Flipping Houses

5 Ways to Avoid Going Over Your Flipping Budget

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When is enough enough when it comes to renovations on an investment property? The answer may depend on where your property is located, as well as how high you think the return will be. Successfully tackling a fix-and-flip project doesn’t begin and end with obtaining solid financing. You must actually take some time to plan how you can use those investment dollars in the wisest ways possible as you rehab a property.

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Check out these simple tips for choosing wisely during the renovation phase (based on my own experience).

5 Ways to Avoid Going Over Your Flipping Budget

1. Focus on the Rooms That Really Count

You may sometimes hear that kitchens and bathrooms are what really “sell” homes. It’s useful advice, and it holds true most of the time. That’s why focusing on those two areas of a home is a smart strategy when you’re working off the philosophy of getting the most bang for your buck.

Springing for fancy countertops and appliances that are finished in stainless steel may seem like a splurge at first; however, you have to remember that you will be saving money for every day that your investment property isn’t lingering on the market. Touches that bring the “wow” factor can get a property sold pretty quickly.

Which features can get buyers eager to sign on the dotted line and even start a bidding war? Take a look at the hot features I often hear buyers are looking for at the moment:

  • A neat and useful laundry room
  • A gourmet kitchen
  • Quartz or granite countertops
  • A home office
  • Exterior lighting
  • Solar panels 
  • A home gym
  • Energy-efficient windows
  • A three-car garage
  • Outdoor lighting
  • A patio for entertaining
  • A walk-in pantry
  • Hardwood floors
  • A pool
  • Walk-in closets
  • A dining room

Knowing which features will pay off on your investment property is essential before you start pulling up floorboards or tearing down walls. The fact of the matter is that it might be worth it to put in a gourmet kitchen or install a luxurious swimming pool—if the home you’re trying to flip is an upmarket property that’s located in a neighborhood where homes sell for a lot.

In fact, those features could be needed to make your flip home a competitive option. However, you could easily lose money if you add fancy features to a property that’s not located in a market where that’s fitting. That doesn’t mean there aren’t winning upgrades for non-elite markets.

Features like energy-efficient windows and solar panels could appeal to buyers in middle-tier markets because those features can help buyers save money in the long run and cause your home to appear as a better investment. In addition, simply investing in some good landscaping and updating the countertops in a kitchen might be all that’s needed in a neighborhood where homes aren’t going for more than $100,000.

2. Establish Worthwhile Investments

Not every upgrade that you put into a flip home is going to be a good choice. Ask yourself, will your investment property ultimately be used as a primary residence or a rental?

Putting hardwood floors in a rental isn’t necessary because it is very likely that the floors will have to be replaced or repaired frequently between tenants. That means you can go with a more cost-effective option like carpeting or vinyl flooring without any worries. In addition, fancy baseboards, vibrant paint colors, or intricate molding are all unnecessary because they may be damaged and require quick, easy replacements in the future. 

I’ve noticed that many buyers say they want more full bathrooms in a home. However, it turns out that a bathroom addition rarely pays off. That’s because the cost of building a new bathroom is typically much higher than the difference you’ll make during a sale. That doesn’t mean that there’s not still an opportunity to maximize a home’s bathroom potential.

Adding a shower stall to a half bathroom could drastically increase a home’s value. This can be an easy update because the plumbing is essentially already in place. It’s even worth considering stealing some closet or storage space to make a shower happen if square footage is tight.

Related: 8 Clever Ways to Save Big Bucks on Your Next Fix & Flip

3. Focus on the Hard Numbers

Talking about which upgrades help and which upgrades don’t really move the needle much is important. However, it’s even more helpful to take a look at the hard numbers when we’re talking about the best ways to invest your money in upgrades on a home. 

The big rule to follow revolves around paying no more than 70 percent of the after repair value (ARV) of any property you’re considering. ARV is the anticipated value of a property once all of your upgrades are made. You’ll need to subtract the cost of the repairs that it will take to get it to that value when determining whether or not you’re making a good investment. 

For example, let’s say you purchase a home with a potential ARV of $150,000. Let’s also say that this property needs $25,000 in repairs before it can reach that value. That means you will want to purchase the home for no more than $80,000 if your intention is to fix it and flip it. 

businesswoman doing paperwork at office desk, working through finances, using calculator and making notes in her notebook with pen

4. Don’t Invest Too Much in One Area of a Home

What are some signs that your investment approach is lopsided? You don’t want to create a single room in a home that is wildly different from the rest of the house.

