Making good cost projections is integral to your success as a real estate investor. When you don’t predict your numbers accurately, you run a major risk of loss on your investment when you invest in real estate. For me, I’ve learned the hard way that not predicting accurate costs can sink any real estate deal. For my house flipping business, they predict all my profits and losses on every flip – hard lessons learned from trial and error. If you are buying real estate with the intention of flipping it in a short period of time, how long you hold a property is one of the things you really need to pay attention to. This measure of time can quickly predict whether you make money or lose money on the deal. It’s one of those absolutely crucial factors when figuring if a house flip is really worth it or not. This is largely because the longer you hold on to a piece of property when flipping, the more your soft costs as well as your finance costs accumulate.
Beware of the Short Timeline Stories Every so often I hear about other real estate investors who buy, rehab and flip all in less than 3 months. If you can find a way to do this consistently, then kudos to you.
This certainly sounds good. But does this really occur on most house flips?
Consider a more realistic scenario where you are about to start fixing up a flip you just bought and you are genuinely fired up about it. So assume you have a good general contractor and you’re ready to get the rehabilitation going on the new property. So you project your flip to be rehabbed and sold within three short months. If you are just doing a coat of paint, a few cleanups and some minor repairs, then chances are good that you can make this happen. But for most house flip deals, these kinds of quick flips are the exception rather than the rule. In most house flips, there are going to be cost overruns and repairs you never could have predicted because real estate investing and house flipping in particular, is not a predictable event. The truth of the matter is that a lot goes into rehabbing a house and if you have unforeseen issues such as lead paint, it can throw off your rehab for weeks, if not months. As hard as it may be to admit, when it comes to the repair end of the house flipping process, there are times when things are just beyond your control. When you start flipping houses, it’s so critical to build a solid team of experts who can help you avoid these untimely scenarios. Yet even with the best team, unexpected things that are completely out of your control still happen – which can require timelines to be adjusted and projects to be started later than planned.
Plan for Cost Overages
I have found through trial and error, that it’s not unusual for the scope of work to increase during the job. This can and will happen to you. So get ready for it and expect it. It’s all a part of the plan. If you plan for it up front, you’ll be far better prepared for it when it happens. Just have a backup plan in place. Thankfully, I have formulated a team of experts that help me minimize this risk. This team has been formulated over years of work and lots of trial and error. Nonetheless, even with this team in place, I always put four to six weeks for the rehab into my plan just to be safe. Sometimes you just get lucky though. This is when you put the house up for sale and you sell it the next day. It’s happened to me and let me tell you, it is awesome. When it does happen, I am so thankful…but it didn’t happen by chance. This should be your goal, so set your sights on this kind of scenario occurring, but don’t plan on it.
The Biggest Cause of Delays
Banks, love em or hate em, they are a necessary evil at times. With all their bureaucracy and committees, it’s a wonder anything gets done at all at times! Banks, because of this are the biggest holdups in my experience and that just won’t change. There is just no way to predict how long the bank takes to process the loan, they are frustrating and slow at times, so expect that to occur. The most frustrating part is when you are waiting on the signature of some banker and he is holding up the whole process. Or maybe it’s a document that is lost in transition…believe me, it happens. It’s totally discouraging; the banks can just kill you and your time frame. They have all sorts of processes that need to get done and it will hold up your flip absolutely no doubt. The frustrating part is that all these things are far beyond your control. To make sure you are profitable, you need to factor these scenarios into your time frames for completion and financial analyses. Whatever you do, it’s important that you realize this early in your real estate investing career. I would suggest projecting six months but aim for three months. Whatever you do, make sure you consider the worst case scenario of nine to even 12 months. If you can still come out ahead even with the house taking nine to twelve months to sell form start to finish, then you probably have a great deal on your hands. These are the kinds of deal that succeed despite all obstacles. So seriously consider what your holding costs would be if you were not able to sell the house 6 months, 9 months and 1 year after purchasing the property. If the numbers still work, pull the trigger. If not, keep looking. That way you’ll stay solvent and live to flip another day.
Mike LaCava is a full time real estate investor located in Southeastern Massachusetts. To find out more about Mike as well as house flipping and his specialty how to flip houses with no money, check out his website where you can get more great information on real estate investing and house flipping.