The key to making money from flipping houses is to accurately predict how much you’ll spend on rehabbing each property. This allows you to estimate the profit on the projected selling price. However, getting the budget right isn’t easy—especially when you’re new to the business. Here’s how to create an accurate budget for fix and flip renovations.
Pricing out the Work
You can’t calculate a budget for fix and flip renovations until you know exactly what work needs to be done to rehab the property so you can get your desired selling price. Begin by asking a local realtor what types of amenities are in demand in the neighborhood—and which ones aren’t. For example, if all the homes in the area have a kitchen with a granite countertop and state of the art appliances, then this one should, too. On the other hand, depending on what’s standard for the neighborhood, adding a spa or Jacuzzi might ramp up the rehab costs but make the property more difficult to sell.
Next, hire a contractor to price out all the work that needs to be done. This includes the changes suggested by the realtor, as well as all other improvements such as:
- plumbing or wiring upgrade
- structural changes, for example creating an open floor plan
- bathroom and kitchen upgrades
- window repairs or replacements
- floors and walls
- exterior repairs
- mold remediation
- security system
Ask the contractor to break down the projects into labor, materials, and delivery costs. Don’t mark down any of these costs unless you are 100 percent sure you can beat them. For example, if the contractor calculates $8 per square foot for wood flooring but you have a supplier who sells it for $7.25 per square foot, list your price. Otherwise, go with the contractor’s estimate.
As the owner of the property, you’ll be responsible for the carrying costs until the property is sold. These costs include property insurance and taxes, as well as utilities such as power, gas, and water.
The longer the rehab takes, the higher your carrying costs will be. Get your contractor and subcontractors to agree when they’ll begin and how long their jobs will last so you can accurately determine how much you need to budget for carrying costs.
Rehabbing often comes with unexpected challenges—even if you’ve had a thorough home inspection done before purchasing the property. Things like mold in a crawlspace, a slab leak, or a rotted floor can take you by surprise—and rack up new costs. That’s why it’s always advisable to add another 10 to 15 percent to what you’ve budgeted for the work and carrying costs. In most cases, this will be enough to cover any unforeseen expenses.
If you follow these guidelines, you’ll greatly reduce the risk of breaking your budget for fix and flip renovations due to unrealistic expectations and unforeseen problems. Instead, you’ll maximize your chances of creating an accurate budget that will allow you to make the desired profit on your fix and flip renovation.
You can get up to 100% financing on all rehab costs and you don’t have to pay for any unused rehab funds with a LendingOne Fix and Flip loan. If you have found that next fix and flip property, apply now for financing and get started today.