There are various costs associated with flipping a house. As much as you keep an eye on the acquisition costs, rehabbing costs, holding costs, and other costs in between, you must anticipate that in a worst-case scenario, you will lose a portion of your investment. It's not that you will not gain a profit; it is just that, in a perfect world, there will always be some budget-related issues you will encounter during the process regardless of whether you are a beginner or not.
I've mentioned this several times already. Flipping a house is not always smooth sailing. Each day is full of challenges you should never get tired of; you should always come to the job site with your backup plans from A to Z. Some flippers may not pay much attention to the costs or how much they've been spending since day 1, but, this is one of the most important factors one should be invested in. Negligence of this factor might cause project delays and other more complex issues impacting progress.
Oftentimes, what causes project delays is a lack of funds. Some cases would be going over budget or just having insufficient funds to finance the project needs. Hence, before you begin pricing houses, you must be smart enough to allocate your budget from acquisition to selling, from calculating gains to determining how much you can afford to lose. Yes, it's part of the investment; losing a portion. You took the risk of gaining, might as well accept the consequence of losing. Well, this is not a connotation of not gaining at all. It's just a matter of allocating the funds realistically.
What are the ways to help flippers avoid going over their flipping budget?
Focus on the area of the house that counts
During walkthroughs, you'll know firsthand which area/s of the house you would like to focus on. Having an initial plan in mind will get you to where you want your investment property to be. If you like to highlight the kitchen, expand bedroom spaces, add room for closets, additional baths, etc., it would be easier for you to allocate your rehab budget. Knowing which features of the house after holding the property for quite some time will help you utilize your resources. Hence, giving you enough control over your budget.
Take note that there are features of the house that sell fast. And you have to consider your market's preferences as you are flipping the house, not for you nor your personal use, but the market. You wouldn't want your property to sit unoccupied for the next couple of months or years. You might end up spending more if you focus on the areas that are not essential, so work on the property aesthetics strategically.
Focus on the Hard Numbers
Relevant to the abovementioned way to avoid going over your flipping budget is considering the upgrades that will help you grow your investment and those upgrades that don't. This time, you'll have to be more realistic on the hard numbers. Spending not more than 70 percent of the After Repair Value (ARV) is the rule; hence, looking after how much you'll spend on the repairs will highly determine whether or not you are making a good investment.
For example, if you are looking to purchase a house with $200,000 potential ARV. You'll have to know how much repair needs will it need before it can reach that value. Let's say repair costs $45,000. Therefore, you shouldn't be spending more than 70 percent of $200,000. If, for instance, the acquisition cost is $95,000, you are looking to get $60,000 from that property.
Getting the Right Financing Partner
Not all investors/flippers engaged in this type of investment use personal savings. Some would prefer to have the property financed by their partner lenders. Realistically, a hard money loan can help you keep the ground running especially if you don't have enough cash in your pocket. It is the smartest and practical way to get you a good investment. Thus, securing your flip property.
Conclusion
In a perfect world, there will always be instances where you'll have to spend more than what's planned. Yes, you may be in control of the budget, but there are factors you can't be in control of. For example, materials cost. The market is unpredictable so is the materials cost. You have to prepare yourself with abrupt changes that might impact execution including budget allocation beforehand. And be more prepared to make adjustments during the process without sacrificing quality work and the investment itself.
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