to live in the area. And if you try to go way too out in these certain neighborhoods or cities, you’re probably not gonna get your money back.”
All of these projects have the added benefit of improving the home’s appearance and potential appeal to buyers. Remember that whatever you can do yourself — whether it’s a fresh coat of paint or scraping popcorn from the ceiling — builds sweat equity that will make you money when you sell.
Rent or sell
Once the work is done, flippers have a choice. You can either rent the home and become a landlord, or sell it. If you used hard money to finance your purchase, you’ll have to refinance to hold the property long-term and rent.
How much should the home rent for?
There are a variety of different ways investors use to determine a monthly rent on their investment properties depending on their financing needs, fair market value, and comps in their market. Here are some methods to consider when getting ready to rent out your property:
- Use an online calculator to plug in your property’s information and determine a monthly rent.
- Research comparable properties and set a monthly rent based on your findings.
- Calculate based on your financial needs: Taking into consideration a monthly mortgage payment, homeowners insurance, property taxes, and a monthly maintenance budget.
- Work with your real estate agent to evaluate rental listings and tap into the MLS
- Consider working with a rental company to handle the listing process — they will likely set the rent for you. Keep in mind that these companies will charge a fee to manage the property (10% to 20% of the monthly rent).
Setting a list price
This is where your top agent can come in handy once again — crafting a listing that highlights the improvements that were made while not being unrealistic on price is a delicate balancing act.
Work with your real estate agent to evaluate comps in the area and set a competitive price. List too high, and it might sit on the market for too long, too low, and you could be leaving money on the table.
“Today, I would be slightly below your goal, your transparent price. I would be a little bit under because you don’t know if you’re even going to get to where the comps are at. Be at an attractive price where people are still going to show up. If the house has value and if it’s really nice, people are going to pay. You’re going to get multiple offers still if the house has the value,” advises Donate.
What can go wrong with a house flip in California?
Experienced flippers price out home repairs before purchasing a house, and leave themselves a cushion for the unexpected. But not even they could have predicted the 20% increase in construction materials between January 2021 and 2022. Building materials continued to rise in cost by 4.9% in the first four months of 2022,but have since fallen to only about 1.4% higher than they were a year ago.
Increases in construction costs could eat away at your flip’s profit, or put you in the red. A delay getting permits, or having materials delivered, would also decrease profits due to increased holding costs. The longer you own the house before flipping it, the tighter the profit margin.
“What can really get you in trouble is not knowing the condition of the home. It could be a foundation issue. It could be that the deck is completely wrong. With how materials are nowadays, the cost of that and the cost of labor, just trying to do a repair could suck up 25 percent of your budget on the house remodel and now you just did a repair that doesn’t really improve the look of the home,” says Donate.
Key takeaways
While California is a fairly expensive place to purchase a property compared to some other regions in the U.S., the state is certainly ripe for flipping opportunities. It’s important to know your numbers and stick to a formula if you want to flip homes in California. Do your research and partner with experts in areas where you don’t have as much experience.
Finding an experienced agent is one important part of a successful flipping venture. HomeLight can connect you with top agents experienced in the California housing market.
Writer Dena Landon contributed to this story.
Header Image Source: (Clayton Cardinalli / Unsplash)
