Let’s talk about what to do first when flipping a house. You just bought your first flipper, and you can’t wait to start tearing the house down to the studs, so you can fix it up and flip it for a huge profit. Well, before you pull out your Chip Gaines demolition moves, stop, take a deep breath, and plan.
Creating a plan is the first thing to do when flipping a house
I know the feeling. You want to jump on the renovations like a drowning man grasping for a life raft, but don’t do that. You need to plan.
There’s a saying, “If you fail to plan, you plan to fail.” This is VERY true in the world of flipping houses. Trust me, without a plan, you will likely lose money on the flip.
How to create a house flipping plan
A house flipping plan starts with a budget spreadsheet like this one. Now that you’ve got your spreadsheet, start with the essential repairs including: foundation, roof, electrical, plumbing, & HVAC.
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Have professionals inspect each of these areas and provide you with an estimate before you even consider cosmetic improvements.
Calculate Your ARV
ARV stands for After-Repair-Value. As the name suggests, its the value of the property after renovations are complete. A realtor can help you determine your ARV.
Do The Math
You need to know how much you have to spend on renovations. Once you have your ARV and receive your estimates for the essential repairs I mentioned above, use this formula to figure out what’s left for other repairs and miscellaneous expenses:
(ARV x .91) – (target profit + purchase price + essential repairs) = what’s left to spend on everything else.
Let me break down this formula. You already know what ARV is. When you sell the property, you can expect to pay up to 9% in closing costs, so right out of the gate, you’re only going to get 91% of the property’s ARV (assuming it sells for it’s ARV).
This why the formula starts with (ARV x .91). Out of that 91%, you want to subtract the amount you want to profit, the purchase price, and the amounts you will pay for the essential repairs.
What’s leftover is what you have for everything else. Remember, though, you’ve got to think about more than just repairs. Other expenses may include:
- costs of borrowing money
- property taxes
- lawn maintenance
Flipping houses successfully starts with a plan. Taking your time to do the math and calculate your expenses will allow you make informed decisions on how you renovate your property.