These days, more and more people are ditching rent and looking to take steps towards home ownership. That also includes purchasing investment real estate. However, what many fail to realize is that there are different steps to take on the investment path. And, if you’re not educated on the process properly, you can potentially end up in an emotional and financial conundrum. Real Estate agent Dr. Randy Bell of Dallas Realty Resources explains three key things to consider when flipping a home:
Before Repair Value – This is defined as the cost to acquire the property. When you are doing your numbers, you want to run comps (or comparables) that reflect previous sales in the area over the last 90-180 days. This will give you an indicator as to what you should pay for the home. The biggest thing to remember is that the market prices are dictated by previous sales. A local realtor can help you run the numbers.
Construction Budget – This is the necessary cost to get the job done. When you are considering acquiring a property to rehab/flip, it is vital to have a detailed, accurate construction budget done by a vetted General Contractor or Handyman. Another thing to consider is the time it will take to do repairs. Things never go exactly as planned, so make sure you have some wiggle room for the time to complete the project and price quotes. When looking to hire a General Contractor, ask to see references, detailed pictures/videos of their work, and ask to shadow them at one of their projects.
After Repair Value – This is defined as the price at which the completed project property will sell. This is similar to the As Is Cost to acquire the home, except you will be comparing move-in ready/completed projects with your completed home. The same rules apply in running the numbers. You will see what homes sold within a 0.5 mile radius in the last 90-120 days that meet the criteria (completed projects).
By utilizing these three values, and taking into consideration your holding costs (costs to hold the property such as utilities, insurance, financing payments), you will be able to calculate your profit spread (profits) and utilize that information to ensure a sound purchase.