How much is enough for Fix & Flip?
How much money does it take to successfully complete a fix and flip real estate project? This question or variations of this question are constantly asked in real estate investing groups all the time. Typically asked by those who have never completed a project all the way to those who have completed a few projects but still getting their feet wet. This article is NOT the end all be all to point out EXACTLY all YOUR costs. This article is to be a general guide as well as give you some numerical calculations you can implement to best set yourself and your project up for success. Now there are a lot of creative ways you can finance real estate. We will not be covering those today. Today we are going to assume you have enough cash to invest in your local market as well as typical costs associated with that market to include the cost of a private/ hard money lender. Let’s dive in!
YOUR MARKET
Deciding WHERE to invest is critical. Almost every tow, city, municipality has affordable housing, median housing, executive housing, and luxury housing. Obviously the costs for a real estate project located in a low income neighborhood in Perry, FL, will drastic change when compared to a low income neighborhood in Miami, FL. And the same all the way up through the different types of neighborhoods and values. You first objective is where will you invest? Identify the TYPE of property you want to begin investing with. Section this off by four categories; Affordable, Median, Executive, and Luxury. Your next goal is to identify the price ranges for properties within each of these categories
YOUR STRATEGY
Your strategy plays a key role in what you want to accomplish, and what your needs are. Is your strategy is to simply buy properties off the MLS (“multiple listing service”) or from wholesalers, or will you buy off market through your own marketing channels? Will you use a realtor or not? Are you going to be purchasing properties that need renovating (big repairs), lipsticking (“carpet & paint”) or no repairs? There are two component’s to game plan your strategy, the entry or acquisition as well as the exit or disposition. These play an equally important role in determining your success as well as amount of capital you will need. The most expensive way to acquire or buy properties is to go through the MLS. This is primary due to the fact any property listed on the MLS #1 A realtor is attached therefore you will be paying for the realtors commission #2 Your competing with every single investor not only in your backyard but across the state and even the US. This of course drives up competition because you have more people willing to pay more = less profit margin, and assume more risks just to get a deal. A least expensive way is to network with wholesalers at your local real estate investors clubs. Wholesalers are supposed to be marketing, negotiating wizards, but this is not always the case. They are supposed to find properties that ARE NOT listed on the MLS, lock them up on an assignable contract for well below As-Is value. For this they add a fee for their effort and ability. What should matter to you is that even AFTEr their fees and costs are considered you should still be below As-Is market value therefore you are saving on the costs of acquisition. The third way which is the most cost savings (in the long run) is to market for properties yourself. This has pros and cons. You will spend much more of your time and dollars marketing for these deals, however once you find a property and lock it up, you can save significantly on the costs. Lets take a look at an example. You identify that you want to be in the affordable housing market in your local city.
Affordable Housing
As-Is = $100,000
ARV = $175,000
Median Housing
As-Is = $150,000
ARV = $250,000
Executive Housing
As-Is = $275,000
ARV = $499,000
Luxury Housing
As-Is = $500,000
ARV = $825,000
So you look at the capital you have available and you decide that for this project you are going to go with an affordable housing project. lets look at the follwoing three acquisition scenarios;
Scenario 1: If you buy it from the MLS you will pay the $106,000 (includes Realtor commission (6%)) + closing cost (approx. 2%). This equates to about $108,000 based on a 100% cash purchase, and this is assuming this is cash you have sitting in an account.
Scenario 2: If you decide to go with a Wholesaler, they may have found the property and gotten it under contract for $70,000 and attached a wholesale fee of $15,000 (21.42%) + closing costs (approx. 2%). This equates to about $86,700 based on a 100% cash purchase, and this is assuming this is cash you have sitting in an account. Awesome you have saved $21,300 off the MLS listing!
Scenario 3: If you decide to market for the property yourself, you would spend let’s say $3,000 (that is high) for the marketing + your time. This is the greatest variable. It takes A LOT of time and sorting through a lot of bad leads just to get this one property under contract. This is the primary reason going through a wholesaler may be so lucrative as you begin. The numbers would look like as follows; you get the property under contract for $70,000 + marketing costs ($3,000) + closing costs (approx. 2%). This equates to about $74,660 based on a 100% cash purchase, and this is assuming this is cash you have sitting in an account. Awesome you have saved $33,540 off the MLS listing!
