How Likely Is It?
Real Estate Investor · Charlotte, NC · Member since 2011 · 133 posts · 5 votes
I watch a lot of RE shows about flipping and solely renovating. I know that there is more behind the scenes then what is shown on TV but on these shows, they seem to be able to do a renovation for between 30-40K. Including kitchen & bathroom. Reading some of the threads on here, I have seen that people claim that 30K would only cover the basics. Painting, Tiling, Cleaning. I know of a local place that sells quality yet cheap cabinets, flooring, doors, etc so this is where I will buy from. As a carpenter I figure I can purchase these & install them myself and leave the major work to the contractor, plumber, electrician, etc. Saving me a couple thousand bucks. So my question is, how likely is it to be able to do a renovation for 30-40K?
Hard money will cost you around 8% of ARV. That assumes four points and 15%, 70% of ARV for the loan amount and six months hold. So, you'll borrow 70% of ARV and take four points off the top. You'll pay an additional 7.5% for six months for a total of 11.5% of the loan amount which is 70% of ARV, which gives 8.05% of ARV.
If you can find cheaper money, that will help. But it won't get you all the way to a $30K profit.
If you have a real estate license and can list it your self and make your own offers on the purchase, you can earn pieces of the commissions on both ends of the deal.
Here's a breakdown, again, with my assumptions:
Purchase: $80,000
Rehab: $30,000
Selling price: $160,000
Hard money loan amount: $112,000
Purchase closing costs: $1,500 (include the legal & recording costs, lenders title policy, inspections, certifications, appraisal, insurance.)
Hard money points: $4,500 (probably another $500-1000 in other costs here, too)
Holding costs: $1000 (more insurance, utilities, etc.)
Interest: $8,500
Total so far (this is the money you need to do the deal): $125,500
Now you sell
Price $160,000
Closing costs: $3,000
Commissions: $9,000
Seller concessions: $5,000
Net from sale: $143,000
Payback loan and your investment: $125,500
Profit (pretax): $17,500
Now, say you can borrow money at 8% and no points. So, its 4% for six months instead of 8%. That save you about $6,000.
If you have a license you can get maybe 2% on the purchase and 2% on the sale. That's another $4,800.
OTOH, if the rehab is overbudget by 25% (not at all hard to do), that's $7,500 less in profit. If it takes nine months to sell, that's more in interest and holding costs (be sure to price "builder's risk" and "empty house" insurance policies, don't bother buying "homeowners", it won't pay off if you have a claim). If your buyers find something they don't like (e.g., a imperfect sewer line, ask me how I know about this one), you'll pay to fix that. too.
Your going to want to know your costs. I've worked with lots of contractors over the years. Cost can be very relative. Costs can vary by location, quality of labor and/or materials, extent of work, the work you choose to do, etc.
As a carpenter you will want to estimate the time involved, what the materials would cost and get estimates for any sub work.
The last thing I would do is assume it will cost 30-40K blindly.
I'm sure others will chime in.
I'm wrapping up a rehab that I'm managing for another investor (A friend of mine who also happens to be on this forum)
We've done Roof, HVAC, light plumbing, light electrical, new cabinets, granite, a fireplace refinish, carpet, hardwoods on main level, 11 boards of sheetrock, exterior work (some light, some not so light), 3 bathroom remodels, and a very swank tile backsplash for under $33k. Also in 3.5 weeks.
Of course, we're both experienced as heck and this is by no means either of our first rodeo - or the biggest bull for either of us. It's also taken an impressive quantity of manhandling of cost and managing of contractors. And me being on site cracking the whip 16 hours a day for the first 2.5 weeks of the rehab.
So all that to say - it can be done. But it's just as easy for a rehab to run up a much, much larger budget in a big hurry.
Possible in a $100K house? Absolutely. I did a pretty extensive rehab on a house in that league a few years ago. Gut of the kitchen, rewiring the kitchen and utility room, new HW heater, new furnace, new paint and carpet throughout the house. About $17K all in, including paying a GC, plumbers, electricians, and carpet layers. I did a lot of the framing, sheetrock, and painting myself. Some work in the bath, but not a full gut.
