Numbers are the heart of every real estate transaction. If you are a rehabber and home flipper, they are even more important. A few dollars lost here and there can turn a great deal into an average one very quickly. It is important to know where every dollar goes in your transaction. Money you spend at the beginning of the deal counts as much as an expense at closing. To best understand the profitability of a deal, you need to understand the basic costs that go into a rehab transaction. The more familiar you are with these costs, the more efficient you will be on your next rehab project. Let’s take a look a the costs all rehabbers need to account for:
1. Acquisition: There is much debate as to where you make your money on a rehab. One camp insists that the acquisition cost is the most important factor. The other side looks at the selling point as the deciding factor. They are both critical for a successful rehab. Your acquisition cost is simply the net cost for the property you are purchasing. This includes paying off any liens on title, title search fees, property taxes, insurance and commissions. Many investors will strictly follow the 70 percent rule when making an offer. This is a good rule of thumb, but every property in each location should be viewed differently. As with any investment, but rehabs especially, you need to get the property price as low as possible. Overpaying leads you to cutting corners on the repairs, which will directly impact the bottom line. This means targeting properties in specific areas at price points that work for your budget. It is important to be disciplined in walking away from deals in which the acquisition price is too high. If your acquisition price is too high, everything else you do may be for naught.
2. Cost of Repairs: Which repairs you decide to do and how much you pay for them is a huge chunk of any project. The most common problem that many rehabbers face is underestimating the amount of work needed. You should make every purchase with a strict plan in mind. The minute you go over your original budget, you are cutting into your expected profits. There is no point in lowballing rehab costs just to make the deal look more appealing. By leaving a cushion for overages and unexpected costs, you can get a real sense of what kind of deal you are looking at. The cost of repairs impacts everything else you do for the rest of the transaction. It is important that you know not only where every dime is going, but what you are getting for your expense. Throwing money blindly at a property does not guarantee a return. You need to do the right work for the particular market. Granite countertops or a fancy pool in some areas is basically throwing money away. There is always going to be repair costs with rehabs. The key is knowing where and how to best spend your money.
3. Holding Costs: Every day that you hold the property without selling it is costing you money. Virtually every rehab will come with holding costs. These are the expenses directly related with keeping the property running while you finish your work. These fees include loan repayment fees, insurance, utilities and even property taxes. Alone, these may not break the budget, but you need to factor them in. Repayment of a hard money loan with a high percentage rate can add up quickly if you tack on additional weeks or months to your project. Even if you wanted to, it is difficult to cut corners on these costs. Without the ability to keep the lights on or insure your property, you won’t get very far.
4. Selling Costs: Finishing the property does not put an end to the costs. You need to get the property sold before you can figure out your bottom line. When you do this, you will endure another set of closing costs and fees. These include attorney fees, real estate commissions, property taxes and other miscellaneous fees. Together, these can add up to thousands of dollars. You can try to sell your property on your own, but you may end up disappointed in the results. In most cases, this will have the reverse effect. You will not have the demand that you expected and will have to deal with showings and lengthy phone conversations. Instead of saving money, you will end up having to consider the best of whatever lowball offers come your way. Selling costs are part of the deal and important to squeeze the highest possible sales price out of the property.
Successful rehabbing is all about knowing how to best allocate your money. This starts with having a firm grasp of where your money is going. If you can shave a few thousand in each of these areas, it will add up to a large amount of money. It helps to think of each rehab project like its own little business. It may take money to make money, but you need to control your spending. As with any business, when the expenses exceed the revenue you will have a problem. There are always costs with every rehab. Knowing what they are will help you make better decisions.