Setting a budget and staying on budget in a fix and flip is challenging! Any budget you build may include a wide range of variables. And that can raise some questions about the precision of your numbers. Your budget is vitally essential, though, when it comes to buying real estate. Between a project being lucrative and being break-even or worse, a strong budget can make all the difference. Additionally, it’s essential if you intend to complete a job of the “repair and flip” variety.
In 2021, flipping activity increased across the country. The number of homes flipped in 2021—323,465—was the highest since 2006 and up 26% from the previous year.
What is the “Fix And Flip” Property?
These days, there are many different types of real estate investors. And depending on the market and the investor’s objectives, they may invest differently. Short-term investments are the only ones that fix and flip investors are interested in. Their objectives are to locate homes that they can purchase at a discount. They begin trying to sell the property or “flip” it once they buy it or have a contract on it. Depending on the extent of the repairs, they might perform some work on the property. From small aesthetic work to larger restorations, these repairs can take many different forms. And that completes the scenario’s “repair” component.
Tips for staying on budget in a fix and flip
1. Think about taking on certain tasks yourself.
Consider taking on a few projects yourself if you only flip one house at a time. Most beginners can complete tasks like painting, landscaping, and staining. However, if you flip numerous homes, seeking for the next bargain is a better use of your time than concentrating on finding a deal on one.
2. Stick to your budget.
If you borrowed money to buy the property, you will have set aside a portion of that loan or gotten a separate loan to pay for the costs of fix and flip renovations. Based on the results of the pre-purchase house inspection and a contractor’s evaluation of the work that needs to be done and the associated labor and material costs, that amount should be determined. You won’t go over budget if you utilize this assessment as a standard for each step of the restoration project.
3. Work with subcontractors
Rates charged by subcontractors may be as much as 10% less than those charged by contractors. Make sure to only work with licensed, insured, and highly regarded subcontractors. Additionally, create a written contract that outlines each party’s obligations and rights.
4. Reduce material costs
Always take care of placing orders, making purchases, and picking up things. Allowing your subcontractors to do this can add up to thousands of dollars in additional time expenditures, and they won’t likely put in the necessary effort to keep expenses as low as possible.
5. Purchase upscale, slightly used appliances.
It always adds high voltage splendor to a kitchen and frequently justifies asking for a greater price when a home has high-end industrial appliances like Viking, Thermador, and Miele. In fact, appliances that are little used might be as expensive as ones that are brand new and standard. However, most customers won’t inquire or care until they have been polished to a sparkling condition and any worn-looking pieces replaced. When buyers first walk into a kitchen, big, shiny, high-end equipment offer a wow factor and make listing photographs and descriptions stand out. Look for discounts on these on Facebook Marketplace, Craigslist, and other websites.
6. Purchase discontinued or in quantity for a discount.
When renovating several properties at once, house flippers frequently utilize the same finishes and go to warehouse sales to buy in bulk at discounted prices. Another strategy to save money is to haggle with supply stores for reduced prices on discontinued items. Because design trends vary and you run the risk of buying too much of one thing, this procedure is not without risk.
Make careful to account for all costs and a safety net when estimating your fix and flip project’s budget. The most important thing is to figure out how much money you have available to spend overall, then go from there. By doing this, you can prevent spending more money than you have available to buy a home. Additionally, stay away from homes that will cost too much to upgrade and renovate.
Typically, there are five places where you want to be sure you’ve set aside money. These consist of:
- Costs of Purchasing a House,
- Upgrades, and Renovations
- Carrying and Selling Costs for the Property
- Initiative Cushion
Costs of Buying a House
It’s crucial to factor in all closing costs related to your fix and flip when deciding how high you may go with a purchase. That should cover all costs, including:
- Origination costs and points for loans
- Inspections of valuations
- Title protection
- Residence insurance
- tax on real estate
- Any escrow specifications
Costs of Upgrades and Renovations
The data relating to refurbishment and purchase costs require some balance. Make sure that your combined budget for the two categories does not exceed what you can reasonably afford based on the down payment and carrying fees. Making sure that the combination does not cost more than the home will be worth is also crucial.
If you are unable to pay the full purchase price of the property plus any necessary repairs in cash, carrying charges from the loan will cover the shortfall. Make sure you are aware of the precise amount of the fix and flip loan. Don’t forget to include additional costs in your carrying costs, such as:
- Residence Insurance
- Real estate taxes
- Loan Interest Expense
- Utility Costs
There are specific costs associated with selling the house that must be estimated. Your financial situation may be affected by your choice to utilise or avoid a realtor. The majority of agents charge between 4% and 7% of the sales price. There are also charges for transfer costs and recordation costs.
Even though it’s extremely common to overlook some of these costs, it’s crucial for your profitability that you don’t!
Cushion Fix and Flip Project
Not providing a cushion can be even more problematic than not accounting for all expenses. In actuality, problems and adjustments arise during every restoration or rehab. No matter how well you plan, it still happens. It is crucial to make sure you have the money for those events.
As a general rule, your cushion should account for 15% to 20% of your rehabilitation or repair budget. You would therefore have between $7,500 and $10,000 set up for a buffer if the projected work loan is $50,000 in total.
If you’re lucky and nothing goes wrong, this sum just adds to your profits. However, if there are problems, you have the money to deal with them and have already taken that into account when calculating your profits.
The Rule of 70
In general, investors adhere to what is known as the “70% Rule.” In that case, the investor would only be required to pay up to 70% of the ARV, less the cost of repairs and renovations, of the property. The “after repair value” of the property is known as the ARV value.
The highest an investor would spend is $70,000 if a home has an ARV of $100,000 and needs $20,000 in renovations. The anticipated purchase price would subsequently be reduced by the $20,000 in repairs by the investor. That implies that a potential investor would make the property’s seller a $50,000 bid.
One thing to be aware of is that numerous markets can benefit from the 70% Rule. However, it might not be the best indicator of a property’s value in specific markets or areas. That explanation, however, will be saved for a next blog article.
Cost estimation for renovation and rehab is rarely an exact science, for better or worse. Being at ease with the analysis process and the results takes time and experience. Budgeting and cost estimation can be aided by online technologies, but local knowledge is more crucial.
Financing house flip
House flipping entails a number of challenging tasks. But it should be simple to find the suitable lender to finance your fix and flip project.
Purchasing houses to swiftly renovate and resell for a profit can be a very profitable venture. However, real estate investors frequently run into trouble with the financing part. There are certain potential sources of cash for financing the fix and flip projects.
Like hard money loan is one popular loan type utilized in house flipping. Since the lender won’t be checking your credit as frequently with a hard money loan, you might be able to qualify more easily. The ratio of your debt to income (DTI) may be assessed, but the score itself is not being taken into consideration. Your down payment might need to be higher depending on how much equity you have in your home.
Because there is less underwriting required, hard money loans from lenders like 14th Street Capital may have shorter approval processes and you may be able to get one with bad credit. The drawback is that interest rates and origination fees could be significantly higher than they would be with a more conventional loan.
You are taking the first step by grouping your costs and expenses into the different categories mentioned here.
By following these suggestions, you can significantly improve your chances of not only keeping within your budget but even coming in under it, which will boost your return when you sell the property. Additionally, you can begin hunting for your next fix and flip opportunity with all the money you’ll save and make. Or if you are stating out you can get a hard money loan from 14th Street Capital, an experienced lender, to buy the property, fix it up, and then sell it. These quick, no-process hard money loans come standard with flexible terms and minimal documentation.