Making Money On A SLOW FLIP (Part 4 – Making Your Budget)

A few years ago, it was common in many markets for real estate investors to buy houses, update or repair them to bring them current to buyer's tastes, and sell at a profit a few months later. For most markets, those days are gone. The problem with flips (and flippers) is that they were primarily in the get-rich-quick game-which may work for a while, but doesn't last forever. You can still make money by applying some of the principles touted on HGTV, TLC, and the like, but it's a slower path to your payday. I call this strategy a "slow flip".

In my earlier posts, we looked at finding the property and ideas for changes. Now, to talk about budgets. The reason I suggest you have your budget before you start looking for a house is because most people don't have unlimited funds. You're more likely to come up with a realistic plan if you define your dollars first, then pick the house that you can fix with that many dollars.

Your project budget will vary depending on whether you decide to go with a house that needs repairs or just updating. New roofs, energy efficient windows and entry doors, new HVAC system, plumbing overhaul, updated breaker box and electrical throughout are just some of the examples of what may be included in your budget. Here's the basic guideline I like to use:

• 30% kitchen
• 15% master bed and bath
• 10% exterior and yard
• 15% whole house
• 10% plumbing (make a list of all the plumbing changes and get a professional out to do the work - everything from changing out faucets to re-seating toilets with new wax seals, in addition to moving sinks or adding second sinks or shower heads coming out of the ceiling. The professional plumber will not only do it all faster, a self-made repair that goes wrong can cost you much more in water damage.) If you need electrical work, handle it the same as plumbing - set a budget amount and bring in an expert.
• 20% cost overruns (yes, that's high, but it's essential for your first time. Keep anticipated and actual results in a spreadsheet don't just keep updating your numbers - save what your assumptions were when you started, it will be more useful in examining your results after you're done and help you learn from your mistakes.)

Create your budget in a spreadsheet and break it down as you get prices for individual items. You want to have a general idea on all your prices before you begin shopping. I've seen countless homes on the foreclosure market that have nice new lighting fixtures but holes in the roof or shingles that are baked and well beyond their useful life. Get the most important repairs done first, THEN start in on the nice-to-have items. If you run short on funds and need to cut back, you'll be glad you got the critical things done first.

In my next post, I'll offer some final suggestions and cautions.

For answers to all your residential real estate questions in Hampton Roads,
Contact Drick Ward - Exit Realty Central
757-227-9007