How Likely Is It?

[Jasmine Claye]

I watch a lot of RE shows about flipping and solely renovating. I know that there is more behind the scenes then what is shown on TV but on these shows, they seem to be able to do a renovation for between 30-40K. Including kitchen & bathroom. Reading some of the threads on here, I have seen that people claim that 30K would only cover the basics. Painting, Tiling, Cleaning. I know of a local place that sells quality yet cheap cabinets, flooring, doors, etc so this is where I will buy from. As a carpenter I figure I can purchase these & install them myself and leave the major work to the contractor, plumber, electrician, etc. Saving me a couple thousand bucks. So my question is, how likely is it to be able to do a renovation for 30-40K?

[Jon Holdman]

Hard money will cost you around 8% of ARV. That assumes four points and 15%, 70% of ARV for the loan amount and six months hold. So, you'll borrow 70% of ARV and take four points off the top. You'll pay an additional 7.5% for six months for a total of 11.5% of the loan amount which is 70% of ARV, which gives 8.05% of ARV.

If you can find cheaper money, that will help. But it won't get you all the way to a $30K profit.

If you have a real estate license and can list it your self and make your own offers on the purchase, you can earn pieces of the commissions on both ends of the deal.

Here's a breakdown, again, with my assumptions:

Purchase: $80,000
Rehab: $30,000
Selling price: $160,000
Hard money loan amount: $112,000
Purchase closing costs: $1,500 (include the legal & recording costs, lenders title policy, inspections, certifications, appraisal, insurance.)
Hard money points: $4,500 (probably another $500-1000 in other costs here, too)
Holding costs: $1000 (more insurance, utilities, etc.)
Interest: $8,500

Total so far (this is the money you need to do the deal): $125,500

Now you sell
Price $160,000
Closing costs: $3,000
Commissions: $9,000
Seller concessions: $5,000
Net from sale: $143,000
Payback loan and your investment: $125,500
Profit (pretax): $17,500

Now, say you can borrow money at 8% and no points. So, its 4% for six months instead of 8%. That save you about $6,000.

If you have a license you can get maybe 2% on the purchase and 2% on the sale. That's another $4,800.

OTOH, if the rehab is overbudget by 25% (not at all hard to do), that's $7,500 less in profit. If it takes nine months to sell, that's more in interest and holding costs (be sure to price "builder's risk" and "empty house" insurance policies, don't bother buying "homeowners", it won't pay off if you have a claim). If your buyers find something they don't like (e.g., a imperfect sewer line, ask me how I know about this one), you'll pay to fix that. too.