Flipping Houses? Know Your Numbers!
We regularly get calls and emails from real estate investors who are looking to flip houses. And what a great idea that is. The trick is to buy at the right price and in the right location.
In 2018, our office has worked with several investors who are flipping houses. Our investor clients range from those who only want to do one a year to those that are pushing through several homes each year.
When you’re thinking of flipping a house, there are a few big numbers you have to have a good handle on. We advise our clients to do some backward thinking. If you want to make $30,000 profit on a house, then add that to the estimate of the renovations. You’ll want to have a good handle on the after repair value (ARV). Then, it’s a matter of subtracting the renovation cost and the desired profit from the ARV to come up with a maximum purchase price.
As an example, if the ARV of a property is $225,000, and it’s going to take $30,000 in renovation then you have your starting point. If you want to make $25,000 in profit, then your maximum offer would be $225,000-$30,000-$25,000 = $170,000.
Except you need to factor in your carrying costs, acquisition costs, and divesting costs.
None of those numbers are frighteningly difficult to figure out, but they do need to be figured out.
Acquisition costs include:
Prepaid insurance and taxes
Property transfer tax
Of course, if you’re paying cash, you can avoid loan fees, possibly appraisal fees, and even some of the prepaids.
Divesting costs include:
Carrying costs include:
So, if you want to get into or get deeper into flipping houses just make sure you’ve got all the numbers. Let us know what types of property float your boat, and we’ll keep our eyes open for you. And, if you’ve already run your numbers, maybe it’ll be helpful to get a professional second opinion.