Riddle me this…
I am your best friend and also your worst enemy, who am I?
I am Time.
When is time our enemy? Well, almost always if you are a flipper. The name of the game really is, quick in, and quick out. The faster we sell, the less holding costs we pay. The less holding costs, the more profit we put in our pocket. If a survey was done, my guess is that most investors would agree that the number one sucker of profits is our holding costs. They can be so subtle that we do not even know it is happening until after we close the deal. That is why they can be the silent killers.
How to Estimate Rehab Costs!
Estimating rehab costs accurately can make or break your real estate business, and it takes years of experience for even the best rehabbers to master the art. However, you can expose yourself to less risk and get more accurate with your projections by learning how the pros think when estimating construction costs.
What Are These Silent Profit Killers?
- The cost of having to pass on a great deal because your money is tied up on one already.
What causes these expenses to run up so high so quickly? Well for one, they NEVER stop. Did I mention, they NEVER stop yet? How about now? They NEVER EVER STOP until the house is sold. The lender could care less if you are sick, or your contractor doesn’t show up, or if the dog ate your homework. They get their interest day in and day out irregardless.
The same is true for the local tax collectors. You pay taxes for the exact number of days you own a property. Same with your insurance company. If you want power on your home, which is a requirement, that also adds up day after day, minute after minute. You want heat in the winter months? Same deal. Of course you could ignore it and let your pipes freeze, that is always a fun day in the great Northeast. Maintenance? Well, you could ignore it, but you WILL pay in the end.
If you don’t mow the lawn, your house will look lousy and probably take much longer to sell. Plus the local towns will fine you if it gets out of control, so in the end it WILL cost you. If you are tied up in a property and have been for 6 months longer than expected, and a killer deal comes along but you are tapped, how much does that cost you?? It is tough to put a figure on that one but we will discuss it later.
One of the Best Details I Decided to Visually Track
Those of you who know me, know that I am NOT a detail person. I am much more of a big picture thinker and a visual person. However, I have learned that paying attention to this one detail has changed my life. So if you are like me and do not like the details, I get it. BUT, take the time to learn and apply this one and your life will change.
Every day costs you money as a flipper. The sooner you get that drilled into your head, the better of an investor you will be. We usually have about 15-18 projects going at any one time, all in different phases. Each of them is accruing these silent killer holding costs. There have been times when we let a house sit for a month or two prior to starting construction, thinking we were waiting for the right contractor, or the right time, etc. What a colossal mistake!! We decided last year to start to really watch those holding costs, VISUALLY.
We have white boards in our office, one for each property we currently own. Each week prior to our Monday staff meeting, we update a very important number in RED with a minus sign in front if it. It is the current accumulated holding costs on that particular property.
Wow, what an eye opener!
Even if you only have one deal going on, I would strongly recommend doing this exercise. Staring at that growing number right out in the open will help you make much better decisions.
Remember Those Math Word Problems in High School?
Stay with me and save this post, it will be your best friend in the future.
Assume you are flipping a house and you have borrowed $100K for the project from a private lender.
Add the following:
- Annual Interest on money if you were to hold the property for one year
- Annual Property Taxes
Multiply each of these monthly figures by 12 to get an annual figure.
- Monthly Insurance Costs
- Average Utilities (higher during construction)
- Monthly Maintenance
Add these annual totals to the Interest and Tax figures from above.
You will now have your approximate annual holding costs. Let’s break it down to your daily holding costs on a property. If you borrowed $100,000 at 12% on a house with taxes of $4000 (welcome to New York State!) It might look like this:
$100,000 at 12% = $12,000 interest
$12,000 interest + $4000 taxes + $1800 insurance + $1800 Utilities + $1200 Maintenance = $20,800 / 365 = $56.99 per day. lets call it $57 per day to make the math easier.
Sounds like not much, huh? WRONG! In a 30 day month, your silent costs are at least $1709.59 each and every month.
Think that will eat into your profits?
You hold a house for 6 months you pay $10,258. Something goes wrong and you hold that same house for 12 months, guess what? You now spent $20,515 just for the privilege of holding your house.
Knowledge is Potential Power, Only If You Apply It!
Use this information to help you make better decisions on your projects. Next time a contractor is not on the job when promised, know that it is costing you about $57 that day. If he disappears for a week…well, you do the math. When a closing is taking weeks longer than necessary, who is footing the bill? You are! So push to get the closings done much quicker.
It is also very helpful to make good decisions on who to hire. You get two quotes to clean up the yard in preparation for getting your flip on the market. One is $1000 and can start that afternoon and be done in 2 days. The other is $700 and can start in 8 days and be done in 3 days.
At first glance, the $700 is much cheaper, right?…Wrong! The $1000 quote will allow you to have your home on the market in 2 days. The $700 quote will allow your home to be on the market in 11 days. The $1000 guy gets you on the market a full 9 days earlier. If we go back to our earlier example of $57 per day, you will see that the true cost of the $700 quote is actually $700 + $513 ($57 daily costs x 9 extra days) for a total of $1213. Most people, including me at times, think that they are saving $300 in that example by going with the “cheaper” guy, when in reality, they lost $213! Amazing, isn’t it? Imagine how those numbers play out on bigger projects, scary!
Learn to calculate ALL the expenses on your next flip! Check out the new BiggerPockets Fix and Flip Analysis and Reporting Tool. Try it out for free today!
Let’s look at one more important silent killer of profits. Let’s assume you have a limited pool from which to invest. Let’s say it’s $100K, the only way to make a great return on the same money over and over is to do more houses in the same time frame. If you usually do 2 house a year, imagine what the return would be if you could trim a couple months off each deal with better decisions and systems. If you did that and could now flip 3 houses a year with the same money, would that dramatically increase your bottom line? Now you see why the daily holding costs we figured above is MUCH MORE as you are not able to do as many deals.
Count ALL the Costs
So next time you are making a decision, look at ALL of the numbers, not just the ones on the surface.
The truly successful investors know that time is the enemy and the only way to make her your friend is to use less of her! I think if a bill arrived every day in our mailbox for $57 and a new bill arrived DAY AFTER DAY until the house was sold, it would push us all to move a little faster. Better yet, imagine if a Mob guy showed up every morning and said in a gruff NY accent, PAY ME! You think we would al move a little quicker?
I know I would!
We should all think of it like this, because even though no one is pressing us daily for the holding costs, there is always a time to pay the fiddler, and the costs are the same rather you pay daily or at the end of a project. Bottom line, trim holding time, add more profit to your pocket and end up with Bigger Pockets! What a smooth plug for Josh and Brandon! 🙂
Hey, if you are a buy and hold investor, use this for when your property sits vacant. How much does it cost you to sit each day unrented? How much does it cost you every day you put off starting an eviction while your tenant strings you along? You won’t like the numbers you see!! Time is not always your friend either!
Sorry for the confusing math lesson today, I sure hope you were all able to follow along with my logic. I would love to hear your comments. Have an awesome week!
Photo: Daniel Y. Go