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.
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.
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.
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.
What other fix and flip tips do you have to offer investors?
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.