Breaking Down the Budget – Property Flipping Questions and Answers

FLIPPING Q&A: BREAKING DOWN THE BUDGET

Alrighty peeps, you asked and I am answering!!

This is the first of several posts answering your questions about the “how” of flipping – we’re about to embark on our fifth flip in 3 years, and I’m hoping that these posts will shed a little light on the whole flipping biz and maybe even give a few of you the boost of confidence you need to start flipping houses on your own!

flipping Q&A

I could talk forever about each one of these topics, but I’m aiming to give you guys a broad picture of each topic instead of focusing on each tiny detail – if you want more discussion about anything, just ask!

I thought I’d kick off this series by talking about budgeting for a flip – after all, if the budget gets out of whack and goes into the red then your foray into flipping will be a fail.  And nobody wants that!  So let’s get down to business . . .

Flipping Q&A: Breaking Down the Budget

Here’s what you guys wanted to know about budgeting:

I understand that you don’t want to reveal hard numbers, but I am really interested in percentages. Can you give a percentage profit over the original purchase price? ~ Jen, Rachel W.

I am wondering about the profit percentage that you target. As a real estate agent, I’m sure you know what a house could sell for if it had the proper upgrades versus what it is listed at since it is so out-dated (as all of your flips have been). So, instead of strict financial numbers, could you perhaps give percentages? For instance, 100% is your target list price, x% is your purchase price, y% is your budget for upgrades, and z% is your profit (less a%–seller closing costs)? I am very interested in this aspect of it and I’m sure you track it all with your lovely Excel spreadsheets! I’m envisioning a few pie charts. :) My husband and I recently purchased a home free and clear that will be a future rental when we move to a bigger home and I am debating how much I want to put into it and how much time I want to personally spend painting it! I am also interested in flipping in the future. ~ Karen

Goodness, I love the chance to break out a pie chart.  :)  I’m so glad that you guys asked about how the budget breaks down because it was really eye-opening for me to see where all the money goes, and how our profits have increased as we’ve gotten smarter and more efficient in this business.

The pie charts below break down the budgets for our last four flips, with the percentages calculated from the final post-renovation sales price.

First Flip Budget Breakdown Second Flip Budget Breakdown Third Flip Budget Breakdown Fourth Flip Budget Breakdown

In a nutshell, our “average” budget for the past 4 flips has broken down like this:

Average Budget

Here’s a bigger picture of how the budget for each individual flip has shaken out:

 

First Flip Budget Breakdown

As you can see below, we barely broke even on our first flip.  Hypothetically speaking, if we sold our first flip for $100,000 only $4,000 of that would have been profit – yikes!!!

I can’t stress enough that you should go into this with realistic expectations – you’re setting yourself up for failure if you expect to hit it out of the park with your very first flip.  That being said, we wouldn’t have continued in this business if we were only making 4% profit on each flip – all of the time and effort that goes into flipping a house isn’t worth it (at least to me) for just a 4% return.

Second Flip Budget Breakdown

So how do you increase the profit?  That extra money has to come from somewhere, so our goal with each new flip is to streamline the budget as much as possible in the other four areas of the pie chart – the purchase price, labor costs, material costs, and carrying costs.  We’ll talk about each one of those areas in more detail later in the series. For our second flip, our profit rose by 6% because, proportionately speaking, we were able to dedicate a little less of our budget to both the labor costs and the purchase of the house.  Our labor costs were lower because we didn’t have a budget-sucking (but ultimately gorgeous) pool to contend with like we did for the first flip.  I may wind up eating my words some day, but no more pools!!

Third Flip Budget Breakdown

Again, we squeezed out more profit – this time largely because we got the house for such a ridiculous steal.  You may recall that we put in an offer on that house based on the list price alone and got it under contract without even seeing inside the house.  Actually, now that I think about it I’m not sure I ever told you guys about that!

Fourth Flip Budget Breakdown

For our fourth flip, we sold it in just 4 days so our carrying costs were lower than usual.

You guys specifically asked about what profit we shoot for when we’re flipping a house.  For our first flip, we dreamed of huge profits but we were really just hoping to make a little money to show ourselves that we could really do this.  Our goal as we moved on to the next flip was to increase our profit (obviously) and now we plan on making between 15-20% with each flip.  That’s the plan, at least.

While 15-20% is a good return for us, we certainly can’t speak for everyone.  You may be delighted with making 5% on a flip, or you might be disappointed with 25% – you’re the only one that can decide how much value to put on your time and effort.  When determining your goal profit, consider whether flipping the house will take time away from other money-making activities (i.e., your day job), how much hands-on time you will be putting into the project, and whether the profit from this flip is necessary to cover your living expenses or if the profit is just “extra” money.

Do you factor in financing costs (no matter which way) into the cost/profit of the house? ~ Nora Rose

Absolutely!!! Not only do we factor in financing costs (which are labeled “carrying costs” in the pie charts above), we factor in every conceivable cost that we might encounter during the renovation.  Examples of some of these include:

forgotten costs of flipping

It’s absolutely imperative that you factor all of these goodies into your budget – they can take up a shocking amount of money (8% of our average budget!) and if you don’t plan for these costs you can wind up over budget without even realizing it.

Home of the Week: A very clean slate

  Mar 4, 2012 – 8:00 AM ET | Last Updated: Mar 2, 2012 12:08 PM ET

morning1

By Connie Adair

Swansea
71 Morningside Ave. (Windermere Avenue and Bloor Street)
Asking price: $1.298-million
Taxes: $3,980 (2011)
Bedrooms: 3+2
Bathrooms: 5
MLS# W2296448

This contemporary house — clean, devoid of frills, practical, simple in design yet well thought out and loaded with features — isn’t your parents’ house. “The proliferation of modern homes and design seems to be led and dictated by the echo boom generation looking to ‘claim’ their own style of living away from their parents’ mindset. Modern contemporary design helps these clients make their stamp on the world,” says listing agent David Oey of Re/Max Professionals.

