Your budget is one of the most influential parts of a fix and flip project. It’s your framework for success, and by fully understanding what goes into a budget and how different aspects of a fix and flip project can affect it, the greater chance you stand of maximizing your ROI.
Evaluate Rehab Costs
In many cases, determining rehab costs before you purchase a fix and flip house project is the biggest challenge. Different costs, such as material and labor costs, can vary widely depending on the condition of the property and the kind of repairs needed. Make sure to identify any cosmetic projects as well as any expensive overhauls like plumbing or electrical problems early on. Without a construction background, you may also need a contractor to advise you on what needs repairing and the costs. Unexpected repairs can ruin your flip budget, so be sure to do your homework here.
- Cosmetic repairs like replacing carpeting, refacing kitchen cabinets, and improving curb appeal tend to be relatively inexpensive and quick fixes.
- Moderate repairs like updating kitchens and baths cost more and take longer to complete.
- Extensive repairs can include anything from adding another bathroom to repairing a foundation or replacing a roof. These tend to be the most expensive and take the longest.
Assessing rehab costs on a per-square-foot basis can make it easier to compare itemized and total rehab costs across properties as well as evaluate contractor estimates and determine the true return on your investment.
Determine Your Budget
A comprehensive budget is one of the first things hard money lenders look at when evaluating real estate investments. Without a firm budget that includes the purchase price, rehab costs, carrying costs, and marketing costs, you risk losing money because of unplanned expenses or delays. Oftentimes, flippers find unexpected rehab problems, such as the need for building permits and or specialized contractors. A good budget includes contingency plans for when it becomes necessary to deviate from the initial renovation plans.
Here’s an easy formula to help determine your budget:
Maximum Purchase Price = Sales Price – Carrying Costs – Desired Profit – Rehab Costs.
- The sales price should be the conservative estimate of what you can sell the property for after renovation, not the list price.
- Carrying costs include costs like property taxes, insurance, utilities, and interest, as well as marketing and realtor commissions you estimate to pay until the flip is sold. Once you’re under contract, use your inspection period to get a home inspection and any other specific inspections you may need. It’s always better to spot problems on the front end than be surprised down the road.
- Desired Profit is the minimum amount you want to make when the project is complete.
- Rehab Costs are the labor and material expenses needed in order to fix the property.
Your Timeline Is Key to the Success of Your Budget
When developing a budget for your fix and flip funding application, it’s critical to remember that the shorter the timeline for the project, the less expensive the carrying costs will be. For example, a home that requires less rehab is usually going to have a higher original purchase cost but you’ll spend less time carrying it. On the other hand, a flip requiring more rehab will typically cost less, but you may have to carry the loan for a longer period of time. A good rule of thumb is to put together a budget that balances the purchase price with expected rehab costs and carrying costs, along with some additional padding in case unexpected repairs or delays cause you to overshoot your initial schedule.
Why Should You Choose a Hard Money Loan for Fix and Flip Funding?
A hard money loan requires a relatively low down payment which makes more cash available for rehab, carrying, and marketing costs. It also allows you to be flexible in your ability to re-prioritize as needed, using that extra cash for unexpected issues, like unforeseen plumbing or structural problems that aren’t evident until a full renovation begins. Lastly, with fast approval, a hard money loan can keep you on schedule and within your budget to get that flipped property on the market faster, maximizing your investment.
Having a comprehensive budget in place for fix and flip funding reduces the chances of delays that cost you time and money. A hard money loan for flipping houses can fund your project quickly and help you get the residential property sold quicker. Contact Bay Mountain Capital today to learn more about how we can support you as residential hard money lenders for your next fix and flip.
About Bay Mountain Capital:
Bay Mountain Capital has been in business for more than a decade, closing approximately 2,000 loans over that time period. We specialize in financing all types of residential and commercial property investments throughout Texas and Georgia. Using common sense and value-added approach, we strive to incorporate these principles into our underwriting and closing processes.
As a direct lender, Bay Mountain Capital can close a loan within one day after receiving clear title and a complete file. The process generally takes from two to three weeks but can be accelerated where circumstances require it.
We are an asset-based lender, which means that qualification requirements are limited. Our rates and fees are among the lowest in the industry.