For instance, a new kitchen might not matter if buyers are seeing outdated carpeting in the living room and avocado-colored tile in the bathroom. In addition, I believe that your investment money should not be used to create a veneer that is simply covering up deep-rooted mechanical and structural problems in a home. I don’t recommend putting money toward style when dollars need to be spent on functionality.

5. Get the Right Financing Partner

To get started on flipping, you need the right property and financing in place. In my experience, most investors don’t show up with enough cash in their pockets to finance a home purchase and the necessary renovations. But a hard money loan could be the solution. It just might help you get the ball rolling and make it easier than ever to start turning your investment property into a smart one. 

hard-money-lenders

What other fix and flip tips do you have to offer investors? 

Share in a comment below. 

Dane Fitch is a Director of Strategic Accounts at LendingHome. His career path took a sharp turn when he decided to branch into the inve...
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    Catherine Coy Banker from Huntington Beach, CA
    Replied about 1 year ago
    It seems to me that fix-and-flip houses aren't "investments" at all, but merely the act of buying oneself a construction job on which you hope to turn a profit.
    David Robertson Flipper/Rehabber from Kansas City, MO
    Replied about 1 year ago
    I'm always a bit confused why the fix-and-flip investment strategy gets so much hate from long-term real estate investors. The very definition of investing is 'the act of allocating funds to an asset or committing capital to an endeavor (a business, project, real estate, etc.), with the expectation of generating an income or profit.' With the fix-and-flip investment strategy, a real estate investor buys a discounted asset, invests capital into the asset in order to generate a profit. How is that not investing?
    Wenda Kennedy JD from Nikiski, Alaska
    Replied about 1 year ago
    Numbers in this game aren't just important -- they are everything. Before you start your fix-up work and make your plan, go see a bunch of open houses in that area. Ask the Realtors what features are important to their buyers. What will buyers pay extra for???? Take pictures. Take notes. Clip ideas out of magazines and fliers. Ask, ask, ask questions of everyone you meet. The market changes from neighborhood to neighborhood. And it changes as time goes by. What works today and is popular, may change on a dime tomorrow. A lot of these design decisions don't cost a lot of extra money to do. They take knowledge and attention to detail. Then sit down and do your numbers. Make your plan. Ugly surprises and stupid missteps can sink your investment.
    Pedro Reyes
    Replied about 1 year ago
    Good stuff!!!
    Jim Walker Real Estate Agent from Roseville, California
    Replied about 1 year ago
    Anyone who follows the "big rule" of never paying more than 70% of ARV is going to pass up and miss out on 99 out of 100 fixer houses in my area in California. Since the sample numbers the writer gave are for the lowest priced neighborhoods in the country, I'll triple them so as to provide a more realistic set of numbers. So instead of potential ARV of $150,000. needs $25,000 in repairs, purchase the home for no more than $80,000. That promises a profit of $45,000. A realistic Sacramento flip would be $450,000, $75,000, then $240,000. That implies a profit of $135,000. ( a 56% profit on purchase price, or 43% profit on all funds invested (acquisition + repairs) For flipping just one house. You are more likely to find yourself holding a winning lottery ticket than to find that kind of deal here. Because flippers in California are eager and willing to take on profitable projects competition for fixers is intense here, and has been for the 32 years that I have had a California Real Estate license. The fact is, these kinds of margins can only be achieved when the seller is clueless as to the value of the property, and the buyer somehow manages to keep them clueless. That means A. No houses listed by licensed agents. B. No houses with competitive bidding such as auctions. C. No houses owned by persons or entities that either have a clue as to the value of property D. No houses owned by persons who have someone looking out for their fiduciary interests. The "big rule" as a result relies on finding vulnerable, gullible, sellers. Usually elderly, with receding cognitive abilities. This is not "hate" for the investor that follows this rule, just a warning that by insisting on 6 digit profit margins on every flip, you could miss out on a series of 5 digit profit margins. I know that gullible sellers exist. These finds are not impossible, just rare. Its just that insistence on outsize profits, means that you might take months to find, secure, and close on such a deal. Meanwhile, a "big rule" follower may pass up all those bread and butter profitable flipping opportunities where the return is a mere 15% or 20% on the money invested. -