Turn on any home improvement channel and you’re bound to see a variety of house flipping episodes where carpentry savvy entrepreneurs make a fortune in buying a junky old house and turning it into a modern paradise—then selling it for a massive profit of course. Real estate investment can provide fantastic profits, and many optimistic entrepreneurs have decided to join in. Unfortunately, the process of flipping a rundown property and selling it quickly for a massive profit isn’t as clear cut as these hour long episodes make it seem. Hundreds of thousands of dollars and endless hours of work are staples of the fix and flip process, and it’s important to understand the true cost of this venture before purchasing that fixer upper.
Assess Your ARV
It’s important to take a look at your After Repair Value (ARV) before breaking ground on your flipping project. This number is best determined by taking a close look at comparable properties in the location you’ve been scouting. If you need help with these comparisons, consider hiring the services of a realtor. Be sure to hire an individual that has immediate access to the Multiple Listing Service (MLS) in order to get the most comprehensive view of your opportunity. While comparing, keep in mind that your focus should remain on the homes that have already been sold. If you find there’s a multitude of houses for sale in a given area, it may indicate low demand, and you’d be better suited to look elsewhere for investment opportunity.
Most of the money you’ll spend on a fix and flip lies in the actual renovations. Depending on the scope of your project and the demographic you’re looking to appeal to, renovation costs can truly run the gamut. The majority of novice house flippers find that renovation costs quickly exceed their estimates, and unforeseen challenges can extend the timeline, further incurring excess cost.
It’s important to consider the features you plan on including with your renovation, which are often dependent on locale and target demographic. If you’re looking to make an upscale property, you’ll need to invest more in high-quality materials and incorporate signature touches buyers won’t find elsewhere. Looking to capture buyers in an eco-conscious market? You’ll likely need to invest in expensive green upgrades like solar panels or drought tolerant turf. There are ways to limit these costs. For example, sustainable upgrades can be funded through a PACE financing program like the HERO Program from Renovate America. When it comes to upscale additions, you may need to approach angel investors from a network like Angel.co. It’s important to consider all of these costs—and the ways you’ll finance them—before jumping in headfirst.
How Will You Finance Your Fix and Flip?
If you don’t have personal capital to finance a fix and flip, you’ll have to pursue other measures, and traditional lenders generally aren’t amenable to these types of real estate ventures. Most novice flippers approach private lenders, and while the money is more easily attained, it comes at a higher cost. Hard money loans can come with extremely high interest rates, making your costs even greater in the long run. However, this is often the only way to finance a fix and flip, especially if you have no prior experience in the industry. It’s unavoidable in most cases; these lenders are taking on a great deal of risk by approving your loan, and they’ll be sure to get the money necessary in order to protect their investment.
The amount you’ll spend on interest depends on numerous factors: the interest rate you agree to, how long it takes your team to complete the planned renovations, and how long it takes you to sell the property in question after completing the flip.
It’s important to insure any and every business project, and house flipping ventures are no different. Take your time and look into various policies. Keep in mind that a basic homeowner’s policy is only protecting your assets in the case of a fire. Due to the extensive construction inherent to a house flip, there are plenty of risks associated with this venture. Be sure to browse a variety of insurance companies, and use legal counsel to ensure you’re completely protected should the worst happen.
Flipping a home isn’t an easy endeavor, and the costs are ongoing. Ensure you’re prepared with the correct financing before beginning a house flip and make sure you’re prepared to commit the time and energy into this challenging business aspiration.