Budgeting for a fix and flip property can be challenging, given the myriad of variables involved. However, in the world of real estate, a well-structured budget is not just important; it’s absolutely critical. A sound budget can make the difference between a profitable project and one that breaks even or worse. This becomes especially crucial when you’re planning a “fix and flip” project, and Davis Legacy Ventures is here to guide you through the process.
What Is a “Fix and Flip” Property?
In the diverse realm of real estate investing, strategies can vary greatly depending on market conditions and investor goals. Fix and flip investors focus on short-term investments. Their objective is to identify properties they can purchase at a discount and quickly resell, or “flip,” for a profit. The “fix” aspect involves making necessary repairs or renovations, ranging from minor cosmetic enhancements to substantial overhauls.
Fix and Flip Budgeting
When determining your budget for a fix-and-flip project, it’s crucial to account for all costs and include a cushion for unforeseen expenses. Start by assessing the total funds available for your project to avoid overextending financially or investing in properties with excessive upgrade and renovation costs.
There are typically five key categories that require budget allocation:
- House Purchase Costs: This includes all closing costs associated with the property acquisition, encompassing loan origination fees, appraisal expenses, inspections, title insurance, homeowner’s insurance, property taxes, and any escrow requirements.
- Upgrade and Renovation Expenses: These encompass all necessary repairs and renovations, representing a balancing act between renovation costs and acquisition expenses. Ensure your combined budget for both categories remains within your financial capacity and doesn’t surpass the property’s expected value.
- Carrying Costs: If you can’t pay for the property and repairs in cash, you’ll incur carrying costs from the loan. Understand the exact fix and flip loan amount, including interest expenses, homeowner’s insurance, property taxes, and utility costs.
- Selling Costs: Selling a property involves its own set of expenses, including realtor fees (typically ranging from 4% to 7% of the purchase price), transfer costs, and recordation expenses. Overlooking these costs can impact your profitability.
- Fix and Flip Project Cushion: It’s crucial to include a cushion in your budget to account for unexpected issues and changes that commonly arise during renovations. A general rule of thumb is to allocate at least 15% to 20% of your rehab or repair budget as a cushion, ensuring you’re prepared for any unforeseen events.
The 70% Rule
In the world of fixes and flips, many investors adhere to the “70% Rule.” This rule dictates that an investor should pay at most 70% of the property’s ARV (After Repair Value) minus repair and renovation costs. The ARV represents the property’s value after all necessary repairs and upgrades.
For example, if a property has an ARV of $100,000 and requires $20,000 in repairs, the maximum an investor should pay is $70,000. By subtracting the repair costs from the estimated purchase price, the investor would make an offer of approximately $50,000 to the seller.
It’s important to note that while the 70% Rule is a valuable guideline in many markets, there might be exceptions where it doesn’t accurately predict a property’s value.
Determining renovation and rehab costs is not an exact science and requires experience. While online tools can assist with cost estimates, local knowledge remains crucial.
If you’re in search of a fix and flip loan for your next project, don’t hesitate to contact us. Let Davis Legacy Ventures assist you in financing your fix and flip project quickly and affordably, starting today!
