Many real estate investors are motivated by the thrill of the fix and flip, which entails buying, renovating, and selling a home for a profit. However, that excitement can rapidly become a financial burden without a well-planned budget.
Read on to learn how to create a comprehensive budget for your next fix-and-flip project.
Demystifying the Fix and Flip
Fix and flip properties are a specific investment strategy. Here, investors aim for short-term gains. They target undervalued properties, purchase them, and then quickly sell them after repairs and renovations. The extent of these renovations can range from minor cosmetic touches to major structural overhauls.
Building a Robust Budget
A successful fix-and-flip budget depends on careful planning and thorough cost accounting. Let’s break down the key cost categories you need to consider:
House Acquisition Costs
This contains the purchase price and all closing costs associated with the property. These include loan origination fees, appraisal fees, inspection costs, title insurance, homeowner’s insurance, property taxes, escrow requirements, and any additional fees levied during the closing process.
Upgrade and Renovation Expenditures
This category includes all of the planned maintenance and upgrades for the property. Here, finding a crucial balance is crucial. The total cost of purchasing the property plus the proposed modifications cannot be greater than your available funds or the projected market value of the completed project.
Many seasoned fix-and-flip investors leverage the 70% Rule. This rule sets that the purchase price of the property, combined with the planned renovation costs, should not surpass 70% of the After Repair Value (ARV) of the property.
Carrying Costs
If you don’t have enough money to buy the property upfront, you’ll need to take out a loan. But remember, this means you’ll have ongoing expenses to cover. These include homeowner’s insurance, property taxes, interest on the loan, and even utility bills if the property is empty.
Selling Costs
A distinct set of costs must be assessed when selling the refurbished house. Consider realtor fees (typically around 4%–7% of the selling price), transfer costs, and recording expenses. Overlooking these expenditures during the budgeting process can significantly impact your profitability.
Project Contingency Reserve
Unexpected issues and modifications are unavoidable in any renovation project. A buffer within your budget, often a project contingency reserve, is essential to address these unforeseen circumstances. A recommended practice is to allocate 15% to 20% of your renovation budget as a contingency fund. This way, you’re prepared for unpredictable challenges without disturbing your projected profits. Think of it as a cushion that can be used to make dealing with overages that much easier.
A well-planned budget safeguards your financial interests and lays the foundation for a profitable fix-and-flip project. So, take the time to strategize and budget wisely, and you’ll be on your way to maximizing returns in the exciting world of real estate investment. Hard Money Georgia can assist you if you wish to supplement your fix-and-flip budget with a hard money loan. Contact us now to learn more.