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When it comes to real estate investing, home flipping can be one of the most effective strategies for generating large returns. Your goal with these homes should be to maximize the value you can add while minimizing your costs and expenses. With some experience, you’ll be able to make a consistent profit and you’ll be able to identify the most lucrative homes for flipping. If it’s your first time dealing with fix-and-flip properties though, or if you’re new to real estate investing, there are a few things you should know about the process before diving in. Renovations in particular can become a make-or-break point for generating returns on a home flip. In this post, we’re going to share some important information that can help you get the most out of your renovations and help you make a profit on your home investment.
Leave some breathing room when estimating your costs
A common mistake investors commit with their first home flip is estimating the cost of their renovations beforehand, and then being surprised when the costs actually exceed that amount. That can easily cut into your returns, so it may be a good idea to leave some padding when estimating your expenses. A general rule of thumb is to overestimate each of your expenses by 10-20%. This tip can also help prevent overspending, since you’ll know exactly which item ends up costing more than you had anticipated. From there you can focus on reducing costs in that specific area, and keep your expenses at a manageable level.
Don’t over-improve the property
Another thing you will want to avoid is spending too much on renovations, and this is true for a number of reasons. Most importantly, you want your property to be appropriately priced with the local market. Spending too much on renovations means a property most people will no longer be able to afford, and then you may have to lower your final sale price to attract buyers. Remember, your goal is to spend wisely and perform renovations that will add the most value to the home. You do not want to own the most expensive home in a neighborhood, since it may be hard to sell.
Once you know the general pricing of homes in an area, you can use the 70% rule to find a home that will make a good flip. This rule states that the purchase price of a home should not exceed 70% of the home’s after-repair value (minus the renovation costs). That means an ideal flip would be a lower-priced home in a great neighborhood that rises to meet the price of surrounding homes after renovations are completed. You can also use this rule to help keep the number of renovations you perform in check, and keep your home’s after-repair value reasonable.
Choose Key Renovations
As mentioned the renovations you perform should add the most value to the home while also not costing you outrageous amounts. That means you need to focus your attention on select rooms and on specific renovations. High-traffic areas of a home like the kitchen and bathroom are always a great place to start and will generally add significant value to the home while costing you little. Afterwards, you should go for relatively inexpensive upgrades like flooring, trim, and lighting fixtures which can have a surprisingly big impact to the look and feel of a room. Sometimes a fresh coat of paint may be the only thing a room needs to look updated and modernized. Keep in mind that you shouldn’t let your personal tastes affect the renovations you perform, and you run the risk of overspending if you tailor the home to your specific tastes. Instead, stick to upgrades with broad appeal that you know will go over well with most home buyers.
Work with a trusted lender that can fund your project
RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. Our short-term fix & flip option provides financing for up to 90% of the Purchase Price + 100% of the Renovation Costs. If you are an investor looking to finance your first home flip, RCN Capital has competitive loan options available. Connect with us today to discuss your next real estate investment.