Let’s talk about Fix and Flip. You know those properties that you buy that need a bit of work then you sell them for a profit. A lot of people see these opportunities because there are a lot of TV shows out there that show you how to do this. It seems to be the thing that people like about real estate investing. I can buy this property that needs a lot of work. I’ll put that work in, and then I’ll flip it and sell it for a profit. But, it doesn’t always work out that way, certainly not in the first couple or even for more experienced investors. Because what happens is that unexpected things happen. There are unexpected costs.
A couple of tips I want to give you when you get involved in Fix and Flip or renovations.
Before you buy, obviously you are going to do your assessment. You are going to do your investment analysis.
In another video, I mentioned that you want to do all your analysis before you even leave the house and go and look at the property. You want to make sure that it cash flows. You will have to get good at doing the calculation for the renovations. So that means either you are a tradesperson or you know someone that can give you the right calculations. Don’t get caught up underestimating the cost either.
The first tip is to do your due diligence.
So when you are buying this property, make sure you make this offer conditional upon inspection and make sure you have a really good inspection completed. Obviously, you are buying this property knowing that it needs work but you do not want to go into this knowing that it needs more work than you originally anticipated.
What you should be doing is getting as detailed an estimate as possible for the renovation. And add anywhere from 25% – 50% to the estimate.
I know that sounds crazy but you wouldn’t believe how many unexpected costs can come along. For example, let’s say you are buying the property for $300,000, and it’s worth, in the neighborhood, of $450,000. Then you get an estimate and there is about $50,000 worth of renovations. What I would do is estimate another $30,000. Make sure that you have a good cushion or buffer in there for unexpected costs. These are good project management principles.
So do your due diligence at inspection time, Make sure you add a buffer to determine the estimated costs that you are going to incur to fix this property. You don’t want to get caught down the line. So, you blow your budget, now all of a sudden you are actually going to lose money. Believe me, I have done a lot of these projects and you will lose money on some of them. However, you eat it, and you move on.
Carrying Costs for Fix and Flip Investments
Do not underestimate carrying costs. A lot of people get in there, they do an assessment, and think they can do the renovation in 2 months, and sell it in another 2 months. Make sure you put in enough costs or enough estimates for carrying costs. What that means is, that if you bought this house through a loan that you have enough money to carry the property loan for longer than you were expecting.
For example, If you think it’s going to be 2 months for renovations and 2 months to sell, I would double that. So I would say it’s going to be 4 months for the renovations or 3 months. Whatever you think, it will take longer than you think. You are going to have your mortgage, your taxes, your insurance, and your utilities to pay for. So if that total is going to be, say, $1,500 a month and you are estimating 2 months, actually calculate 3 months, so $4,500. So put in $4,500 for estimates for carrying costs.
Do not underestimate your carrying costs because most projects, even my IT projects, will overrun.
Therefore. you are paying for those extra support costs. Those extra loan payments, those extra utilities and so on.
Selling Price for Fix and Flip Investments
The third thing I would recommend is when you go sell the property, price it to sell.
People get hung up that they are trying to get the biggest bang for their buck. They are trying to make the most profit. So they look at surrounding properties and say. “So this property in the surrounding area sells around $450,000 based on comparable, based on what we are going to do and you have an appraisal and all that’s good.” Well, guess what?
You are also competing with those other houses, so unless that person likes that exact street, the exact cabinetry that you picked out, the exact countertop you have to allow for additional carrying costs for during that sales period.
So we said earlier 3 months of renovations and now there is 2 months of being on the market. I would also estimate 2 or 4 months of being on the market.
Make sure that you get a good Realtor if you are going to do this. You want to try it yourself, sure but a good Realtor is worth it.
The other thing is when you are getting ready to sell it, you want to make sure of a few things.
1. that it’s staged properly.
2. that it has the right marketing around it.
3. that it is priced properly.
What that means is It may look like it can compete with other properties at $450,000 but why compete? This is a renovations purchase, so you are going to get $5,000 or $20,000 less than you thought. Once you sell that property, you are going to save money on those carrying costs.
The faster you move that house, the faster you get out, the faster you get that cash back so you can start on your next project.
When you price the property you want to price it at what I call a “Fire Sale” price.
For example, let’s say properties are selling in the neighborhood for $450,000. Usually, people would price them around $460,000. What I would do is go in and price it at $430,000, final sale, and advertise it as final sale, Advertise that there is an open house and you’re accepting all reasonable offers. I have a Realtor and we know how to do this very well so that we can get the property sold pretty fast.
Those are just some tips that will help you in your Fix and Flip projects.
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