It is so exciting to find a deal that you think is going to be a promising real estate fix and flip investment!
However, it is easy to fall into the trap of doing a few quick numbers in your head and thinking you are going to make a fortune on that fix and flip.
“Wow! Huge profit!” you say. “Let’s do it!”
The truth is, we’ve all fallen into that fix and flip numbers trap.
We do a quick back-of-the-napkin assessment of our fix and flip deal using the largest, most obvious numbers like the property price, the estimated rehab costs, and the After Repair Value (ARV).
But what we do not realize is how the other costs in the fix and flip deal are going to come into play. Sometimes, those costs can be substantial enough to kill the entire fix and flip deal.
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How can you avoid wasting your time on fix and flip deals that do not pencil out? Remember to add in the following costs for your fix and flip project before you pop the champaign.
- Closing costs alone (title, taxes, appraisal, insurance, loan origination costs) can be 5-8% of your fix and flip purchase price.
- Add in your real estate funding holding costs, which are the monthly costs associated with owning the fix and flip property. This includes things like electricity, water, gas, lawn care, snow removal, and possibly insurance, if your lender did not require you to pay a year upfront.
- You will also have real estate funding soft costs, which includes things like zoning, architectural, legal, and environmental and permit fees.
- Then, be sure to factor in the cost of the real estate funding you are using to do your fix and flip project, which includes points the fix and flip lender has charged, any real estate investment lender fees, and your loan interest over time.
- Do not forget your realtor’s commission (typically around 6%), or other fees to any service that is helping you sell your home.
- And, once you factor in all these additional fix and flip project costs, run your numbers for a best-case and worst-case scenario (I.e., 20% additional expense/20% additional income).
We suggest you toss the napkin and use a professional fix and flip project proforma or deal analysis spreadsheet to make sure you do not miss any details that could impact your bottom line.
Then, take that proforma to your real estate investment lender when you meet with them about your fix and flip project. It will show them that you have thought through every detail of how you are going to spend the funds for real estate that they are (hopefully) loaning you, which will work in your favor in terms of the real estate funding approval and potentially the fix and flip rates and terms they offer you.
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Working through this document carefully will help you make sure you do not miss any costs on your fix and flip project.
The bonus is that once you finish, you have a top tier proforma document for your lender!
Ok – now go out there and rock it, Investor Nation!
The iFC Team
OH, THERE’S MORE – LOTS MORE!
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