How Likely Is It?
Real Estate Investor · Charlotte, NC · Member since 2011 · 133 posts · 5 votes
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?
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.
Hi all! I'm a big fan of those shows too, but often times when they give the home's "new" value or the list price, they never address if that's the appraised or retail price, if a home actually sold for that price, what market they're in, or what year the show was filmed. And a lot of the shows come from Canada, so there's the USD->CAD dollar value difference (i.e. currency not clarified), plus the Toronto area, where alot of the shows focus on, is still an extremely competitive seller's market.
When doing a rehab budget, I like to reduce the total amount by 20% initially and keep it for 'surprises', which you will always run in to! And that 20% is still conservative, IMHO. But if you luck out and don't need to spend it, that's just more $$ in your pocket! But I figure the full 100% in when determining max purch price. So if you buy a house for $100k and think rehab will be $30k, use $24k as your initial total budget when itemizing - do all the core stuff first (structure, electrical, plumbing, HVAC, etc) and then work in the finishings. Personally, I think that's where you can make or break maximizing your profit, and where the TV shows give lofty expectations (eg $3500 for a rain shower head??).
And finishes depend on the ARV too - in my area, I'd never do granite countertops or solid hardwood floors in a $100k house (well, unless it was MY house, LOL). Instead, I'd look at tile or laminate countertops and engineered wood, laminate, or carpet. But, if I had a $200k home I'd be doing granite and solid hardwood as standards. Even something like the furnace or hot water heater - is 92% efficiency sufficient vs. the 95%+? Is a standard HWH OK vs. a tankless? I strive for high quality, but as another poster mentioned it's a property you're selling for profit, not your own home.
Maybe start out by signing up for mailing lists for the supplier stores you'll frequent, including the manufacturers' sites of materials you like. I've gotten TONS of coupons that way! For appliances, see if there's a Sears outlet in your area (i.e. Sratch n Dent) - I always have good luck there and a lot of times there's no damage (floor model) or the damage won't be seen (wall side of a stove). Prob an avg of 50% off retail, if not more.
Oh duh, I just realized this post is old, but oh well - I typed all this already so I'm posting! :)