Marcus LeBeof continues his list of six steps to entrepreneurial happiness in the residential real estate market.
Step #4: Do the House Flipping Math
When doing your initial house flipping analysis, you can do a little “napkin math” to estimate if the house is a winner. The first thing you need to do is determine the potential selling price of the house when it’s all fixed up – this is what’s known as After Repair Value (or ARV). Then simply subtract the purchase price, repairs and all your monthly carrying costs. What you have left over is your profit.
If all this initial math points to profitability, then you may have an excellent flip opportunity on your hands and you should consider purchasing the house.
Step #5: Manage the Rehab Tightly
Once you do purchase the house, don’t just rely on your contractor to handle and supervise all the repairs. Make sure you manage this process tightly if you are on your own, but better yet hire a professional contractor to oversee all the rehabilitation, especially if the rehab is extensive. Make sure you personally supervise the repairs to ensure that they are being carried out properly and on budget.
In the end, your profit largely depends on what you pay for the house initially, but making sure that the repair costs stay within your budget is equally if not more important. Likewise, overextending yourself by doing more than your budget allows on the rehab or taking your eye off the ball and allowing your contractor to run free are two of the quickest ways to ensure that your make profits will go up in smoke.
Step #6: Work Fast, Make a Profit
Time is of the essence when flipping houses for profit. It’s a race against the clock because the longer the rehab takes, or the longer the house sits on the market once it’s done, the less profit you make. Soft costs such as financing payments, insurance payments, town taxes, utilities and other carrying costs, all of which have to be paid at regular intervals, add up to diminish your profits the longer you own the house.
It’s simple—the shorter the time you hold onto your investors’ money, the better your profits will be, so make your improvements fast. Do the job well, but do it fast. Make sure your contractors do the job on budget and on time and hire good real estate agents who help you price the final product so it sells quickly. In all of our house flips, we estimate six months from purchase to sale, but factor in a few additional months of expenses to make sure we profit on each and every flip we do.
I constantly remind my mentees to be intentional in everything that they do. If you want a certain type of job, you need to network with the people who hold the position you aspire to so that you may learn their path and avoid pitfalls. If you want to attend a certain institution, you need to identify the members of the admissions committee and find ways to appeal to their interests so as to stand out from the crowd. With investing, be it in real estate or otherwise, it is always wise to take on a mentor (or two) so that you may benefit from the collective wisdom of those who have gone before you. And you need to assemble the right team of advisors to ensure that you can navigate the inevitable problems efficiently and successfully.