It all starts with the numbers. This number might include a lump sum, an amount you’d be willing to lose if you have to sell the house quickly, or additional monthly debt payments you can handle if you end up not being able to sell the house. Then divide your budget into four parts: house purchase, renovations and carrying costs, selling costs, and cushion. Determine how much cash and/or how much credit you will use to do the flip.
Meet with a real estate agent to assess your house purchase price budget as compared to the rehab budget. Ask your agent to show you houses you can purchase and rehab within your budget and what the expected sale price and profit will be if you meet your estimates. For each property, request a comparable sales report. This shows the prices for which comparable homes in the area have sold.
Renovations and Carrying Costs
Calculate the buying, selling and carrying costs for several house prices in your initial budget. Include the down payment, real estate agent commissions and closing costs on the purchase and sale of the house, and any inspection fees, taxes and interest. Budget for a full inspection to reduce the chances of buying a house with problems that you might discover only after you begin your rehab work. Subtract these amounts from the total cash or credit line you have available. This will determine what you will have left for rehabbing, based on the different purchase prices.
Set a target budget ratio of home purchase to rehab costs. For example, if you have $30,000, you might use $15,000 for a down payment and $15,000 for rehabbing the house. If you can purchase a home for little money down, you can apply more of your budget to the rehab. Reserve 15 percent to 20 percent of your rehabbing cash or credit to deal with unexpected expenses. For example, if you have $25,000 worth of cash or credit for upgrading the house, budget only $20,000 to $21,250 for the rehab. Be sure to calculate and include carrying costs such as utilities and debt service, based on the timeline of your projected rehab, in order to be most accurate.
Use the amount of money you have budgeted to guide your real estate agent in selecting a house. Tell the agent your desired profit goal for the flip. An experienced agent will only present a home that you may purchase for a price that leaves you enough money to upgrade it and sell it at a comparable price for the neighborhood.
Review houses recommended by your agent, pricing the upgrades the agent tells you that you’ll need to make to get you your selling price and profit. Once the offer has been accepted, schedule time to meet with contractors to get exact costs on all construction work such as painting, electrical, plumbing, drywall, roofing, tile and cabinetry work.
Create budget documents for several home prices. List the purchase price on each separate document, including commissions, inspections, and closing costs. Include your budget remaining for renovation costs. Add your 15 percent to 20 percent rehab cushion amount as an expense. Enter your selling and closing costs and review your total costs to determine if they line up with your available cash or credit for the project.
Purchase a home that leaves you enough money to complete upgrades. This allows you to sell it for a price and in a time frame that gives you your desired profit. Base a realistic selling price and timeline on your agent’s assessment of what upgrades need to be made to create a comparable selling price for the neighborhood. To familiarize yourself with this process and all the steps, choose a few homes that you may be interested in and get calculating. Even if you don’t have an agent you can use sites like Redfin or Zillow. Remember, practice makes perfect.
So you’ve purchased a house to flip. Now what?
Check out my tips on how to get started when flipping a house.
Want to buy a property and renovate it?
I have a freebie checklist that will help you — 8 Things I look for When Purchasing a Home. Just click here to download it.
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