Correctly Estimating Your Rehab Budget
As a fix-and-flip real estate investor, your profit is made through rehabbing and increasing the resale value of a home after the rehab is complete. Completing a rehab project requires you to properly calculate a rehab budget based on sales comparisons for the area which the property is located in and how much rehab you are willing to put into a project. In this post we’ll explore how to correctly estimate your rehab budget to avoid costly mistakes and headaches that can cause you to lose money on your fix-and-flip projects.
1) Complete Sales Comparisons for the Area
One of the first things you can do when calculating your rehab budget is to take sales comparisons for the area that your flip is located in. Looking at the value of other properties in the same area can provide a sense of what your home will be worth once the rehab is complete. Having that information will allow you to calculate your budget around the ARV or After-Repair-Value of the property, the ARV is what the home will be worth once all of the necessary rehab has been completed. This is a key number to have because you want to avoid over-rehabbing the home and put more into the home than it is actually worth.
2) Determine the Amount of Rehab You Want to Do
Understanding how much rehab you are planning to do on a property is another key factor in determining the overall rehab budget. The quality of the materials and appliances, such as kitchen appliances and counter tops, you are willing to put into a project is a factor in calculating a rehab budget. If you plan to add a garage or back porch then your budget will need to be higher to compensate for those larger additions. Having a solid design plan in place will make it easier to form a budget and provide structure to the overall rehab process. It is also important that investor’s prepare for the worst and over budget to cover any unforeseen issues that may arise during the course of a rehab such as having to replace electrical wiring or fixing a water damaged basement. These unexpected issues that may not appear on a surface level walkthrough of the home can quickly eat away and your budget and your overall bottom line.
Fix-and-flip real estate investing is an exciting and when done right, profitable form of investing. Having a sound rehab budget that details what work needs to be done and leaves room for unexpected problems that may arise gives you an excellent chance to make a strong profit and return on investment without breaking your budget.
At Lima One Capital we are the nation’s premier lender for real estate investors. We make it easy to finance all of your fix-and-flip projects, rental properties, and multifamily investments. We are a national hard money lender lending in 42 states across the country including Washington, D.C. To learn more about our programs and how they can benefit you as an investor click here.