Tarek and I sometimes go back and forth about budgeting on our flip houses. I’ve teased him more than a few times about how low he tends to estimate rehabs, and he gets after me about how much money I like to spend on kitchens.
In the end, we come to an agreement, find our budget range, and do the rehab. You might wonder about that when you see us spending more and more money on a fix and flip, but as long-time pros in the real estate business, we actually have a very structured system in place that keeps us from getting in trouble and turning a flip into a flop.
Start by Researching the Local Market
Figuring out your budget on a flip starts before you even buy the property. First, research the local market. What are comps going for right now? What were they going for a month ago? Six months ago? Are market prices going up or are they dying? Learning where prices are now and where they’ve been over the past year can give you a decent prediction of how much you’ll be able to sell your house for when you’re done with rehab.
While you’re researching the market, take a drive around the area. Look for new construction on shopping centers, playgrounds, parks, and other amenities. If you see these going in, you can expect market values to start to rise, which is great news for your flip houses.
Estimate Your ARV and Your Rehab Costs
With the information you got from your research, you should be able to come up with a pretty accurate after-repair value (ARV). That price tells you what you can spend on your flip to break even or to make a profit. Remember, all of your expenses have to be less than its ARV – including the price you pay for the property, all rehab costs, costs associated with showing the house, any interest accrued on loans for the property during rehab, and closing costs.
Not only do you need to make sure that you keep the price of your flip lower than your property’s ARV, but you also have to take into account the time it takes to sell that property. If you take three months to flip a house, and you only clear $3,000 in profits, is it really worth it? Probably not. On the other hand, if you take four months to flip a house and you clear $50,000, it’s definitely worth it!
So, as you make your estimates, figure out the absolute most you can spend on rehab and still clear a good margin that will be worth the time and energy you put into your flip. Then, once you’ve figured out that number, subtract at least $10,000 from it. This should be your rehab budget, and you should work as hard as you can to stay within it. If you do go over budget, though, you’ll know that you have a little bit of wiggle room to make those important rehab decisions that really sell houses.
Stay On Top of Your Budget Throughout Your Rehab
To stay within budget on your flip houses, you’ll need to stay on top of your spending on a daily basis, especially at the beginning of the job. Keep in close contact with your contractors and find out what needs to be done to fix and flip a property and how much it will cost you. If I’ve learned anything in the real estate business it’s this: flipping is expensive, and you have to spend money to make money…but you don’t have to spend all of your money!