When Flipping, how do you determine how much rehab is needed

Question

When flipping homes, would you rather do a light to moderate rehab and see a quick profit or do you do a longer more extensive rehab to see maximum profit?

J Scott · Answer

Other people are commenting on the condition of the house and the market, etc.  All very good points, but assuming you're correct that you could resell quickly for a small profit or resell in a longer period of time for a larger profit, it doesn't answer your question...

The answer is, as it usually is, that it depends on your personal goals, opportunity costs and financial situation.

The first thing I would ask is:  If you sell the property quickly for a smaller profit, would you have another opportunity to invest the money quickly thereafter?  I see a lot of people who would take the quick sale for a better ROI, but then have nothing to do with the money after the sale -- they ultimately make a much worse return with their money sitting in a bank account waiting months for the next deal.

So, ask yourself what you'd do with the money if you took a quick sale.

Next, assuming there's an opportunity cost (you have another project to put that money into), ask yourself what the likely return on that other project would be.  Keep that number in mind, as that's your opportunity cost should you go with the longer rehab.

Next, you need to figure out which option makes more sense from a pure financial perspective.  Figure out your ROI -- I prefer IRR for something like this as it will take the length of time the money is invested into account.  If one or the other IRR is significantly higher, highly consider that deal.  The exceptions would be if the shorter-term project has a higher IRR, but you have no other deals to put the money into, or if the longer-term project has a higher IRR, but you have another deal with an even better potential return on the horizon.

Does that make sense?  There's no right or wrong answer to your question...just a right or wrong answer for your particular situation right now.

Andrew D. · Answer

I've always had more luck buying the houses no one else wants due to the amount of work.  I buy them cheap and then I know that all the work is done correct and use them for long term rentals.

Mark Gagner · Answer

This is one of those "it depends" questions.  Generally, the more value you add to the property, the more profit there will be for you.  But it really depends on each property and what is needed to maximize the value.  Doing more will increase your holding time and costs, so be sure that these costs don't exceed the value you are trying to create.  Also, certain items will add more value than others, so try to understand what is important to buyers in your market (good RE agents should be able to give that type of feedback).  At the end of the day, I think you just need to make sure that you are not "over-improving" the property for the neighborhood and buyer demographic.  In my hot market here in N CA, we try to create a wow factor for every home we remodel, because that almost always pays off in the premium resale value we are able to obtain.  This may or may not be the case in your market.  Again, I suggest talking to experienced agents in your market to learn what buyers want and will pay for....a great agent should be the most qualified person to answer your question.

Ndy Onyido · Answer

All,

Read J Scott’s /BiggerPockets ‘The Book on Flipping Houses-How to Buy, Rehab and Resell Residential Properties’…It’s a MUST read for everyone on this subject matter….excellent rendition with clear details of actual deals and rehabs.

Thanks

Nathan Emmert · Answer

I'm with J Scott... if you're in a target rich market, keep flushing your money through as quickly as possible... if you're in a more arid environment maximize the potential from each deal you do find to maximize your total profit.

Alesha Levora · Answer

Great responses already. Before doing any rehab I think it would be smart to do the research to find out what the houses that sold the most for had to offer and what features may have played a key role in the selling of that home. Research what the recent sales have been for that neighborhood. Do a quick calculation of the expenses versus the potential profits based on neighborhood comparables, for the house you're looking to flip. Conservative Future Sale Price - Expenses (not including renovation) - Lowest amount of profit you require = Budget for Renovation. Use that amount to determine how extensive to renovate the house. Best of luck!

Account Closed · Answer

It also depends on the condition of the house. In general, I'd say make it as nice and functional as you possibly can. You don't necessarily have to do high-end upgrades but whatever you do, should be done well.

Darryl S. · Answer

David; I have only done 25 rehabs so far here in Tennessee but here is a list of what I have seen as being the best for a good return for me on the ones that I have done.

1. Research and due diligence BEFORE you buy. Whatever problems are present you better  know exactly what they are and how much it is going to cost before you make your offer. I like to use a simple excel spreadsheet to estimate hours and materials cost.

2. Cleaning and Painting. I am not talking about swipe at it cleaning, I mean you can almost eat off of every sg ft of the property inside and out. A couple of trips to your local dollar general store for cleaning supplies on the cheap and lots of elbow grease will make a huge and profitable difference. Paint and painters caulk can be had for reasonable prices and when applied with a skilled hand is awesome.

3. Landscaping. Curb appeal has a huge return as it is easy and cheap if you use your head and are willing to put some elbow grease into it. Draws buyers like a fly to honey.

4. ANYTHING that would prevent the property from going FHA financing. You need the help of your local FHA loan experienced real estate agent on this if you are just starting out. It is the most sickening feeling when you had already reached your budget and you feel good about your current contract and then BOOM the FHA or VA inspector comes back with a huge expensive laundry list of to do items.

5. Kitchens and master baths. Be very careful here, it is possible to do on a budget but it is the easiest thing to get out of control cost wise. If you have done your research and due diligence then you are going to know if that great looking 300 dollar formica countertop and stick on vinyl floor versus the 2000 dollar granite and ceramic tile floor is going to be acceptable in your price range and neighborhood.

When Flipping, how do you determine how much rehab is needed

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