Here’s our complete guide to house-flipping from tips and mishaps to a case study.
5 house-flip tips (via Investopedia)
- Going down the math to success. The most important figure is the “After Repair Value” (ARV). This is the price that you will ultimately sell the property for once it is renovated. Your real estate broker arrives at this number using “comps” from other recently sold properties similar to yours.
- When the going gets tough, the tough go hunting. Finding an undervalued property in this market can be like finding a public bathroom in Manhattan. With foreclosure rates down and bank owned property inventory drying up, inventory is slim. Bandit signs in public spaces and cafes, email-marketing, direct marketing to absentee owners and contacting abandoned property owners from city record data will help you broaden your search. Also your real estate agent can show you properties that really need fixing.
- Build a dream team. Your pre-season picks are vital to long-term success so for your draft, find the real estate agents, attorney, CPA, general contractor, designer or architect, insurance agent, wholesaler and private lender to bring home the trophy. They will help you find, fix and sell your house flip and shorten your own learning curve to allow you to make money faster.
- Time is money and the longer the renovation takes to complete, soft costs such as financing payments, insurance payments, town taxes, utilities, and any and all other carrying costs start to add up. Your stress may increase with time, but your potential profits will take a dive
- Don’t be brash with cash and do your homework. Finding investors can be tough so earn your stripes by considering a joint venture and getting some “skin in the game” first. There’s no need for greed as you build your portfolio first as split profits are better than no profits.
- The second most important number is your “Maximum Allowable Offer” (MAO). This is the highest allowable price you will pay for the property.
- Take your ARV and multiply it by 70%. Then deduct your cost for rehabilitation which yields the MAO. Click here for an example.
5 flops in a house-flip (via Investopedia)
- Mo money mo problems. Although the interest on borrowed money is tax deductible, it is not a 100% deduction. Every dollar spent on interest adds to the amount you will need to earn on the sale just to break even. Also keep in mind Property Gains Tax.
- Is it worth your time? Unlike New York City’s G train, being on time matters. Between finding a property, buying it, fixing it, scheduling inspections to ensure compliance and taking prospectives on inspections – you may easily make more money on your regular Monday to Friday 9 to 5. Once you have a timeline together, do the math using the formula we set out above and decide whether a house-flip is worth your trip.
- Skill two birds with one stone. Don’t just be the project manager – get your hands dirty and save money. Professional builders, carpenters and plumbers typically have union jobs and house-flip as a side gig while they collect unemployment or leave checks. To be competitive and maximize profit, you need the skills too.
- Yes and know. As ambitious as you may be, you’ll need to knowledge of property costs and location. You’ll also need to have a strong editing eye to understand which renovations are essentials and those that can be skipped. Finally – read up on your tax laws or have someone in your dream team who’s an expert
- Patience pays. Don’t rush and blindly finish all the work on your own and similarly don’t go with the first contractor who offers you a good rate. Try various DIY options when it comes to handy work, finding property and even reaching out to sellers. Call in the experts when you need. At the Zen of the day, your profit margin may be slim and that’s a commitment you’ve made!
Case study (via Invest Four More)
The following case study has some insightful lessons including:
- Working with difficult contractors who may not actually work on your project and hire helpers you’re not satisfied with.
- Examples of where your timeline can completely blow out.
- A scenario where purchase and sale prices did not match expectations.
- A detailed budget for renovations for ceilings, kitchen, floors and windows.
- Tips on avoiding structural issues and code violations (as this flipper experienced!)