I get a TON of questions about where the money comes from on my projects. I’m happy to be super transparent about how it all works, where the money comes from, and how much different things cost, because that’s how we all learn! 

First off, I just want to be clear that the info and numbers I am sharing here are based on my experience. Yours might be a bit different. I highly recommend working with people you trust (lenders/contractors/realtors/etc.) so that you can get the advice and information YOU need to make your decisions. Also know that everything always ends up being a tad (or more than a tad) more expensive than you thought it would be. Everyone has different comfort levels with financial risk and even how big of a project they are willing to take on, so make sure you’re doing YOUR thing, not someone else’s.

So here we go!

I’ve used two financing options to buy real estate over the past few years, conventional bank financing (with and without a refi) and hard money loans. Depending on the property and what you plan to do with it (flip it or keep it as a rental) you’ll need to decide which is the best for you.

Let’s chat about flipping houses first.

Flipping houses is fun. It’s exciting. It’s sexy. People will think you’re cool if you do this. But, it’s also a full time job on it’s own, even if you’re not DIYing. You’ll think about your project 24/7. You’ll wake up at night worrying that the paint color is wrong, or that your basement flooded or your pipes have frozen, or that you’re over budget or taking too long, or wonder if someone has broken into the house. The job is not hard, per se, but there are a lot of moving parts and just like selling your house, it can be stressful or overwhelming. Selling a house you don’t live in and have a lot of money into can be even harder, emotionally and financially.

If you’ve decided that all of that sounds like it is for you, then it’s time to start project shopping and talking to everyone you know about where to find your deal.

Finding the deal is the most important part of a flip. People say, “you make your money when you buy” and they are 100% right.

I’ve seen people buy a house because it was yucky and needed updating but without a clear after repaired value, scope of work, and a budget up front and they are lucky if they break even or make a small profit. You need to know from the outset how much you can get it for, how much it needs in repairs, and what you can sell it for (including the costs of holding it and selling it). You can find deals on the MLS, but you can also find them on Craigslist, Zillow, and for sale by owner. I most often find them through people I kind of know. Because I’m basically always talking about a project or working on a project, people have started letting me know when they know someone with a house that needs to go. Never underestimate the power of asking for what you want. If you’re serious about doing this, start talking about it with everyone you see and asking questions. It works. Thanks Universe! 

When I flip a house, I use a hard money lender to finance the deal. I love working with Sean Blomquist at Pine Financial. He’s easy to work with and super quick to get me the numbers I need to help me make my decision. The hard money lender will lend you 70% of the ARV (After Repaired Value). I use this math to help me with my initial thought process: If I think this property is worth $200k (or whatever number) when it’s done, how much can I pay for it, and how much will I get to use for repairs?

I always try to be conservative with the math. Here is my actual thought process for my recent project on Fremont:

  • After looking at comps, I think this house is worth AT LEAST 200k, if not 210-220k. When I look at the comps, I want similar aged and sized houses in the same neighborhood and ideally something that has had some updating. In this case, we didn’t have much for updated comps, but we did have similar, more livable houses selling in this price range.
  • To be conservative, I look at the numbers like this: 200K x 70% = 140k. Can I buy this house and fix it up to the 200k level for 140k? If I can get it for 100k, then I have 40k to spend, is this possible/doable?
  • If yes, then I move forward with making an offer. With hard money, I try to keep the 70% of ARV as my guide for the max I want to spend on acquisition and repairs, which builds me in a pretty nice buffer in the case that I need to go over on the repairs a bit, which is somewhat inevitable. You cannot predict everything that will come up on a flip.
  • 200k (ARV) – 140k (acquisition and repairs) – 9% of ARV (rough cost of sale) = $42k (rough profit).
  • If I like that rough profit number enough to take on the project, I’ll move forward with writing an offer. I see many flippers work for less than 40k. The profit goal is completely personal and seems to have more to do with what you’re making in the rest of your life and how much time/energy you’ll be putting into this project. I like at least 40k for 2-3 months of my life, and I knew that in this case, it was likely I can sell it for more than 200k which would allot me a bigger repair budget and a bigger profit margin.
  • I made the seller an offer of 100k. I didn’t ask for seller paid closing costs, and I wanted to close 4/1. He took the deal.

Once you have a signed purchase agreement, you need to put together your scope of work. This is the MOST IMPORTANT PART of the project. If you don’t have a plan for exactly what projects you’ll be doing and how much they will cost, you WILL BE OVER BUDGET. You will also likely do too much. My stance on cosmetic repairs is that many buyers like to take on small, personalization projects, like painting a bathroom, picking out curtains, modifying the property to their specific needs and uses, etc., but really don’t want to undertake BIG stuff like electrical, plumbing, changing flooring, etc. So I try to make sure I can do all of the boring stuff like HVAC and electrical, and enough of the pretty stuff that my house is cuter and more updated than the rest of the neighborhood, but still at a comparable price to something uglier. This way buyers feel they are getting a GREAT value and I don’t have to sit on the market for too long. I do not want to be the nicest, most improved, most updated house in the neighborhood at the highest price.

