Forget about all the TV Shows! Flipping properties is not easy. Buying real estate, renovating properties, and putting them back on the market is a real estate investment strategy that requires knowledge. Many TV Shows feature real estate investors making the process look fun, easy, and profitable. Far too many people get into real estate investing without gathering the proper information or educating themselves. They underestimate the amount of time and money that a flip requires, and overestimate their knowledge and skills for a successful flip.
In this article, Kyle covers the key points you need to know about flipping properties. As a successful real estate investor and local realtor in Rhode Island and Massachusetts, Kyle understands the market and wants to share his insights to educate people looking to flip properties in the area.
Find a Good Contractor
Having a contractor that you trust is key to a successful flip. A good contractor needs to work on schedule and most importantly stay on budget. If those key components do not work, you will not have a chance to make a successful flip. In other words, you are at risk to lose money. It’s not uncommon that people do not make a profit when flipping properties for the first time.
References. You need to treat hiring a contractor like hiring anyone else on your team at work. If a professional contractor was referred to you by a friend or someone you trust, you still need to double-check that they are a good fit for your project. Check references and request a list of past flips they have worked on.
Payment & schedule. A contractor asking for a large sum upfront can set off a red flag. When flipping properties, it is standard to pay for the materials needed however, you should never pay for work that has not been completed yet. From the beginning, it is important to agree on a payment schedule and release funds as the job gets completed based on the agreed-upon milestones of the project. The scope of the project, costs, timetable, and all other relevant components need to be part of a contract which the contractor should agree to and sign.
Project Management. Most good contractors are usually busy on multiple projects. You need to check that the one you picked out is going to be available and show up. They may tell you what you want to hear but make sure to hold them to the timeline and schedule you agree together. Project management is often the most challenging part of working with a good contractor when flipping properties.
Licensed & Insured. Before committing to a contractor, you should always request a copy of their current license and insurance verification. A contractor without the proper documentation can be a major issue in case something happens at the property. If your contractor is not licensed and insured, you need to look for another one.
Related: Working with contractors
Understand The After Repair Value (ARV)
Flipping Properties 101
First, it is important to determine the After Repair Value (ARV) What is the property worth after renovation?
Calculating the ARV is an important step in every house flipping project. It provides the estimated value of a property once improvements are made. It helps real estate investors measure whether or not there is enough margin for the flip to be profitable.
With knowing the ARV, you run the risk of wasting a lot of time and money resulting in an unsuccessful flip.
How to calculate ARV?
Formula: Property Current Value + Value of Renovations = ARV
The first step is to determine the property’s current value or also know as the “AS-IS” value. It’s highly recommended to work with a professional real estate appraiser to provide you with this information or work with a realtor who is an expert dealing with investment properties. They can quickly identify some issues that can impact the property value and provide an accurate estimate value of the investment property you are looking to buy.
Determine a Renovation Budget
The second step of flipping properties is to determine the renovation budget and make sure it is accurate. This is usually where people run into issues and start losing money. You also need to allow some room in your budget to cover unforeseen repairs and issues. Once you start tearing down walls, it is not unusual to discover new plumbing or electrical issues. These additional repairs will cost you money to fix so make sure your renovation budget can support that.
Perform a Comparable Market Analysis (CMA)
Once you determine the ARV, it is key to look at real estate comparables listings (aka comps). These comps are properties similar to your investment properties that recently sold or are currently listed on the market.
If the ARV and the value of the house comps don’t match, there is a chance that you’ve made an error in your calculation or that your flipping project is not a good investment.
You Should Be Aware Of The 70% Rule
There is a general rule of thumb that many real estate investors apply to determine the price they are willing to pay for an investment property. Known as the 70% rule, it states that investors should not pay more than 70% of the ARV of the investment property, minus the cost of repairs. This calculation ensures a 30% Return on Investment (ROI).
Formula You Can Use When Flipping Properties
(ARV X 70%) – Cost of Repairs = Max. Purchase Price
ARV = $150,000 / Estimate cost of repairs = $25,000
Maximum Purchase Price = 150,000 x 70% – 25,000
Maximum Purchase Price = $80,000
The Seyboth Sessions – Episode 3
The simple math of flipping properties is easy but you need to be realistic. It is important to really understand the numbers.
- ARV needs to be right,
- The renovation budget initially is going to be lows so you need to allow some room for unforeseen repairs.
- You need to make sure you are not overpaying for the property.
- Most importantly, you need to make a profit.
If the final equation includes a profit that you are comfortable with, and you have followed all the other steps discussed here, there is a much greater chance you will be successful at doing a house flip project.
If you are looking to invest in real estate in Rhode Island or Massachusetts, feel free to browse our investment properties. As a local realtor and successful real estate investor, Kyle Seyboth can help you acquire investment properties and be successful at flipping properties.