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”!
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.
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.
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.