Many people are drawn to television images of people ripping up materials from a dilapidated house, renovating it, and selling it for a substantial profit. The return earned from each investment can be modest or substantial, or the investor could lose it all depending on decisions made before or during the process.
My Home Change Budget Checklist
Before you go shopping for the perfect property to remodel, you should create a budget for the entire project, not just for purchase and rehab costs.
The first item on your checklist has no direct monetary value and cannot be added to the expense column. However, it is an important “ingredient” for your budget: an excellent credit score. Unless you’re financing an investment entirely out of cash or through private means, an excellent credit score works in your favor with banks, especially when the loan is for a high-risk project like a home investment.
Now, let’s see the details of your budget:
• After Repair Value (ARV): Determining the ARV of your potential investment is the starting point from which you can base your expected return on investment (ROI) when the home goes on the market. A trusted real estate agent can help you estimate the ARV of the property.
• Rehabilitation Costs – Will vary widely depending on the amount of rehabilitation work that needs to be done. A repair estimate form can be helpful in keeping track of all necessary repairs.
• Financing/maintenance costs: These include not only the loan but also the costs of holding the house until it is sold:
o Financing loan(s)
o Property taxes
o Utilities (gas, water, electricity)
or property insurance
o HOA/Condo Dues
An important point to keep in mind here is that the longer the rehab work takes and/or the longer the home stays on the market after the rehab, the higher your maintenance costs will be and the less profit you can make.
• Realtor Fees: You can sell your home yourself (FSOB – For Sale by Owner) but if you’re looking for the fastest turnaround on your investment – and profit – trusting a good realtor is worth the commission (and actually gives you helps save money on your flip project in the long run).
• Forgotten Costs – These are additional expenses of moving homes that are often overlooked, including:
o Inspection fees
o Loan interest
or Contingencies
o Closing costs
The average budget of an experienced homemaker was broken down into these cost percentages:
• 53.25% = Purchase price
• 20% = Labor
• 6.5% = Materials
• 8% = Maintenance costs, utilities, commissions, etc.
• 12.25% = Profit
Realistic budget = reduced risk
Nothing can completely eliminate the risks inherent in moving, but creating a realistic budget is one of the key ways to mitigate some of that risk. Another way to “manage” some of the risk is to gain a thorough understanding of moving houses before you make your first investment. And a final way to manage risk is to follow the old adage and never invest more than you can afford to lose.
Best wishes for the success of your house move!
