Real estate promises great profits and the saturation of home and garden television shows has seen an influx of optimistic entrepreneurs hoping to make their mark on the fix and flip industry. However, flipping a rundown property and selling it for a profit isn’t as easy as it may seem. There are numerous costs and responsibilities associated with this real estate endeavor, and going into the process with a realistic idea of expenses you’ll face is integral to success.
Determining Your After Repair Value
Before beginning any flipping project, it’s important to look at the After Repair Value, or ARV. The best way to determine your projected ARV is to take a look at comparable properties in the neighborhood that you’re hoping to purchase a fix and flip property. You can do this through the help of a realtor (look for a professional that has access to the Multiple Listing Service), or doing the research on your own. Remember to look at homes that have already sold, not ones still on the market. If there’s a plethora of houses for sale, it may indicate that demand is low in this area.
Financing a fix and flip isn’t always easy. If you don’t have personal capital to draw on, you’ll likely be pursuing loans from less traditional lenders. Banks and traditional financial institutions rarely grant loans for fix and flip ventures, so many flippers approach private lenders. Getting hard money loans in California and other populous states with skyrocketing real estate prices is often the only way new house flippers can finance their fix and flip.
How much you’ll spend on financing interest depends on a variety of factors: how long it takes you to complete renovations, how long it takes the property to actually sell, and the interest rate at which you agree upon. Be aware that private lenders charge much higher interest because of the risk they take on by giving house flippers a loan—that’s why it’s in your best interest to expedite the renovations and repairs on any flipping project, as the longer you hold onto a loan, the more you’re going to pay.
The bulk of your expenses will be due to the actual renovation, but this can range greatly depending on how much needs to be done to the property. If you’re just beginning in the flipping business, you likely aren’t equipped with all the skills necessary to handle every renovation portion. Many novice flippers hire a contractor to help guide the renovation processes and ensure that all the repairs are done to code. Having an experienced contractor with you from the onset will help you estimate costs before work begins. You’ll also need to rent a dumpster, which can easily cost thousands of dollars depending on how many dumpsters you need and how long you need to rent them.
There are numerous instances in which you’ll need an attorney’s help during the fix and flip process. Their services are first required during purchasing, and this may run in the thousands. You’ll also require a lawyer’s help to sell the property with deed preparation.
It’s important to always insure any business project, but this is especially true in the case of a flipping venture. Shop around and look at a variety of policies, as your basic homeowner’s policy will essentially only keep you protected in the event of a fire. Because flipping a home requires construction, you’ll have a variety of dangers and risks associated with the renovation. If you do hire people to help with your flip, you’ll also want to be sure you’re protected from legal action should anything go wrong during said renovations. Create an LLC and take insurance through that instead of under your name as it will keep your personal property and belongings more protected.
This is only the tip of the iceberg when it comes to the costs associated with a home flip. Before beginning this type of venture, ensure you have the financing in place and are prepared for the time and monetary commitment involved with such an endeavor.