3 Tips for Fix and Flip Real Estate Investing
Lets 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, you see allot of TV shows out there that show you how to do this. Seems to be the thing that people like about real estate. Buy this property that needs a lot of work, Ill put that work in and then ill flip it for a profit. Doesn’t always work out that way, certainly not in the first couple. What happens is that there is unexpected costs.
A couple of tips I want to give you when you get involved in Fix and Flip or renovations, whatever you want to call these types of deals.
Before you buy, obviously you are going to do your assessment, you are going to do you investment calculations, 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 caught up in underestimating the cost either.
Due your due Diligence
This is the first tip is 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. Obviously you are buying this property knowing that it needs work but you do not want to go into this know that it needs more work than you originally anticipated.
What you should be doing is looking at detailed estimate for the renovation as possible and add anywhere from 25-50%. I know that sounds crazy but you wouldn’t believe how many unexpected costs would come along. For example: lets say you are buying the property for $300,000 and it its in the neighborhood of $450,000. You do an estimate and there is about $50,000.00 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 actual cost that you are going to incur to fix this. You don’t want to get caught down to the wire. You are blowing your budget, now this thing all of a sudden you are actually going to lose money. Believe me, I have done a lot of these things and you will lose money on some of them. However, you eat that and you move on.
Do not underestimate carrying costs. Alot of people they 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 estimate 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 for longer than you were expecting.
For example: If you think its going to be 2 months for renovations and 2 months to sell, I would double that. So I would say its going to be 4 months for the renovations or 3 months. Whatever it is its longer than you really think. In there you are going to have your mortgage, your taxes, your insurance, your utilities. So if that total is going to be $1500.00 a month and you are estimating 2 months, so calculate it for 3 months, so $4500.00. So put in there $4500.00 for estimation for carrying costs.
Do not under estimate that because most projects, even my IT projects will over run time where therefore you are paying for those extra support costs. Those extra loan payments, those extra utilities and so on.
The third thing I would recommend is when you go sell the property, people get hung up that they are trying to get the biggest buck 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 $450,000.00 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 a couple of things. One, its staged properly. Two, it has the right marketing around it. Three, that it is priced properly. What that means, it may look like it can compete with other properties at $450,000.00 but why compete. This is a renovations purchase, so you are going to get $5000.00 or $20,000.00 less than you thought. As long as you move that property, you are going to save the money in 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 “Fire Sale” so properties are going in the neighborhood or $450,000.00 usually people are pricing them around $460,000.00. What I would do is go in and price it at $430,000.00, final sale and advertise it as that , open house, accepting all offers. I have a Realtor and we know how to do that pretty well so that you can get the property sold pretty fast.
Those are some tips that will help you in your Fix and Flip projects.