Just bought first flip!!

[Bryant Blackwelder]

Hey guys!!!

Just bought our first home in Knoxville, TN!

My question is how do you determine your rehab budget if you plan on flipping within 3 months

Thanks!

[Dave Foster]

@Bryant Blackwelder, You may want to adjust. your time horizon if you want to 1031.  You cannot 1031 a house that you purchased with the intent of reselling.  So fix n flips do not qualify.  most people feel comfortable at a hold of a year.  To use a rehab model you would fix and rent and if you want to refi to pull cash out for your next deal until that one is ready to sell.

If you don't adjust then your profit margin will drop dramatically. Be very careful with your proformas anyway as this is your first one. There's usually a 25% rookie tax on the cost of your improvements. That would put you all in at around $225-230 plus three months holding costs (PITI utilities, etc) so maybe $240K. Your net sale is not going to be the market comp. And if you were looking at active listings that's not factoring in any price adjustments in negotiations. It will be less closing costs and commissions and the offer factor. So using your range a net sale of around $270 is probably a better proforma (Always plan for bad surprises but hope for happy surprises).

That makes your gross profit more like $30K.  And the whole reason i led you down this path is to show you the impact of adjusting your model for a 1031 vs doing a true fix in flip.  If your short term profit is $30K then plan on 10K - 12K going in taxes.  So you walk away from a three month rehab realistically making $15 - 20K.

Or you lengthen your runway a bit. Put a rentor in and generate some NOI for a few months. Then sell and 1031. The NOI from rent is nice. The depreciation allowance will help you tax wise. The tenant is paying the mortgage so there's a little amortization from that as well. Holding longer lets you capture more appreciation (maybe). And when you 1031 you won't pay anything in tax. All of the deferred tax will go to buying your next piece of real estate - so it benefits you not the government.

Flipping's fun.  But it's not a gimmee. There's a lot of hidden pitfalls.