Quick calculations when considering the flip
When looking at investment properties you can dive pretty deep into spreadsheets and calculations leaving your head spinning. Of course, these calculations are important but before you get ahead of yourself, there is a much quicker and simpler calculation you should do. To get started you need the following numbers:
Property price
Renovation budget
Carrying costs
Closing costs
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= All-in cost
Property Price
This number is as it sounds, the price that you will pay for the property. Ask your realtor to do some comparables to help decipher what price you will need to pay to acquire the property and to be sure you are not overpaying. These comparables will also be very important for later on in this discussion.
Renovation Budget
This number is easy to mess up as there are many costs that are often forgotten. Below I’ve included an exhaustive list of things to include in your budget.
Material (flooring, kitchen, appliances, paint, etc., etc.)
Labour
Dumpsters (This can add up! Talk to your contractors about more affordable options than the local Bin There Dump That)
Permits and planning
Construction insurance - protects you from liability of anyone harming themselves while on your property. Note: all of your contractors should also have their own insurance.
10-20% extra for “Oh Shit!” occurrences
Let’s talk about the last point for a moment. This is a safety net for any issues that you may find once you get into the project. Also, we have found projects end up taking 2x times longer and costing 3x as much as you had originally planned. For experienced flippers, 10% extra is probably enough but if this is your first go at it we’d set aside an extra 20%.
Carrying Costs
These costs will depend on your schedule and your ability to stick to it, so again a buffer may be a good idea. Carrying costs include:
Property tax
Interest on the financing you have utilized (this is assuming you have not bought the property fully in cash)
Utilities - lighting, heat (hello, Canada!), water, etc.
Insurance - fire and theft
Closing Costs
This one is pretty basic and includes your lawyer and realtor fees. It’s easy to cheap out on a lawyer but if you plan to make investment properties a regular part of your portfolio we suggest spending the money on great legal representation. Don’t be penny wise, pound foolish.
Okay, so you’ve got these numbers figured out, now it’s time to come back to those comparables your realtor looked up for you. Look at homes in the neighborhood that had the highest selling price and comparable finishes to what you’ll be doing - is the price greater than your all in cost? How much profit will you make? Is that profit worth the effort, time and resources? If your projected profit is only $10K it’s probably not worth it and time to keep looking at other properties.
Catch you on the flip side,