In a $500K house? Not a chance.
You can't go into this, though, with broad generalizations. You have to look at each deal in detail.
Thanks for the responses:
Sorry I left that part out. I was leaning towards a house of around 80-90K. I know each house is different but compared to Aaron and Jon's information I am now assuming that it can be done for that much. I do understand though that location and material costs can vary greatly from area to area but I am determined to find a house for this price range (80-90K) and renovate it for 30-40K. I believe that it can be done! I plan on purchasing the house, estimating my costs of time & materials for the work that I will do myself and then take a walk through with a GC for all the work that I plan to allow them to do for costs estimates. Once I have these estimates I will take a look at all costs and decide if it is a Go or No Go for my price range (30-40) on a (80-90K).
So, if you're planning to be all-in at 110-130K, you need to be looking at houses that will sell for $160-185K. That should yeild a profit around $16-18K, assuming some things do not go as planned. Maybe a little more if things go well. That assumes you use hard money to finance the deal, hold for six months and sell with a realtor.
Thats a big difference in profit. If I invest 110K into he house (purchase + reno), and it sells for 160K, I should only assume a 16K profit? I know unexpected costs may come up but I would at least think I would net a profit of about 30K. Am I wrong to think that?
I said this in my first post, but I think it bears repeating and elaborating -
A 30-35k budget is very tight. Very tight indeed when talking about doing a 'touch virtually everything' renovation. It's very easy to run over budget.
Before we got started on the reno I was talking about, we spent many happy hours bouncing excel sheets back and forth determining what the scope of work was. We cut a lot of places in favor of certain splurges elsewhere.
Don't just assume "This rehab will cost $XX,XXX"... you need to do proper estimating - room by room, fixture by fixture.
As others have said, it really depends on your location and the level of house, but certainly you can do a lot for $30K.
As an example, I just sold a 3/2 house that had 8 feet of water in it (major flooding) a year and a half ago. The house was stripped to the studs (other than the ceilings, requiring 112 sheets of 12' sheetrock), and all finishes were removed other than the two tubs and shower.
So, it was basically a complete gut on the interior. The entire renovation ran about $35K.
To get an idea of what I was able to do for $35K, feel free to look at the before and after pics of The Flood House (House #19) on my blog...you'll be surprised how far $30K can go when you have a good set of contractors and suppliers.
And btw, if you take a look at my blog post from November 26, 2010, you'll see a detailed breakdown of all costs to get an idea of how the $35K was spent...
While Charles mentioned that as a carpenter you will want to know.....but I did not see where you stated your experience orskill level.
RE is not the Music Man, where you can use the "Think Method" just because you think you can does not mean you can. Knwoing is not skill. Skill is acquired by those who don't have two left thumbs and who practice carpentry skills. Just knowing what to do is not enough, you can still scew up setting cabinets even if you follow the directions.
If you don't have the skill, I would suggest you get someone who you can work with and acquire the skills needed in rehabs.
It's a matter of money. If you mess it up, it takes longer and you have to replace what was messed up. Your lender is not going to be happy if the windows don't open, and ceiling is wavy. When it is appraised, the workmanship will be noted and it will appraise accordingly.
But, if you have 10 years as a finish carpenter then forget what I just said...lol
what i have learned from others is that the rehab phase of an investment is the area most investors experience thier most significant loss. If you do not have reliable,skillful and honest tradesman lined up in advance you are likely to go well over budget even if you do not uncover the inevitable unexpected problem. The more expensive the property the more room for disaster. recently I had an estimate on replacing a relativily inexpensive granite counter top in ubatuba. it was measured by several contracters all specs and design were the same. the low bid was $6800 and the high bid was $25,000. If you dont know electric, plumbing, and the other trades or dont have reliable people you can trust, you can easily find yourself with a money pit.
Ha, which reminds me of the low ball contractors who get half way done, collect 3/4ths of the bid, tell you it's going to be more because.....and if you don't agree, they walk off!
