How do you Determine your Budget When Flipping a House?
You’ve probably been sleeping under a rock for the past several years if you haven’t heard of the concept of flipping houses for a profit. Every channel you turn to on the television seems to have a show on the subject. While these shows make flipping a house look simple, there’s a lot to consider. Here is a guide to helping you determine your budget when flipping a house.
The first step to help with your budget should be to determine the value of the home after the repairs are completed (we’ll call this the after repair value – ARV). In order to do this, you should look at recent home sales (not just listings!) in the immediate area, as well as to look at the finishings to get an idea of a final sales price. It’s important to keep this number in mind when budgeting because it’s foolish to think you will get an exorbitant value that is way out of line with the neighborhood.
The next thing to consider is the all-important cost of the actual renovation. First and foremost, you should never cut-corners and do a shabby job when flipping a house. Becoming a successful flipper has a lot to do with reputation so do the work right. Depending on the condition of the property, the most common budget items include the following:
- Kitchen: a total gut will include new appliances, counter-tops, and cabinets
- Bathroom(s): a total gut will include new tiling, flooring, sink, bathtub, and toilet
- Painting walls: fairly simple task, but for a flip, it’s best to choose light paint colors
- New flooring: unless the home has original hardwood floors, the best option is to put in new flooring, whether it be carpet or some sort of hardwood (this would depend on the standard for homes in the area)
- Curb appeal/landscaping: landscaping can sneak up on you as a costly and unexpected expense, but the positive curb appeal will leave potential buyers entering the home on a good note
- Windows: new windows help with energy efficiency, which will be attractive to buyers
- Heating/air conditioning systems: especially on older homes, you should consider updating the heating and air conditioning systems to make them more efficient to attract buyers
If you’re working with a contractor, they will likely give you a cost estimate for the work to be done. Based on the estimate you are given, you should add at least a 20% cushion for additional costs that are likely to come with the renovation. If you intend on doing the work yourself, you can save money on labor, but it’s important that the final product is well done.
In addition to the renovation costs, you’ll have carrying costs throughout the period that you hold the property, as well as selling costs once you finally complete the project. Carrying costs include potential mortgage payments (if you take out a mortgage), real estate taxes, insurance, and utility bills. Selling costs include broker commissions, tax on gain, and title cost.
Once you’ve determined an estimate for the renovation costs (with 20% cushion), carrying costs, and selling costs, you’ll have an idea of your potential profit based on the ARV as discussed above. You can also use one of these handy budgeting apps to handle the calculations. Modern technology aside, always consider a worst case scenario when budgeting and if the numbers in that scenario still look good, it may be a home flip worth considering.