RENOVATION / CONSTRUCTION COSTS
Affordable Housing
As-Is = $100,000
Total purchase = $108,000
Lipstick = $20,000
Sell price $148,999
Net Profit $10,999 = 8.5%
Hold time = 3 months
This is where the strategy can widely vary. If you are approaching a property with you are simply going to “lipstick” it you may not reach the supposed ARV of $150,000. If you do a full rehab your probability of meeting your projected ARV or even setting the market (you sell the property at the top of the market valuation) is much higher. Lets take a look at this, assuming the following scenarios; If you go with the lipstick the property must meet a 4point insurance inspection As-Is. In most cases if you go with acquisition scenario 2 or 3 the property will probably not meet a 4 point, therefore more than likely you will want to account for a full rehab. Lets assume a lipstick scenario (acquisition scenario #1) would be paint, carpet and modernizing the kitchen and bathroom with builder grade material from Lowes or Home Depot. This type of lipstick will cost you $15 - $20K. This means you have total into the project up to $128,000. You sell it to a long term buy and hold investor for $148,999. Out of the $148,999 you pay your listing agent 6% = $8,940 + misc seller concessions of $1,060, bringing your total cost to sell at $10,000. Subtract your $10K from the sell price of $148,999 and you are left with $138,999 gross. You then account for the original capital you had into the deal ($128,000) and you are left with a net profit of $10,999. That does not sound great but we can also assume that you were in and out in 3 months. Your Cash-on-Cash return would be 8.5% on 3 months. This means, if you are able to find the same property scenario over and over your annual return on your money could be upwards of 30%+ assuming all things being equal and no issues arises. Not bad. Of course the difficulty comes into play the ability for you to find these type of deals consistently, as well you would not come across any major issues such as foundation, roofing, electrical, HVAC, or plumbing. Any one of which could completely wipe your gains out for the year, especially the foundation.
Affordable Housing
As-Is = $100,000
Total purchase = $86,700
Renovation = $50,000
Sell price $175,999
Net Profit $28,739 = 21%
Hold time = 5 months
Let’s look at if you went with a full rehab so that you could sell at the market value of $175,000 (acquisition scenario #2). You would still be getting most of your material from the big box retailers with the exception you go with nicer countertops, full new appliance package as well you replace the electric, roof, windows, and HVAC. This type of renovation will be upwards of $50,000. This means you have a total into the project up to $136,700 (Purchase price of $86,700 + renovation $50,000). You sell it on the open market for $175,999. Out of the $175,999 you pay your listing agent 6% = $10,5600 (you have a beautiful project with everything new so no seller concessions), bringing your total cost to sell to $10,560. Subtract your $10,560 from the selling price of $175,999 and you are left with $165,439 gross. You then account for the original capital you had into the deal ($136,700) and you are left with a net profit of $28,739. That sounds ok but we can also assume that you were in and out for 5 months. Your Cash-on-Cash return would be 21% in 5 months. This means if you are able to find the same property scenario over and over your annual return on your money could be upwards of 42%+ assuming all things are equal and no issues arise. Not bad. Of course, the difficulty comes into play with the ability for you to find these type of deals consistently, as well as you not coming across any major unforeseen issues such as foundation and your actual costs did not go over budget. Any one of which could completely wipe your gains out for the year, especially the foundation.
BUT … I don’t have $100,000 sitting in my account?
Affordable Housing
As-Is = $100,000
Total purchase = $86,700
Renovation = $50,000
Leverage = $115,000
Cash to do the deal = $30,900
Sell price $175,999
Net Profit $19,539 = 62.23%
Hold time = 5 months
Ahhh the quintessential problem. This is where Blue Bay Capital can help you significantly. Now all things being equal in all the scenarios above you will need to make sure that you have enough of an equity cushion to assume the debt. Remember the debt of our loan affects your end numbers. However, you are only paying the money for a short period of time. As well your capital out of pocket could be significantly reduced. Let’s take a look at the second scenario. Say the costs of the money is 3 points (3% of the loan amount) plus appraisal, attorney doc fees, and inspections plus 4x draws on your $50,000. We fund up to 70% of the ARV, and up to 80% of the purchase. Your purchase is $86,700 = Blue Bay Capital would fund $69,360 (80% of purchase). We fund $45,640 of the renovation bringing our total loan to $115,000. It will cost you 3% of our loan amount or $3,450. So you have to bring to the table, at close $20,790 (down payment and the 3%). We will charge 12% annual or 1% per month on the loan so thats $1,150 per month. Over the course of 5 months thats a total of $5,750. So now the final numbers look like such; Down payment = $17,340 + 3% Lender points = $3,450 + 5 months of interest = $5,750 + Renovation funding we DID NOT fund $4,360 = TOTAL Cash you had invested $30,900. Combine that with the loan amount that gives you a total of cash and leveraged amount (the borrowed amount) into the project at $145,900. You sell the property for $175,999 and then back out your sell cost leaving you a gross profit of $165,439. Out of your gross prfit you pay us back our $115,000 leaving you $50,439. Now back out the money that you had into the deal, $30,900 leaving you a NET profit of $19,539. Well, thats less than if you bought it with all your cash… so how is this better? Simple what is your cash-on-cash return!? Cash-on-Cash is an excellent way to determine what your actual ROI is on a project. So you used $30,900 of your own capital and got a NET return of $19,539 leaving you a ROI of 62.23%!! Thats an ANNUAL RETURN of 124%+!! This is the power of utilizing leverage properly! Now here is your sophisticated revelation for the week… imagine if you did have $100,000… and each project you could get into for $30,900… that means you could technically have THREE projects going at once… you could DOUBLE your money in 1 year!!
If you would like to learn more about Blue Bay Capital can help you with your real estate funding, please reach out and connect with us, or get a jump start and submit a loan application today. We will reach out as soon as possible to discuss how we can help you in your situation!
