Alrighty peeps, you asked and I am answering!!
This is the first of several posts answering your questions about the “how” of flipping – we’re about to embark on our fifth flip in 3 years, and I’m hoping that these posts will shed a little light on the whole flipping biz and maybe even give a few of you the boost of confidence you need to start flipping houses on your own!
I could talk forever about each one of these topics, but I’m aiming to give you guys a broad picture of each topic instead of focusing on each tiny detail – if you want more discussion about anything, just ask!
I thought I’d kick off this series by talking about budgeting for a flip – after all, if the budget gets out of whack and goes into the red then your foray into flipping will be a fail. And nobody wants that! So let’s get down to business . . .
Here’s what you guys wanted to know about budgeting:
I understand that you don’t want to reveal hard numbers, but I am really interested in percentages. Can you give a percentage profit over the original purchase price? ~ Jen, Rachel W.
I am wondering about the profit percentage that you target. As a real estate agent, I’m sure you know what a house could sell for if it had the proper upgrades versus what it is listed at since it is so out-dated (as all of your flips have been). So, instead of strict financial numbers, could you perhaps give percentages? For instance, 100% is your target list price, x% is your purchase price, y% is your budget for upgrades, and z% is your profit (less a%–seller closing costs)? I am very interested in this aspect of it and I’m sure you track it all with your lovely Excel spreadsheets! I’m envisioning a few pie charts. :) My husband and I recently purchased a home free and clear that will be a future rental when we move to a bigger home and I am debating how much I want to put into it and how much time I want to personally spend painting it! I am also interested in flipping in the future. ~ Karen
Goodness, I love the chance to break out a pie chart. :) I’m so glad that you guys asked about how the budget breaks down because it was really eye-opening for me to see where all the money goes, and how our profits have increased as we’ve gotten smarter and more efficient in this business.
The pie charts below break down the budgets for our last four flips, with the percentages calculated from the final post-renovation sales price.
In a nutshell, our “average” budget for the past 4 flips has broken down like this:
Here’s a bigger picture of how the budget for each individual flip has shaken out:
As you can see below, we barely broke even on our first flip. Hypothetically speaking, if we sold our first flip for $100,000 only $4,000 of that would have been profit – yikes!!!
I can’t stress enough that you should go into this with realistic expectations – you’re setting yourself up for failure if you expect to hit it out of the park with your very first flip. That being said, we wouldn’t have continued in this business if we were only making 4% profit on each flip – all of the time and effort that goes into flipping a house isn’t worth it (at least to me) for just a 4% return.
So how do you increase the profit? That extra money has to come from somewhere, so our goal with each new flip is to streamline the budget as much as possible in the other four areas of the pie chart – the purchase price, labor costs, material costs, and carrying costs. We’ll talk about each one of those areas in more detail later in the series. For our second flip, our profit rose by 6% because, proportionately speaking, we were able to dedicate a little less of our budget to both the labor costs and the purchase of the house. Our labor costs were lower because we didn’t have a budget-sucking (but ultimately gorgeous) pool to contend with like we did for the first flip. I may wind up eating my words some day, but no more pools!!
Again, we squeezed out more profit – this time largely because we got the house for such a ridiculous steal. You may recall that we put in an offer on that house based on the list price alone and got it under contract without even seeing inside the house. Actually, now that I think about it I’m not sure I ever told you guys about that!
For our fourth flip, we sold it in just 4 days so our carrying costs were lower than usual.
You guys specifically asked about what profit we shoot for when we’re flipping a house. For our first flip, we dreamed of huge profits but we were really just hoping to make a little money to show ourselves that we could really do this. Our goal as we moved on to the next flip was to increase our profit (obviously) and now we plan on making between 15-20% with each flip. That’s the plan, at least.
