Flipping 101 - Is it time to quit your day job?
Contributed by Team Hazzi
For my very first article I felt it made sense to write about something that has had the biggest impact on my own life financially and that’s the fine art of flipping houses.
Many of you have seen those “Flip This House” shows on the real estate channel and thought to yourself, “I could do that!”
The fact is many people just like you, right here in Kelowna, do this as their primary source of income. In the real estate flipping business, an eye for what looks good, some DYI skills and of course a little investment capital can be put to extremely good use.
This is without question my favorite aspect of the real estate business to consult clients on, as this is something I have not only grown up with thanks to my folks, but have engaged in for over a decade in numerous projects every year personally. I find acquiring and rehabbing property incredibly rewarding and it’s my pleasure to share what I’ve learned.
What is a Fixer Upper?
For those unacquainted with the term, a fixer upper is real estate bought from distressed homeowners, fixed up (hence the term fixer upper) and sold at premium prices. In a way it is like finding a jewel in the rough, polishing it, and sending it back to the market for a profit.
Many have gone on to be millionaires from this kind of venture. If you look at it, theoretically, it makes a lot of sense. However, no matter how attractive it may seem to be, this type of business isn't without its risks.
Fixer Uppers involve a fair chunk of money, assumptions and risks. You assume that the real estate you are buying can be fixed up and sold at a higher price. You also assume that the house can be brought up to a state where it is attractive to those seeking a home to move into. This is why having a qualified expert on your team is so incredibly vital to your overall success.
1. Goals – You will have to set realistic goals for your business. Fixer upper homes can earn a good deal of money, but it wouldn’t hurt to set a conservative figure as you learn the ropes. Sometimes conservative is good – especially when you are just starting to get the hang of a venture.
Some people set unrealistic goals, like aiming for $100,000,000 at the onset, hoping they can hit a home run with one extensive project and sell at an incredible return. However, it would be better to keep with a realistic expectation. Most fixer uppers will agree that $100,000 is a good amount to expect per year in a fixer upper venture. This figure is taken by considering the sale of 3 fixed up houses with a cut of $30,000-$35,000 per house.
You will also have to consider what this business will mean to your life. Will you give up your day job just to focus on this business? Will you do this on your own free time? Or will you try a little of both to see where you do best?
Here is an illustration of a successful flip:
The tried, tested and true formula for successful flipping
First, there are 3 ingredients to successful flipping
1. Cash- Funds available to you for down payments and renovations
2. Credit- Your ability to obtain the necessary financing for the project
3. Competency- The actual design and skilled labor
If you don’t have all three, partnerships are a great idea when it takes more than one person to complete the 3C circle.
Eg: Party 1 has Cash + credit, Party 2 has competency
Party 1 has Credit and 1/2 cash, party 2 has Competency and 1/2 cash
Party 1 has Cash and party 2 has competency and credit
Know your numbers
1. Aim for a minimum profit margin of 10% of the Purchase price
2. Budget 10-15 dollars per sqft. of the property
3. Include professional fees 3.5-4% of future sale price
4. Carrying costs = Interest cost + utilities + property taxes for holding period
5. Property transfer tax is 1% on the first 200k and 2% on the balance
Then use these numbers and work backwards to find the appropriate purchase price
Illustration of Success
Sales price $244,000
Reno 10$/sqft $13,000
Professional fees $12,500
Carrying costs $ 3,000
Land Transfer tax $ 1,800
Profit $ 33,700
Purchase Price $180,000
This is really just the tip of the Iceberg. Castanet and Vantage West Realty have partnered to bring as much value and as many resources to our readers as possible.
Free Downloadable PDF’s include: Project estimator work sheets, The 50 steps to flipping, and tips on where the biggest return on investment can be found for various renovations.
Read more Investment Real Estate articles
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- 2013 review: What worked...what didn't Feb 2
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- The 'L' word Mar 26
- Rent to own, good or bad? Feb 22
- Waking the Dead...Equity Jan 15
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