Driving the nails is only one side of a rehab holding costs down and getting theproperty to market on time. Just wait til you get hung for a couple months, have your marketing time go off into the winter and end up holding one through the next marketing cycle, just because an owner thought they could get some of the small stuff done.
Jasmine,
Yes it can be done, it depends on the house, the extent of the repairs, your contractors, your taste! I find myself telling my husband often, it's not OUR house, it's a starter house for some young couple! That's also why I do this on my own with a carpenter as opposed to with my husband! LOL, I bought a 9900 house last year, put 35000 in it, sold it for 70000.
Linda
jasmine, there certainly is cheap labor around us...you can get a lot done for 20-30k...that being said, what store are you considering for your materials? as for jon's calculations, if you sell a property for 160k, you're going to pay closing costs of around 3,000 to buy and 3,000 to sell, commissions between 5-11,000 (depending on if you list or use a flat fee, etc.), with hard money points of around 10,000, and 6 months of interest only payments of about 7,000. that's 28,000 that you may or may not have considered that will definitely eat into your profit...don't forget holding costs such as taxes, insurance, utilities...during the winter, my gas bill alone was around 100/month for a recent flip.. you'll also want to leave a buffer for concessions since most buyers ask for those when you go to sell the property, and also a buffer in case the rehab goes over budget...as you can see, these "reality shows" that subtract sales price from purchase and rehab price are not accurate at all!
Sorry, but, yes, you're wrong. If your purchase plus rehab costs are 70% of the selling price, you use hard money to finance a deal, sell with an agent, and hold for six months your profits will be about 15% of ARV at the best. If anything goes wrong, and it always does (sell for less, spend more on rehab, hold longer than you expected) 10% is a more likely figure.
TV is entertainment. "Flip this house" math seems to say there will be a much bigger profit. They're full of bull.
Could go much worse. The last hard money loan my partner and I did had the borrower spending $30K out of pocket before he gave the house back to us. ARV was estimated to be $213K and we make a $149K loan. We spent another $20K fixing the code violations and repairing the damage before selling for $172K. It was more or less a wash for us for a 15 month investment. The borrower lost $30K. The buyer's got a great deal.
I do not plan on using a HML. More so a conventional loan if I can ever find one which, I will try my best to do so. I was thinking I could check out banks, credit unions and state programs for funding. I also plan to bring about 25,000 to the table so I should be able to get a loan with that down correct?
Bryan .... I was chceking into cheap materials and the Habitat for Humanity has some materials for cheap that are all in good shape for a flip. Cabinets, countertops, flooring & other misc items. I was also thinking about the newspaper classified ads and Craig's List for items. As far as labor, I have not checked into any cheap licensed labor. However, I do know some people who could do some of the work for not a lot of money. Laying tile, installing cabinets and countertops, etc.
Hard money will cost you around 8% of ARV. That assumes four points and 15%, 70% of ARV for the loan amount and six months hold. So, you'll borrow 70% of ARV and take four points off the top. You'll pay an additional 7.5% for six months for a total of 11.5% of the loan amount which is 70% of ARV, which gives 8.05% of ARV.
If you can find cheaper money, that will help. But it won't get you all the way to a $30K profit.
If you have a real estate license and can list it your self and make your own offers on the purchase, you can earn pieces of the commissions on both ends of the deal.
Here's a breakdown, again, with my assumptions:
Purchase: $80,000
Rehab: $30,000
Selling price: $160,000
Hard money loan amount: $112,000
Purchase closing costs: $1,500 (include the legal & recording costs, lenders title policy, inspections, certifications, appraisal, insurance.)
Hard money points: $4,500 (probably another $500-1000 in other costs here, too)
Holding costs: $1000 (more insurance, utilities, etc.)
Interest: $8,500
Total so far (this is the money you need to do the deal): $125,500
Now you sell
Price $160,000
Closing costs: $3,000
Commissions: $9,000
Seller concessions: $5,000
Net from sale: $143,000
Payback loan and your investment: $125,500
Profit (pretax): $17,500
Now, say you can borrow money at 8% and no points. So, its 4% for six months instead of 8%. That save you about $6,000.
