Is There Money to be Made in Flipping Property?
So, you're thinking of investing in property to flip? At Vantage West Realty, flipping property is one of our favourite aspects in the real estate business to consult clients on. Since this type of investing is something we have engaged in for over a decade in numerous projects ourselves, we believe we have the necessary "real world" experience to comment on the full gamut of this sort of venture. Acquiring and renovating property can be incredibly rewarding and it's our pleasure to share what we've learned after many successful flips for both ourselves and our clientele.
Let's Get Right Into It - What is a Fixer Upper?
If you are unacquainted with the term, a "fixer upper" is a distressed property that's in need of some "tender loving care". As the new owner, you would fix it up to bring it into an appropriate state of repair (hence the term fixer-upper) and sell it at a premium price. In a way, it's like finding a diamond in the rough, polishing it, and sending it back to the market for a profit. However, before you run out and start buying property that fits this description, be sure to carefully consider the necessary steps below.
The Basics Of Flipping A House
1. Set Realistic Goals
It is important you set realistic goals for your business venture. Fixer upper homes can earn a good deal of money, but without careful planning and execution your potential profit can easily vanish into thin air. As you are learning the ropes it wouldn't hurt to set a conservative figure as a target profit and then aim to increase your margin as you gain experience. We've seen the disappointment of people who set unrealistic goals, like aiming for $100,000 profit, hoping they can hit a home run with one extensive project and sell at an incredible return. We don't want to see you make the same mistake so set a realistic expectation. Most investors in fixer uppers will agree that $100,000 is a reasonable amount to expect per year in a fixer upper venture. This figure is arrived at by considering the sale of 3 fixed up houses with a profit of $30,000-$35,000 per house.
2. Go In With Your Eyes Wide Open & Be Honest With Yourself
Think very carefully about how this type of business will affect your life. Are you considering giving up your day job to focus on this business or will you work on it in your spare time? Will you be doing most of the actual work yourself and if so are you qualified or prepared to learn? If not have you considered what it takes to find qualified help and the related costs? These questions are meant to help prepare you for this exciting new opportunity and of course we would be happy to help you in any way we can through the process.
3. Ensure You Have What It Takes For A Successful Flip
There are three key ingredients needed for a successful house flip:
Cash – You will need to have funds available for down payments, renovation materials, contractors, holding costs, legal fees and other related expenses.
Credit – Unless you are purchasing the property and funding all other costs with cash you will need the ability to obtain necessary financing for the project.
Competency – To renovate the home to a state where it can be resold for a profit you will need to have access to skilled labour.
If you don't personally possess all three, partnerships are a great option to complete the “3C” circle. For example, you may have the cash and credit while party 2 has competency for design and the renovations. Or, you may have the credit and 1/2 cash while party 2 has the competency and 1/2 cash. Or, you may have the competency while party 2 has the cash and credit. There really is no cut-and-dry formula for partnerships so just be sure you have it clearly outlined in writing what each party is responsible for and your respective return based on your contribution to the project.
4. Know Your Numbers. Seriously.
We can't stress enough how important this one is. On more than one occasion investors not properly planning upfront or getting carried away with renovation costs and end up doing a bunch of work for no financial return.
Here are a few things to keep in mind.
- You will do well to aim for a minimum profit margin of 10% of the finished price.
- Budget 10-15 dollars per square foot of the property that requires renovation.
- Factor in carrying costs = Interest cost + mortgage payments + utilities + property taxes for holding period.
- Property transfer tax will have to be paid when purchasing and is 1% on the first 200k and 2% on the balance.
- If using a realtor when reselling (we just happen to know a good one… by the way) you need to factor in commissions.
- There will also be legal fees on both the purchase and sale of the property.
- Of course you want to carefully plan your renovations so you are spending your money only on items that will increase the value of the home more than your cost of materials and labour. There are specific places you want to focus on renovating for the best return on investment and we would be happy to sit down and discuss these with you.
- As in all things with life it is important you realize there will be unexpected costs and surprises. and just like we have, you will make mistakes resulting in more financial costs. Plan well to avoid these as much as possible but have a buffer set aside just in case. Once you have these numbers work backwards to find the appropriate purchase price. All too often we have seen people buy and sell a fixer-upper without a definite plan. They buy a house, fix it up and then add a hopeful profit onto their costs. Have you ever bought a house according to what the seller has into it? Of course not. You look at similar houses to determine the value. If you have invested $350,000 into a project, and similar homes are selling for $325,000, then $325,000 is the number you must expect as a final sales price. In fact it's prudent to expect your final sales price to be slightly lower to ensure a quick sale and minimize holding costs.
Still Thinking About Becoming A House Flipper?
Consider Using Our Fix and Flip Formula
1. Before you make an offer determine the after-repair value of the house you're looking at. Get an appraiser's help, or look at what similar houses have actually sold for (not asking prices). The price it's likely to sell for is going to be your starting point. 2. Calculate costs: closing fees, loan fees, document preparation, homeowner's insurance, repair costs, interest on loans, property taxes, sales commission, fees, etc. You want projected costs of all four categories: buying, improving, carrying, and selling. Subtract all costs from the expected sales price. 3. Subtract a profit that makes it worth the effort. Now you have the highest price you can pay for the property. Don't buy with your emotions… you have to walk away if you can't get it for this price or less. You'll offer thousands less, of course, to give yourself negotiating room.
A Fix And Flip Example
After Renovation Sale Price - $322,000 Fees - $12,000 Renovations - $37,000 Carrying Costs - $4,000 Property Tax - $2,500 Original Purchase Price - $230,000 Profit - $35,000 Cash required - $87,000 total Estimated ROE 40.2%
This is just the beginning of where a Vantage West Flip specialist can help you in achieving your goals of successful fixer upper projects.Posted by AJ Hazzi on