You’ve done your homework and found what you think is a good deal on a piece of residential real estate to flip, but is it really a good deal when you look at the numbers?
The way to make money while flipping rehab property is to be able to fix it up quickly without spending a lot of money, put it back on the market quickly, and sell it quickly.
Don’t be fooled by all the “get rich quick” schemes and infomercials. There are quite a few things to consider in order to have a successful house flipping venture, especially in today’s market.
First you need to figure out what the value of the house will be after you’re finished with the rehab. The correct term for this is “Market Value” or “After Repaired Value” (ARV). To help you determine the ARV of the home, ask for the help of a realtor or home appraiser. They are familiar with the area you’re looking to buy in and can be a valuable resource.
You’ll also need to figure out how much to offer on the property and still be able to make repairs and make a profit when it sells. It’s a pretty simple formula. After Repair Value (“ARV”) times 70% minus Repairs minus $5000 equals Maximum Allowable Purchase Price (note: the $5000 is the cost of borrowing money for your project).
You’ll also need to have a good idea up front on how long you think it will take to make the repairs. That time frame for repairs will be an important part in determining if this is a good investment property. Just remember, the longer it takes to repair, the more the costs will add up month after month in the form of utilities, taxes, insurance, mortgage payments, maintenance, etc.
Things to consider when calculating time and cost of repairs:
1. Cleaning up the outside and putting in landscaping.
2. Exterior brick, siding, paint. It’s vital that the exterior of the house is appealing.
3. Condition of roof. The price of replacing an entire roof can be costly.
4. Broken windows. Getting replacement glass can be costly on odd-sized windows.
5. Plumbing fixtures. Broken or leaky fixtures need to be replaced or repaired. Outdated fixtures should also be replaced if you want to get the most “bang for your buck”.
6. Sewer lines, especially on rural properties, can be a disaster area that a lot of new investors overlook.
7. Electric wiring, fixtures, outlets, light switches all need to be inspected for problems.
8. Interior paint. Do walls or ceilings need painted? Do walls have holes? Do ceilings need texture?
9. Interior repair such as doors, cabinets, mini blinds, etc.
10. Air conditioner and heating system. Do they need repairs?
11. Bathroom and kitchen. These two areas are usually the most expensive areas for repairs. Make sure the sinks, toilets, tubs, showers, cabinets, counter tops, appliances, & floors are all clean and working properly. If not you will need to make the repairs. These two areas of the can make or break a deal.
12. Other structural repairs such as ceiling and flooring supports.
Don’t forget to put in a fudge factor of 5% for unforeseen expenses. The majority of the time, you will run into repairs that you didn’t account for up front. Adding in the fudge factor gives you some wiggle room.
It’s tempting to only do the bare minimum when it comes to making repairs and upgrades on your rehab properties. That’s acceptable if you’ve bought the property as a rental investment. On the other hand, if you bought it with the intent to rehab and flip quickly, you need to make your house look better than anything else on the market.