As someone in the commercial end of the real estate industry, that is large scale projects and developments with UC Funds, I have learned that many of the same rules that apply in the real estate macrocosm can be scaled down to the microcosm of individual residential projects. The first thing you need to know is that it is never as easy as it looks or sounds. Flipping houses is a lot of work and takes a great deal of planning and budgeting. However, there are some dos and don’ts which can make or break a project. I have put together some basics to keep in mind if you are just starting out or thinking of your first real estate project.
Do it properly
There are those out there who buy deeply distressed properties, do very little in the way of renovations and then sell them on for a profit. If you want to make a real profit in the long term, it is advisable to ensure your renovations are done right with a real aesthetic value in mind. This type of house flipping not only provides beautiful, sustainable living spaces for families and individuals, it helps strengthen a community through housing recovery. It’s more ethical and the bottom line is, you’ll make more money. If you start with this in mind from the outset, it will help you make better decisions as you work toward an overarching goal.
Be realistic about your cash situation
Examine your financial resources. Remember, no investment should put you in the hole so avoid the temptation to over extend yourself. You may need a partner which can be a very good thing. If you don’t have enough money of your own, you can certainly approach a bank or private money lender. If you would rather team up with someone who wants to be more involved, make sure you are on the same page in terms of what you want to achieve, how much you plan on spending and over what time and how the responsibilities will be divided.
Find an undervalued property
The trick to making money when investing in real estate is purchasing the right property. Essentially, you make your money when you buy. That means, always buy a property that is below market value to begin with. These are properties with very motivated sellers. They may need to relocate quickly or simply need to make some fast money. Don’t be afraid to knock on the doors of distressed properties or properties with for sale signs out the front in your target neighborhoods.
Become a genius at “napkin math”
You’ve found a property you think is right. To make sure you go into this with your eyes open, you will need to perform a quick assessment of the project’s viability. The first thing to do is figure out the eventual selling price after the house is completed. This is known as After Repair Value (ARV). Then subtract the purchase price, repairs and monthly rolling costs. What’s left over is your profit. This may take a little practice and a little know-how regarding the cost of renovations. However, if you don’t have any idea of how much you expect it to cost, it might not be the best starting point.
Project manage your renovations
You might have an excellent contractor who can oversee every aspect of the property’s rehabilitation. This can be expensive and first timers often choose to manage the process themselves. This entails making sure the work is done properly, in a timely manner and stays within budget. Allowing the contractors to continuously go over budget is the first warning sign that you will not make a profit, be firm from the outset and you will get what you want.
Remember, this is a time-sensitive project
The more time it takes for the renovations to be complete, more of your money is going down the drain. This means, work fast, sell fast. The longer the renovations take and the longer the house sits on the market, the less profit you’ll make. Do the job well, but do it fast and make sure you hire good real estate agents who price the property so that it sells quickly. It is realistic to expect a 6 month time frame from purchase to sale.
Whether you flip a house once and decide it’s not for you or plan on flipping houses for the foreseeable future, these types of projects involve a learning curve that takes time. When I started UC Funds with a small but dedicated team we had all worked on several large scale projects and through sharing our experiences and continuously learning from our partners we have been able to treble what we once thought we were capable of. I always start any project be it large or small by stating “If you think it is possible, it just may well be.”