​Fix-and-Flip Investing: Estimating the Repair Costs

[Juan Diaz]

Fix-and-Flip Investing: Estimating the Repair Costs

Let’s assume that you are new in the house flipping game. You probably heard a handful of advice from the experienced investors telling you one of the biggest and most common mistakes in the business: underestimating repair costs.

This is true and always happening. You may be surprised by a ton of unexpected home improvement costs which in the end will spell loss instead of profit. Entering the house-flipping business requires having a careful decision and foolproof planning.

As a successful investor, I will be going to share a checklist that will serve as your guide on anticipating and understanding all the repair costs of your fix-and-flip project.

Read on and take note of these critical things listed below.

The House – Be careful

The most obvious thing is to determine the condition of the house. Imagine what the repair costs will be. You can simply do this by asking yourself, “What exactly do I need to fix?”

It can be just a cosmetic repair where you’ll just do a basic paint job and arranging the furniture or do a complete rehab and fix everything such as renovating the 20-year-old kitchen, putting additions, changing fixtures, and so much more.

Not just that, sometimes there are other things that you need to fix and the bad part is you don’t see them or you ignore them! There are instances that it seems everything is okay, but when you take a look at the foundation - it’s the complete opposite and signals a disaster.

How to make sure that you are not overlooking anything?

Prepare a budget repair sheet.

This is basically a spreadsheet with a list of repairs to be made in the different areas of the house. Include your cost estimates and ask your general contractor what to add on your list. The budget repair sheet’s main purpose is to help you track and take note of the repairs needed and its corresponding costs.

Work with a reliable General Contractor.

Why work with a general contractor? When you are new in the business, it’s given that you have limited experience. That is why it is important to have a general contractor help you walk through your investment property. Trying to ‘do it all’ by yourself and pretending that you know everything will just put you at risk of losing more money than hiring someone who knows what to do particularly in the aspect of construction.

With a good GC at your side, your work will be easier and you can have more time and use it to find your next property. Choose a general contractor who is reliable and who has good credentials. Most of all, he should be willing to stick to your project until the very end and do the right job.

Hire Subcontractors.

Not just GC, you will be also needing to hire subcontractors. Who are they? These are the workers that will be in charge of handling specific repairs to your project. They are skilled to perform a certain task. Your subcontractors are typically your plumbers, painters, electricians, and others. Though you can find and hire them by yourself, most of the GCs will help you find subcontractors and take out the hassle.

Don’t ignore the Carrying Costs.

It’s a common thing that young fix-and-flip investors overlook. Typically, repairing the property will take a few months to be completed, and during this period, it is your responsibility to act for the maintenance of the property.

Generally, the carrying costs for fix and flippers are property taxes, property insurance, mortgage payment, utilities (water, electric, gas), and HOA fees. You can also include marketing and advertising fees since all of these affect your budget.

Simply put, the key here is the timeframe of your fix-and-flip investment. The longer the project, the higher you will have to pay for the carrying cost – and it can ruin your budget. Together with the general contractor, keep an eye to what your subcontractors are doing and have clear communication with them regarding your expectations, plans, and budget. Create a schedule that everyone will follow to avoid potential delays.

Expect the Unexpected.

Not because you have followed the checklist above, it will guarantee that your renovation is a complete success. Though you’ve been careful throughout the process, there will be some bills that can come the least you expect it. Be always ready and do not underestimate the repair costs. Remember that it’s better to have an extra fund to add to your budget. Add at least 10% to your overall estimated budget.

Fix-and-flip investment is a continuous learning process. No house is the same. Learn as much as you can, anticipate the costs, and plan how to approach the things you don’t know. These all will guide you to a successful real estate investment experience.