Where do I even look to find my flip home, and how much is this going to cost me?
Types of Flips
Before you even begin to search for a home, you need to decide what type of flip you are willing and able to tackle. We take into consideration four different types of flips:
Cosmetic flips tend to be standard updates that make a home more visually modern, including new floors, kitchen, bathroom(s), touching up the paint, and patching up the nail holes in the walls.
Full Rehab flips essentially gut the insides and start design from scratch.
Pop-Top flips consist of major updates such as adding second stories, enlarging the master bedroom, etc.
Scrapes mean you intend to knock down the entire house and work from ground-up construction.
Decide on one or two variations that you can be successful on and hone in on those. Narrowing down what type of flip you want to focus on will help you save time during the search process.
There are a handful of traditional and non-traditional routes you may take to find the flip house that best fits your needs. Our top search suggestions include:
- Your local MLS (for Denver, that’s REcolorado)
- Local real estate experts
- Networking groups
- Research on investment forums such as BiggerPockets
- Scanning foreclosure websites
- Working with wholesalers
Some of these avenues may be more fruitful than others, but they are a great place to start your investment journey. For those that are new to the fix & flip (F&F) journey, we highly recommend that you work closely with an experienced agent that can help guide you through the process until you are comfortable and confident enough to navigate on your own.
Big Picture Monetary Considerations (ROI, ARV, DPD)
In our previous Flip Tips 101 blog post, we discussed what to look for in potential homes to use as flips. This outline will be useful for any of the flip types mentioned above (except for scrapes, in which case, the house is essentially irrelevant).
Beyond the cosmetic checklist we provide, there is an extensive list of monetary considerations as well. First and foremost, you need to think about what your max buy price/budget is. Do not waste your time looking for a flip in a high-price neighborhood if you cannot qualify for a loan for a house in that area.
ROI (return on investment), ARV (after rehab value), and DPD (dollars per day, or net profit for each day it takes to hold a project) are also critical monetary factors.
ROI needs to be calculated on a project-by-project basis. The ROI calculation includes dollar amounts that are specific to each property, like purchase price, which includes:
- Rehab expenses
- Holding costs (personal capital, hard money loans, etc.)
- Contingency costs (a.k.a. “just in case” costs)
- Simple projects should calculate contingency costs at about %5 of overall budget
- Traditional whole-house lift should calculate at about 10% of overall budget
- Houses with structural problems should calculate at about 12% of overall budget
- Costs to sell the property
- Commissions on the buy side
- Commissions on the sale side
- Referral fees
- Insurance on the property
- Closing costs
- Staging costs
- Inspection fees
Not all of these costs will apply to every property, but will likely apply to most.
DPD, a less common financial term, helps you to decide which properties will make you the most money in the shortest amount of time. To calculate DPD, use calculated net profit/anticipated number of days to complete a project. Example:
- You buy a ranch house at $300k, spend $75k in rehab, and finish the project in 140-150 days with a net profit of $50k. You total at approximately $350 DPD.
- You buy a townhome at $200k, spend $25k in rehab, and finish the project in 30-40 days with a net profit of $15k. You total at approximately $400 DPD.
Theoretically, consistently flipping townhomes will make you more overall. On the other hand, you also need to calculate daily burn, or how much money you are spending every day. This will depend entirely on the scope of your rehab project.
Things That Will Eat Up Your Budget
Are there cracks in the structure? Are there windows that need replaced, or PVC sewer line cleanups in the front or back yard*? None of these are horribly expensive alone, but they can add up very quickly. More costly updates include:
- Roofing problems – a roof can range anywhere between $5,000-$15,000 to replace
- Furnace or boiler – ensure that this has been cleaned and maintained
- Hot water heater – a few years ago this was not a necessary expense, but in today’s market, you will likely need to update/replace this
There are a few specific expenses that we would like to highlight. The first is electrical, which is tricky to navigate. When examining a home, take care to notice if a home is filled with 2-prong or 3-prong outlets. If necessary, 2-prong outlets will require you to spend approximately $7,000-$12,000 for new wires, breakers, etc. For comparison, upgrading electrical in a home with 3-prong wires averages about at $3,000. Older homes will require these modifications more often than newer, so be conscious of this and take note.
Plumbing is not a legal responsibility, but if the plumbing is bad it will cause more problems in the future, so it is always better to take care of this immediately. Have a professional examine the sewer line for a shift in position, a low belly line, cracks, or breaks. These are considered spot repairs, and will typically be billed at $2,000-$4,000 per section.
If it is necessary to replace a full sewer line, depending on how deep the line runs (a.k.a. how far from the house to the pump) we estimate $7,000-$8,000 to replace. Longer sewer line replacements (65ft+) can cost up to $12,000 to replace!
So, what we are trying to convey to you is to not get caught up in counting costs for new handles for the cabinets. These are all costs that happen before you initially purchase the house, and will take up a majority of your flipping budget.
Flipping houses is worth the risk if you make the right investment. Whether or not an investment is right is a personal choice and up to you.
If you have any other common flipping expenses, let me know!
*It’s worth the money to scope the sewer line – always scope the sewer line! At the very least, if you find any major concerns, you can use that to negotiate the price of the house.