Now that flipping homes has made a resurgence in popularity, I want to give you advice about how to do it properly.
Today, let’s talk about something near and dear to my heart—flipping homes. This is something that I consulted many people on about 10 years ago during that last real estate boom. During the slump, it went out of style, but here we are again at the height of another real estate boom.
Flipping homes makes good sense in this market, so today, I’ll be giving you an updated version of the right way to flip homes.
A lot of people make the mistake of just buying a home, adding a profit margin, and then just taking a price that they think they’d need to justify the whole exercise. That’s the wrong way to go about it.
Conservatively, figure out what the after-renovation value of the home is per the neighborhood it’s in. Look at what comparable homes are selling for, and then work your way backwards from there. Factor in everything, like how much you’re going to spend on the renovation, how much carrying costs will be, transfer tax, legal fees, real estate fees, and your profit margin. After you’ve calculated all that, you’ll have an idea about what you’ll have to pay in order to prep the property.
"It’s very important that you buy properly—you can’t just buy any house and add lipstick to it."
An easy rule of thumb is to assume 70% of the after-renovation value should leave you enough; 10% for the budget to do the proper renovation; 10% for the profit margin; and 10% for carrying costs and fees. This is a rough and dirty way of doing it, but it does give you a good idea of whether the home is going to be worth it.
It’s very important that you buy properly—you can’t just buy any house and add lipstick to it and expect to make a profit. Here at Vantage West Realty, we use a worksheet to figure out what we’d have to pay for a property in order to make it valuable.
For example, we’re currently working on right now. It’s located in an area where most of the homes are $700,000 or more, so we can conservatively expect that much for it when the project is complete. There will be about $28,000 in fees when you factor in commission. The renovation will cost about 10%, or $70,000. We use about $25 to $30 per square foot to do a cosmetic renovation, which includes things like flooring, paint, baseboards, and fixtures.
After that, I factor in a decent amount for carrying costs. Assuming that we’ll end up owning this house for a whole year, we factor in the interest costs and the property taxes over that period. There are also legal fees to consider, as well as a 10% profit margin. That leaves us with a purchase price of $507,500. Additionally, I also factored in how much cash is required. With $200,000 in cash, and you make $70,000, that amounts to a 35% return on your equity.
This is a project that is very viable in today’s market. Although there aren’t many of them, they need to be well scrutinized.
If this is something that interests you, we are always open to consulting clients through this process. Feel free to reach out to us, and we can sit down and analyze your situation.