While 15-20% is a good return for us, we certainly can’t speak for everyone. You may be delighted with making 5% on a flip, or you might be disappointed with 25% – you’re the only one that can decide how much value to put on your time and effort. When determining your goal profit, consider whether flipping the house will take time away from other money-making activities (i.e., your day job), how much hands-on time you will be putting into the project, and whether the profit from this flip is necessary to cover your living expenses or if the profit is just “extra” money.
Do you factor in financing costs (no matter which way) into the cost/profit of the house? ~ Nora Rose
Absolutely!!! Not only do we factor in financing costs (which are labeled “carrying costs” in the pie charts above), we factor in every conceivable cost that we might encounter during the renovation. Examples of some of these include:
It’s absolutely imperative that you factor all of these goodies into your budget – they can take up a shocking amount of money (8% of our average budget!) and if you don’t plan for these costs you can wind up over budget without even realizing it.
How do you estimate the overall remodeling costs? I will be remodeling my own house and really have no idea where to start for puttting together a budget. – Jen, Crystal P & Maggie
Ah, that’s an excellent question. Estimating how much a renovation will cost comes down to 3 things:
When you’re first starting out, you will need expert advice as to how much things are going to cost – that’s where your contractor comes into play. Even after you’ve done 10 flips, your contractor’s insight will be invaluable for estimating your renovation expenses because there are likely to be things that you just don’t know – that’s why you hire a contractor, right? And if you’re planning on contracting the job yourself, the only way you’ll be able to estimate your renovation costs is to get trades to walk through your project and give you estimates. Yes, getting bids can be a pain and a time suck but it’s totally necessary to have an accurate picture of your budget.
However, here’s something to keep in mind – some trades and contractors won’t bother to come give you a bid until after you’ve bought the house – after all, they don’t want to waste their time if you’re not going to wind up buying the house. Even if they are willing to take a look at your project, they might just give you a “ballpark” estimate as opposed to a precise bid, which can make it difficult to have an idea of how much you’ll need to invest into the home before you buy the house.
So how do you get around this problem? Research and experience will help you to an extent (discussed in detail below), but what if you don’t have any prior experience with renovations? If that’s the case, I would recommend teaming up with a contractor from the very beginning (more discussion about whether to hire it out or DIY here). Yes, your contractor will just have to have faith that you will eventually buy a home to flip, but the contractor is more likely to take the time to give you bids if he knows that the job is his and you’re not running 10 contractors through the house to see who gives you the best bid. That being said, don’t ask your contractor to give you a bid on every house you like. Make sure that you’ve thoroughly vetted the house, run the numbers, done your due diligence, narrowed the field to just 1 or 2 potential houses (and possibly even gotten one under contract) before you ask your contractor to give you a bid – getting thorough and accurate bids is very time-consuming and you don’t want to waste anyone’s time – that’s a terrible way to start off a relationship!
Moving onto research – something that we do constantly is research. We research materials, trades, home prices, etc. and you should as well. The more information you have floating around in your head, the better. For example, contractors often put “allowances” into their bids for materials – tile allowances, appliance allowances, allowances for plumbing and electrical fixtures . . . pretty much anything that the homeowner would be supplying to the project can be an allowance. Your contractor may budget $1,000 for the tile allowance, thinking that you want builder basic tile – but what if you want the entire house tiled in carrera marble? You need to be able to pick up on the fact that the allowance will not cover your material costs and correct the budget.
Now that we’ve completed 5 renovations, we’ve gotten pretty decent at estimating how much money we’ll have to put into a flip to get it ready to sell. That’s where the “experience” portion of the equation comes into play – after you’ve got a few flips under your belt you’ll be able to tell whether a particular house is going to cost you $25k, $50k or $100k. In fact, before we even have our contractor walk through a potential flip we have plugged our own estimates of labor, materials and carrying costs into a spreadsheet to give us an idea of our potential investment. You won’t likely be perfect in your estimate, but you can get in the ballpark.
Whew, I think that’s it for budgeting for a flip! Keep an eye out for the next post in the series, and in the meantime feel free to ask any questions in the Comments! :)
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