If you have a license you can get maybe 2% on the purchase and 2% on the sale. That's another $4,800.
OTOH, if the rehab is overbudget by 25% (not at all hard to do), that's $7,500 less in profit. If it takes nine months to sell, that's more in interest and holding costs (be sure to price "builder's risk" and "empty house" insurance policies, don't bother buying "homeowners", it won't pay off if you have a claim). If your buyers find something they don't like (e.g., a imperfect sewer line, ask me how I know about this one), you'll pay to fix that. too.
i wouldn't recommend counting on solid, cheap labor from friends who are out of ajob either....nobody loves getting a good dealas much as i do, but habit REstorse are hit or miss....they'er awesome, but i wouldn't count on it...same with craigslist, classifeids...it's best to have a solid plan, especially for your first flip....price out appliances, flooring at lowes, home depot, etc. if you find a deal great, but i wouldn't factor that into my budget....that couldput you in hot water if the deal isnt' there when you need it..good things can happen like a great deal on labor or a steal off of craigslist for appliances, but i wouldn't count oneverything going right and the cards laying out perfectly..that is dangerous
Everyone has given you good feedback on the feasibility of a rehab in the 30-40K budget and I agree it's doable, sometimes. I watch those shows too. We don't see the established relationships these investors and contractors have OR the consideration likely given to the investor for the free advertising the contractor gets for being featured on the show.
Very likely, a 30-40k budget can get you alot.
My last 2 rehabs were under $27k
On one I got:
roof, furnace, water heater, kitchen, appliances, granite counters, bathroom, paint inside and out, knock down texture, new tile, new carpet, new doors throughout, some landscaping, new windows. That was a 1000sf 3/1.
On the next, for 23k I got most of the same above, minus the roof/water heater/furnace/windows but also: new hardwood floors, one extra bathroom finished.
For $30k, you should be able to pimp out a decent sized house (1500sf, 4/2).
Thanks everyone. Jon, I'll check into that financing. Still trying to decide.
Bryan .... I plan on creating a solid plan with solid prices to calculate real, almost correct reno costs. It's just hard trying to forget about the deals that are more than likely always there. Habitat materials, classifieds, etc. Everyday I look in the newspaper, there are appliances for sale, cheap too. As far as the Habitat place im referring to, I've been going there for a while now and they always have stuff for sale. This particular one im talking about sells household things just like Lowe's and Home Depot does. Alot of it is brand new while some is in really good condition. I like to compare the Home Depot material prices to the Habitat store and see the difference in price. When I calculate a budget, I'll use Home Depot prices but once I actually start the reno, I will visit the Habitat store, classified ads, etc. FIRST.
jasmine, we live in teh same city, so chances aer that we shop the same places, see the same ads on craigslist, in teh classifieds,etc. lol i think it's smart to budget for new stuff, and then fish around for a deal if you have the time...when i sell a house, it looks pretty new, so i won't buy used appliances unless they look brand new as well
I would look at the components that may need rehab: Roof, furnace, hot water tank, refinish floors, kitchen, baths, landscaping, new carpet, windows, paint, cleanup, dumpsters, etc. etc.
If the furnace, roof, and windows are in good shape, your estimate may be ok.
I find the rehab shows focus on drama and flash and rarely get into the details. They usually completely ignore holding and selling costs.
I work with one other guy and we just did a 1560 SF, 3br/2.5ba for about $22k. We did a new kitchen (granite, cabinets, appliances), all new bath fixtures and tile, solid hardwood floors, new carpet, new vinyl windows, brand new heat pump, water heater and 90% new plumbing, new lights, fans, and hardware, interior/exterior paint, built 12x12 deck, landscaping, repaired extensive wood rot and termite damage, termite treatment and bond, graded and seeded yard, reinsulated and lined crawl space. Basically a new house. We do about 50-75% of the work ourselves and have a great network of connections in almost every trade.
I took the following as an indication that Jasmine is a carpenter.