Flipping Real Estate – Calculating Costs

I know, I know – how obnoxiously American a term – ‘flipping’ real estate! However it works – and whatever we chose to call it Down Under – we still do it (and probably better than the Yanks anyway 😉 )

If you’ve been in the real estate investing business, or more specifically been flipping real estate, for more than a few days, you’ve inevitably gotten an email that reads something like this:

“Investor’s Dream. This property will go QUICK.

– Property Address: 1234 Main Street

– Asking Price: $400,000 (Add or subtract zeros!)

– After Repair Value: $500,000

– Repairs: $25,000

– Profit: $75,000

– Details: Needs paint, carpet, tile, new kitchen, update bathroom, some roof damage.

STOP! Before you read on… Take a guess at what you think the “real” profit’s going to be on this real estate investment…

If you haven’t ever gotten an email or fax broadcast like this, then rest assured, you will! I’m about to probably tick off all of the late night infomercials and pitchmen out there! Sure, I understand that when you’ve got 30 minutes (or 90 minutes, for that matter), that you’ve got to sell what’s sexy… not what’s real!

Now it’s my turn to expose the real deal on real estate investing! This goes for flipping real estate itself (i.e. properties) or simply flipping the contract (also known as assigning the contract). When you’re flipping real estate, you need to be able to calculate the “real” bottom line and if your assigning the contract, you need to know your numbers so you don’t get blacklisted by investors! This one piece of information will keep you from getting into trouble because of any “real estate bubble”!

Purchase Costs

Here goes… Have you EVER purchased and sold a piece of real estate for FREE? If you’re not sure what the answer is… It’s an emphatic NO… You are going to have costs to buy, costs to hold and costs to sell. This holds true even if you are buying a property for all cash. (Think stamp duty, titles office fees, conveyancing  fees, etc.)

If you’re not getting a mortgage, your purchase costs are obviously much lower, but nonetheless, there are costs associated with any real estate transaction. Plus, more than likely, if you’re relatively new, you’re probably not paying all cash for property anyway. You’re probably going to be using a home loan/mortgage for your initial real estate investing financing! (As a general rule I expect you would be using loans and mortgages for most if not all of your investments in real estate).

For a quick calculation, you can estimate anywhere between 3% – 5% for settlement costs to just acquire the property. That’s 3%-5% of the purchase price.

Holding Costs

How much is it going to cost you each and every day to own this piece of real estate? See, if you’re making money in real estate, you’d better believe that there are a lot of other people that are going to expect to get paid and they get paid in the form of mortgage interest, council rates, utilities (unless it is rented), property insurance, etc. Each of these is an expense each and every day that you own the property. Here’s an example… A home loan on a bread and butter type piece of real estate might run you 5%. Let’s say you got the property for $400,000. Every month, you are paying $1,666 in interest alone. Let’s say that taxes and insurance are another $200/month and then utilities at $200. Right there, the property is costing you $2066/month – or roughly $68/day. See, why it’s important to know not only your holding costs on a real estate investment, but also how long it’s going to be on the market before you can flip the property.

Selling Costs

Here’s the third part of the real estate investing puzzle. When you want to turn around and sell this piece of real estate, it’s going to cost you yet again! Are you going to use a real estate agent and pay a commission or 1.5-3.5% or even more? On $500,000, that’s anywhere from $7,500 to $17,500 chopped of the top.

If you can remember this… and apply what you’ve just learned to each and every real estate deal that you do, you’ll be safe flipping real estate in any market. You see, if it’s a hot market, you can calculate less time for holding cost. But, in a slower market, make your offer based on 6 months or 9 months of holding costs. It’s really simple mathematics! And real estate really is a numbers game…

5 House Flipping Do’s

1) Do put everything to pen and paper and plan it out carefully before you begin.

2) Do establish a budget for the entire project.

3) Do have an inspection.

4) Do know the neighbourhood and plan your flip according to the needs of the area rather than your personal tastes and needs in a home.

5) Do remember that you are in the market to make money not waste money when it comes to establishing an asking price for the property.

5 House Flipping Don’ts

1) Don’t forget to check out the neighbourhood before you buy.

2) Don’t blow your budget without just cause. Your budget is what you used to determine whether or not the house would be a profitable venture.

3) Don’t forget to set daily goals and hold yourself accountable to those goals.

4) Don’t neglect the exterior. Curbside appeal is what brings buyers into the property.

5) Don’t spend money you don’t need to spend. While it would be great to put in granite countertops and gourmet kitchens into every home it isn’t always practical.

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Things to look for from your mortgage broker

Buying or refinancing a home is one of the biggest decisions you’ll ever make. It’s not easy and there are a multitude of hurdles to overcome. As such, it is important to feel like you’re working with someone who has your best interests, both personal and financial at the forefront of their mind.

Here are the most important factors to take into account when deciding to use a mortgage broker to assist you with your finance needs.

Not just interest rates

While it seems logical to look for the best interest rate, and the media, big banks and most of your friends and family all will prioritise interest rate to you, a lot of borrowers are surprised to learn that most lenders will offer the same rates. And any differences will likely be quite minimal. It is the features of the loan, and the loans ability to service your individual specific requirements that should be a priority.  Rate is important, however the other aspects of the loan need to be considered in order to provide you with an overall finance solution. A good mortgage broker will not only tell you this, but provide you with that solution.

Good signs:

When you’re looking for mortgage broker, here are a few indicators to watch for:

  • Availability
    Does someone answer the phone when you call? Or at least return your call within a reasonable time frame? Have you been assigned to a specific lending manager who you can call directly and who will call you back and knowledgeably answer your questions?
  • Information
    When you have questions do you feel like you can talk to your mortgage broker and get an informed and knowledgeable answer? You’ll be surprised in your hunt for a broker how many  have bad or outdated information. After some Internet research you will know when someone is behind the times. Make sure you’re talking to someone you trust and who knows what they’re talking about.
  • Reliability
    You should be able to completely trust your mortgage broker to follow through. If the person you’re working with says they are going to do something or call you back, you need to know you can count on them to do it. If you have to pester your broker for a call back or follow up on every detail to make sure it’s been handled, find someone else.

The mortgage experts at Sherlock Holmes Lending Solutions have helped thousands of borrowers through the loan process. We are knowledgeable and responsive. Call or email us to get up-to-date and current information about the mortgage and home buying/refinancing process.

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Buying or refinancing a home is one of the biggest decisions you’ll ever make. It’s not easy and there are a multitude of hurdles to overcome. As such, it is important to feel like you’re working with someone who has your best interests, both personal and financial at the forefront of their mind. Here are…