One of the most frequent questions that we get here from our students and borrowers at Strategic Real Estate Coach is “How can I accurately budget repairs?”
This is a BIG deal because comping the property correctly and making sure we know and understand the After-Repair Value (ARV) of the home is very important to have a successful, profitable house flip. One way to ensure that we are offering the correct asking price on a property and that will be a solid investment is by running the numbers through our Automated Offer Formula.
This formula is simply:
ARV x 68% - Repairs = Max Offer Price
The first objective when analyzing whether any property will be a profitable flip is to determine the After-Repair Value (ARV). In my market of Cleveland, Ohio, the rule of thumb is that most properties that are attractively renovated are going to sell for about $110-$130 per square foot.
Let’s walk through a current case study of mine to help make sense of all the numbers.
1148 Whittlesay Lane, Rocky River, OH
What is unique about this property on Whittlesay is that the city of Rocky River is one of the top school districts in Northeast Ohio, it’s close to Lake Erie with a great downtown shopping area and it’s very safe and walkable. So overall, it’s a highly desired neighborhood to live in.
Properties in areas like this usually have slightly higher prices per square foot, so for this particular home, we are estimating $150-$175 per square foot when it is sold. After reviewing comps in the area for similar houses, we settled on an ARV for this property of $399,000.
$195,000: Purchase Price
$170,000: Private Lender
$110,000: Josh’s Money
$100,000: Potential Private Lender #2
$84,000: Est. Net Profit After All Costs
We will be all in on this property for $275,000 + $9,900 in interest + $30,000 in realtor commissions & closing costs.
One important thing to keep in mind as a new or seasoned real estate investor when looking for new deals is that the listing price is almost meaningless. As a real estate investor, based on running your numbers with the Automated Offer Formula, you are going to offer your Max Offer Price and that’s it. If the seller accepts your offer, great, if not, move on to the next.
Now, before we get into the details about this property, please keep in mind that $80,000 for a rehab budget is large, so if you’re working on your first or second deal, I would not suggest going this high, unless you have very reliable contractors that you regularly work with. For a first or second renovation, try to stick with a budget under $40k.
Some of our initial thoughts when visiting Whittlesay was that it has:
- Newer windows
- Brand new roof
- Vinyl siding
- 2 car garage
All those exterior newer items are helpful in saving money in the budget. We will be re-doing the driveway, but most of the work that needs to be completed on this property is all interior, cosmetic renovations.
5 Phase Renovation Breakdown
To tackle a project like this, we put our budget together and break it down into 5 Phases.
- Have all your permits and SOW together
- Make sure your plans for structural changes are approved with the city you are working in to begin renovations
- If you are replacing any windows, make sure those are ordered first because it typically takes about 2-3 weeks to receive them
- Start interior demo work – tearing down walls, removing carpet, cabinets, etc.
*It’s important to note that normally, exterior projects such as replacing the driveway or painting the siding would also be included in Phase 1, but since we are in Cleveland, OH in the middle of winter, our Phase 1 for this project starts with interior work only.
- Demo is finished, and framework is complete and ready to put the property back together
- Rough plumbing and rough electrical
- HVAC installation
- Once the plumbing and electrical inspections are clear, you can start putting up drywall and putting things back together
- Trim and any crown molding installed
- Interior doors and door handles installed
- All interior paint
- Tile installed – bathrooms and kitchen backsplash
- Vanities and mirrors in bathrooms installed
- Cabinets and countertops in kitchen installed
- Electrical finish
- Plumbing finish
- Paint and waterproof basement
- Exterior paint
- Replace garage door, driveway, exterior doors
- Privacy fence installation
- Custom awning
- Refinish all hardwood floors
- Install carpet
- Install appliances
To learn more about how we find, renovate and sell our houses in 60 minutes or less, register for this free web class. After flipping about 700 houses, we’ve perfected our investing system down to a simple 5 step system.
Josh and the SREC Team