Flipping Houses 101: Maximize ROI with These Tips

Editor's Note: This post was originally published in May 2018 and has been completely revamped and updated for accuracy and comprehensiveness.

Hey there, real estate investors! If you're starting out with your fix-and-flip project, you probably have a ton of questions swirling around in your head.

What is the financial investment required to purchase and renovate a home, and is there a potential for a large return on investment? How much does it cost to flip a house? Well, we're here to help you answer those questions and create a budget for your first flip.

Rehab and renovations

First things first, let's talk about the rehab and renovations. Besides the cost of the house, there are costs associated with the rehab, including materials and contractors.

As a newbie, you'll probably want to start with a single-family property to cut down on rehab costs. The amount of money it takes to renovate a house is largely influenced by the condition it is currently in.

Making smaller cosmetic changes can be inexpensive but can make a big difference in how much you can make off the sale. Purchasing a property that needs a few adjustments and care can be a great way to maximize profit.

Once you get the hang of things, you can work your way up to homes that need more significant repairs. But don't worry—with the right tools, resources, and time, you can successfully flip a house regardless of your experience.

Moderate repairs, like renovating kitchens and bathrooms, require the knowledge and experience of a licensed contractor. Homes that require substantial repairs may be offered at a lower price, but you should be aware of the amount of time and money that will be needed to carry out these repairs.

Buying a property that needs extensive repair may be tempting because of the low acquisition price, but consider the money, time, and commitment before investing. The amount of time it takes you to rehab a property has an effect on the overall expenses you will incur, such as utility bills, loan payments, and taxes.

Insurance and utilities

Insurance and utilities are essential factors to consider when flipping a house. You'll have the property's purchase price, the renovation expenses, plus taxes, insurance, and legal fees. Don't forget to factor in property insurance when investing in a fix-and-flip project.

Property insurance costs can vary depending on your location, so research the average price in your area and include it in your budget.

Contractors require water and electricity to get the job done, so it's crucial to set the utilities up as soon as possible to prevent any delays. To estimate these costs, try reaching out to the former owner for a rundown of the typical monthly utility bills.

Marketing

Once the renovations are complete, it's time to flip the house. Getting the word out about your freshly updated property might not be as easy or budget-friendly as you'd hope. Sure, spreading the news that you have an investment property for sale, putting up a "For Sale" sign, and using social media can help, but you might need to include more focused marketing strategies in your plan and budget.

Collaborating with a realtor is a popular choice for advertising your property. They handle much of the behind-the-scenes work, helping you find serious buyers without investing too much time. While you'll need to pay for their services, it could be worth it if you don't have the time, expertise, or connections to market your property effectively on your own.

Let's look at the math

Alright, let's dive into the nitty-gritty of flipping a house - the math! Many factors go into the cost of a fix-and-flip project, and figuring out your specific budget can be a challenge. But don't worry, we're here to help.

First things first - financing. While some investors pay cash for their first properties, this may not be an option for everyone. If you're planning to finance your investment, it's important to know that hard money lenders are a great option. Unlike standard loan providers, hard money lenders like Kiavi prioritize the worth of a property when issuing loans, creating a more convenient solution for those wanting access to funds in a timely fashion.

Once your financing avenue has been decided, the next step is determining your after-repair value (ARV). This is the property value after all the upgrades have been made.

To get an idea of average renovation costs and what your ARV might be, check out comparable homes in the area that are similar in size, location, and upgrades. Find out how much has been sold in the previous quarter to get an idea of the final cost in your case.

The ARV is also helpful in determining the best price to bid on a property. When deciding how much to offer on a fixer-upper, a helpful guideline is submitting a bid up to 70% of the estimated market value. Use this formula to calculate your offer to ensure you get the best deal:

Best bid price = (ARV x 70%) – the cost of repairs

When estimating a property's price, consider the After Repair Value (ARV). For a property with an estimated ARV of $150,000 and will need $30,000 worth of repairs, the highest price you should be willing to pay for it should be no more than $75,000 to cover any additional costs that may arise—for example, labor costs.

By calculating your ARV and using the best bid formula, you can ensure that you have a realistic budget for your fix and flip project. It is vitally important to know the facts and figures and tailor your financial plan to your circumstances to succeed.

Determining your ROI

Let's talk about everyone's favorite topic—money! We know that the ultimate goal of any real estate investor is to make a profit, and the fix-and-flip strategy is no exception. So, is flipping houses really profitable?

The answer is a resounding "yes" - if done correctly, of course. That's why it's important to have a good understanding of return on investment (ROI), and there are a few different ways to calculate it when it comes to fix-and-flip investments.

The out-of-pocket method

One way to calculate ROI is through the out-of-pocket method. This approach takes into account your personal investments for purchasing and improving an investment property.

For example, if you put $15,000 down on a house and plan to use $30,000 for repairs, the total out-of-pocket cost would be $45,000. After all of the renovations, if the house is worth $180,000, you would have $135,000 in equity ($180,000 - $45,000).

This is then divided by the total value of the property to calculate a return on investment (ROI) of 75%. It is important to bear in mind that the rate of return is high in this scenario, as a large portion of the money is being spent in advance. This approach takes into account all the costs and also uses borrowing to generate a larger return on investment than the cost method.

The cost method

Another way to calculate your ROI is through the cost method. With this approach, you'll need to consider all the expenses related to buying and fixing up the property.

Let's say you snag a rental place for $130,000 and put in $12,000 for repairs. That brings your total investment to $142,000. If you rent it out for $1,100 monthly, you'll make $13,200 in a year.

Now, account for things like property taxes and insurance (in this example, $200 each per month or $2,400 yearly). To calculate your ROI, do the following:

Subtract your expenses from your rental income to get your net operating income: $13,200 - $2,400 = $10,800.

Then, divide your net operating income by your total investment to find your ROI: $10,800 / $142,000 equals 7.6%.

Flipping houses like a pro means knowing your costs upfront and what each step will set you back. From placing the savviest bid on a property to estimating everything from labor to utility costs, having a solid budget in place before diving in is essential for success.

Ready to launch?

If you're feeling overwhelmed by all the details involved in fixing and flipping houses, don't worry - you're not alone. Fortunately, there are many resources available to help you navigate the world of real estate investing. Industry leaders like Kiavi can provide you with the knowledge and guidance you need to get started and grow a profitable business.

Don't hesitate to reach out and speak with real estate professionals who can help you achieve your goals. Remember, with a little hard work, careful planning, and the right resources, you too can launch your own successful fix-and-flip business.

Final thoughts

Flipping houses can be an exciting and profitable way to invest in real estate, but it requires careful planning, budgeting, and execution. By understanding the costs associated with the rehab and renovations, insurance and utilities, marketing, financing, and calculating your ROI, you can set realistic expectations for your first fix and flip project. Remember, every property and situation is unique, so it's essential to do your research and work with experienced professionals to help you along the way.

While challenges and unforeseen circumstances may arise, the satisfaction of taking an outdated, run-down property and turning it into a beautiful, modern home is second to none. The reward of seeing the return on your investment and knowing that you made a positive impact on the community is worth all the hard work.

So, if you're ready to take the leap into the world of real estate investing, don't be afraid to start small and work your way up. With dedication, determination, and the right tools and resources, you too can become a successful real estate investor and achieve your financial goals.