The echo boom generation comprises more than 40% of the population and is the key driving component for this design movement, which is based on maximizing square footage with a more relaxed, open-concept and accessible feel, he says.

Features such as ornate crown mouldings, once considered a necessary element of interior design, are absent in the majority of new projects, which instead focus on clean square simple lines, Mr. Oey says.

A number of modern homes dot the Swansea neighbourhood. They help update neighbourhoods, he says. “Most of the time, they don’t fit in but rather highlight the changing ownership of the community.”

The home at 71 Morningside Ave. features an open-concept layout, high-quality finishes and attention to detail. The contemporary design includes five bathrooms, five above-ground bedrooms, a courtyard between the garage and home, and a classic exterior of stone, stucco, wood and metal.

The custom home offers approximately 3,400 square feet of finished space above grade, plus 1,000 sq. ft. of outdoor balcony space. The covered rooftop balcony, which has a hot tub and lake and city views, was built to accommodate 7,000 pounds.

The open-concept living and dining room has a gas fireplace. The custom kitchen has an island/breakfast bar, soft close drawers and a designer backsplash.

A walk-in closet, a five-piece ensuite bathroom and a walkout to a south-facing balcony terrace are features of the master bedroom.

Other highlights include a heat recovery system, gas outlets on two terraces, LED lighting and phone and Internet wiring throughout the house.

This home will appeal to a variety of people: professionals and executives, whether singles or couples, families because it has five bedrooms or to those living in downtown Toronto but who are looking for greater value, Mr. Oey says. “Condos [sell] on average from $500 to $600 per square foot plus maintenance — much higher in Rosedale, Forest Hill and The Annex. This home is offered at $400 per square foot. The value is incredible.”

The 25×123-foot landscaped south lot is close to High Park, the lake shore and Rennie Park, which offer biking and walking trails, as well as tennis, indoor salt water pool facilities, skating and baseball. It’s also close to the subway, shops, restaurants, churches and schools.

Home-building industry poised for green future

BY MIKE HOLMES, REGINA LEADER POST MARCH 5, 2012

I’ve been hearing a lot of green talk bandied about lately. It’s the thing to do nowadays. I know we’re talking green, maybe even thinking green, but are we really doing green?

I won’t comment on other industries — I’ll leave that to their own pros — but I will talk about the industry I’ve been working in for the last 30 years. And the trend is definitely swinging toward “green” products and options. This is good.

The problem is when people and companies jump on the bandwagon just to make a quick buck. It’s what some call “greenwashing.

“When I first started commenting on the home-inspections industry, I would characterize it as a lot of cowboys but not a lot of sheriffs. Well, the same could be said about the green movement.

Because it’s new, there are a lot of regulations and certifications being developed. The problem is knowing which ones are the legitimate ones. What are the regulations today that will define the green standard of tomorrow?

It’s still a moving target. So I’m more inclined to talk about something I know does the job for both the homeowner and the environment — and that’s energy efficiency and durability.

Building an energy-efficient home isn’t a trend. It’s becoming a standard, and I like this, because it’s asking more of builders, as well as homeowners.

It’s a way of thinking that says it’s better to invest in more insulation than a granite countertop. It’s cool to have solar panels, energy-efficient appliances and a green roof. These features are becoming the new eye candy of the modern and contemporary home.

Do I like green? Yes. But I don’t like greenwashing. And for me, the smarter and greener option will always be something that proves its “green-ability” on a consistent basis. And that’s energy efficiency and sustainability.

The cost of energy is rising, and there’s no sign of it levelling off at any point. We have energy-performance labels that tell potential buyers exactly how energy-efficient elements of the house are.

What does this mean for homeowners? That an energy-efficient, durable home will appeal to anyone living on a fixed income and/or thinking of selling his home in the future.

We’re going to see more builders offering energy-efficient packages and upgrades. We’re going to see more homeowners choosing renovations that will bring their homes to higher performance levels and make them more durable. And we’re going to see an increase in demand for experienced and skilled renovators who know how to do this — the right way.

As builders and renovators, we need to mix the old construction theories that worked with new technologies, and get rid of the middle era that didn’t work. Look at passive houses.

The good news is that there are a few options that don’t require a lot of restructuring to make a home more energy-efficient. It’s just a matter of incorporating smart, simple, eco-friendly solutions that deliver real positive changes in the future, such as:

1. Increase and/or replace old insulation in the attic with one that has a higher R-value (at least 60). Make sure there’s good ventilation in the attic and seal off any potential areas of heat or en-ergy loss, such as windows and door frames.

2. Always go for Energy Star-rated appliances whenever possible.

3. Install a programmable thermostat that regulates the temperature of your home between day and night, whether you’re home or not.

4. Replace older toilets with ones that are low-flow to save, on average, 30 to 50 per cent of the water normally used.

5. Install a domestic hot-water recovery system that recaptures heat gathered from hot water used during dishes, showers, etc., and uses it to preheat the water going into the hot water tank.

Homes need to be more energy-efficient and environmentally sustainable if we want to build for the future. In fact, I think we have a responsibility to build homes you can buy when you’re young and grow old in. We used to build that way. We can build that way again.

Catch Mike in his new series, Holmes Inspection, airing Thursdays at 8 p.m. ET/PT on HGTV. For more information, visit www.hgtv.ca. For more information on home renovations, visit makeitright.ca.