Real Estate Investing - 3 Important Factors to Consider Before Investing Your Money

April 24, 2009 by Admin
Filed under Real Estate Investing

The Pitfalls, the Pain, and the Rewards of Flipping - Rehabbing Homes

April 24, 2009 by Admin
Filed under Real Estate Investing

So your looking to get into flipping or as it is known in the United States, rehabbing to some. We will call it flipping to keep things simple. I have over 9 years of experience flipping homes. From doing a lot of the work myself to hiring people to do it for me. So lets take a look at what flipping a home really is.

Flipping means many things to many people. I define it as buying a home for the sole purpose of making a quick profit, within 3-6 months. I hope this fits most peoples definition of it. I will solely focus on the part of flipping that includes renovating.

Now here is the golden rule. You make ALL your money when you buy the home not when you sell. What do I mean by this? Well, if you buy a home at a sufficient discount, if you bought wisely then all things being equal when you sell you are guaranteed to make a profit.

How does this affect you? Let’s use a scenario. You buy a home for $100,000. The homes in the area, same square footage, same general look and layout sell for $115,000. Now your home needs a lot of work and the ones selling for $115,000 are in pretty good shape. You think you can put in $5,000 and your Realtor fees are $5,000. So you will walk away with a cool $5000 in your pocket. Smart right?

Well now it takes you 4 months to fix. There was an unknown plumbing issue and on top of it all the market fluctuated like it does, and houses dropped 1% (doesn’t sound like much but it is). So lets add up about $3,000 in mortgage and taxes, another $1,000 in extra plumbing repairs, and let’s drop the price of the homes in the area by $1,000. So now if you sell your home for the average price you will make $0 dollars in profit not to mention your time invested. This is a terrible deal. So make your money when you buy a home.

Flipping is about numbers. No emotions at all. Make a spreadsheet. Follow the budget. I cannot stress this enough. Follow the budget. A lot of shows on TV say this. But what they do not say is that you have to make your budget realistic. Yeah you might have a $20,000 dollar budget on a $400,000 dollar home. Again might sound like a lot. When you add in carry costs, repairs, labor, your time and unknown costs. It is a small amount. But on the flip side if your home you bought was $40,000 then $20,000 is a huge budget. Please remember to be realistic with your budget and then stick to it as if your life was on the line, which it might be.

How will you make your budget? Use free estimates when you first start. Get in a lot of people to estimate the work. Find some good flooring/tile/cabinet/paint/lumber/etc stores and get prices. How much are 35 2×4 studs? How much is 400 square feet of quality Berber carpet? This will come easier and easier as you get into it. When you get good, you will walk into a home and make a very accurate estimate in minutes.

Now labor. Do you do the work yourself? Well it matters on 2 things. Are you handy? And do you have the budget for laborers/contractors? If your handy I would recommend doing the easier jobs yourself. This saves a lot of money and costs you little time. What jobs? Putting on socket covers, painting, things like that. If you are not handy then you have to budget labor. It will make things harder but it will force you to find the best deals in your area.

So know the nuts and bolts. Where do I start? Get pre-approved by the bank. Know your limit and only use 90% max of it. Leave some cushion for a LOC (Line of Credit). You will need this money, trust me.

Next get a GREAT Realtor. The key word is great. I know you want to save the commissions but trust me again, they are a valuable ally in this business. First, they will find you homes, drive you around and the really good ones will even break down the numbers for you. And you don’t pay them a cent. When you sell they will advertise for you, do Open Houses and in general sell the home way faster then you ever could yourself. I have tried to sell homes on my own in the past and it is not worth it. The wasted time, headache and in the end less money for the same home. But I cannot stress this enough, they have to be on top of their game. No part-time Realtors or ones that don’t do much, or have not clue about investing. They need to be great at their profession. How will you find them? Have them buy you a coffee and interview many. Ask a lot of questions about flipping, are they Full-time, etc. This will take time and might be one of the hardest things to do. But if you do it right and take your time, the Realtor you choose will pay of dividends for you.

What should my Realtor look for? Well, there is a simple rule. Find the cheapest home in the most expensive neighborhood. Also make sure there is something wrong with it that you can fix. A house no one wants is a gem waiting to be picked up and make beautiful again. Also make sure the seller is motivated. You will know this by how long the house is on the market and how they negotiate with you. Some even tell you. Do your own due-diligence and talk to the neighbors on either side. Get some info from them. Then if the all is right, send out an offer.

Next, once your Realtor has found you the home. Remember you made your money already, cause you made it when you bought the home. Make your budget. I assume when you bought you bought a home that was not over your head. What I mean by that is the foundation does not need to be replaced or the entire roof removed. Do work in your scope. You would be shocked by how a little paint, some new carpet and some staging (will get into that in another article) can make a home look like new. Again, and again keep to your budget. Do not forget monthly utilities, mortgage, taxes, labor, materials, Realtor fees, and a 5-10% cushion for any unexpected issues.

Finally, time line. Do not hold your houses longer then 6 months. Unless your doing a major flip where your adding a second story or something. I say this cause the market could change dramatically in more then 6 months, many times earlier then that. And not always in your favor. Most flips should be in and out, like a ninja. You get into the area, clean up the house, make your profit and leave. Budget time realistically. In the beginning if you think painting the interior will take 6 hours, triple that number. That is probably more realistic. Again once you get good you will know exactly. But again get in, 3-6 months later get out. I mean sold and money is in your back on month 6.

In my next few articles I will talk about staging and holding properties. Yes once you have a small nest egg you will start renting, I know, shocking. See you next time people of the web.

Daniel Kepka, after 9 years of flipping homes joined his wife Marlene Alcon as a Realtor in the Calgary, Alberta, Canada area. After many mistakes and downfalls he has learned more about Real Estate then most people learn in a lifetime. His love of all things Real Estate fuel his urge to learn.