After you develop your scope, the appraiser will look at the property as it is, and with the repairs that you’ve specified in your scope of work to determine the After Repaired Value. If this number comes in where you like it, your deal moves forward. In my case, it came in at $225k. So here’s my new budget: 225k x 70% = 157,500. Now I have almost 60k to spend on my updates and repairs, closing and holding costs, and a bigger profit margin of about 47k.

Your scope of work should go room by room and be very specific:

EX. Kitchen:

    • Demo/Dumpster: $300
    • New cabinets and counter tops: $5000
    • New flooring installed: $1000
    • Appliances: $2500
    • Plumbing: $1000
    • Electrical: $500
    • Paint: $200

Go through each room of the house and put numbers on everything. For some things, you’ll have one big number for the whole job (i.e. painters will paint the whole house, electrician will do wiring in the whole house, not just one room) but things that are room specific, especially kitchens and bathrooms you’ll need to break out into explicit detail.

Don’t forget:

  • Exterior work
  • Basic landscaping
  • Dumpsters
  • Permit costs
  • HVAC tune up/repairs
  • Flooring
  • Painting (inside and out)
  • Roof
  • Cute light fixtures
  • Tile/toilets/faucets/etc
  • Garage
  • Cleaning
  • Staging
  • AT LEAST 10% of the total budget for surprises. You will NOT AVOID surprises. It is impossible =)

Here are the surprises that came up on just this last project:

  • The garage door opener didn’t work and needed replacing AND new outlets
  • The garage roof needed to be resheathed AND reroofed
  • There was no framing behind the paneling in the basement so we needed framing and insulation and a building permit
  • The basement bathroom didn’t have a bath fan
  • There were no ducts to run heat into the basement finished area
  • There was drain tile and a sump basket, but no sump pump and no circuit to plug it into
  • Second dumpster and extra trash pickup

Some people use a fancy spreadsheet for their scope of work, and I usually do too, but most of the information gets collected in a notebook while I’m walking around the property. Take measurements of each room so you can figure out how much flooring and tile you’ll need. Make note of how many light fixtures you’ll need to pick out. Measure your kitchen for cabinets, draw rough sketches of how you’ll lay out the cabinets or changes you’ll make with walls or fixtures. Take a TON of pictures.

During your inspection period, bring in contractors to estimate the cost of the repairs in your bids. I usually have 2-3 contractors bid each job, if not more. I’m continually AMAZED at how different their prices come in and how long each one will take to do the work. This varies a ton. I’m not being dramatic about this. For example, for the electrical on this project, I received the following bids: 6k, 12k, 15k, 28k. Contractors said it would take 5 days for 2 guys, 2 weeks, or more. It ended up costing about $8599 and taking 1 guy about 4 weeks (not working daily). You want options here, so don’t worry about having too many bids. Inevitably someone will be too busy for you, or the one you liked will be too expensive, etc.

You need to figure this all out ahead of time, BEFORE you go to closing.

Finding contractors is hard. Start by tapping your network, ask on social media for whatever trade you’re looking for. Ask your lender, your realtor, your friends and family who they have worked with before. Then check Yelp and the Builder’s Association directory if you need more recommendations. I try to schedule the bids during 2 or 3, one-hour windows in a week so I don’t have to disrupt the sellers too much (if the property is not vacant) and so that I can be effiecient with my time too. 

Next you need your construction schedule. It should go something like this:

  1. Closing day!
  2. Dumpster Arrives/Demo Begins
  3. Apply for permits
  4. Framing
  5. Mechanical rough-ins, electrical/plumbing/HVAC
  6. Rough-in inspections
  7. Insulation (and inspection)
  8. Sheetrock, tape/mud
  9. Cabinetry, vanities, tile work, flooring, paint
  10. Finishes go in: appliances, lighting, receptacles, plumbing fixtures
  11. Cleaning
  12. Staging
  13. SELL IT!

Here’s the BIG REVEAL of my Fremont Flip Project!

Depending on how big your project is and how much you have hired out or are DIYing, this is going to be at least 6 weeks. I have done them in 4, but it’s really a full time effort and too stressful to go that fast. 8 weeks is typically more than enough if you are organized and working hard. Remember that time is money, the longer you hold this thing, the more payments you’ll need to make and you’ll need to take on routine maintenance stuff like mowing/shoveling/raking etc.

That’s really it for flips. You’ll want to get this thing sold quickly so make sure you’ve got an amazing real estate agent to help you get that done.

Let’s transition to some talk about RENTALS.

The cool thing about the hard money loan, is that you can also use it purchase rental properties, especially if they need some fixing up. You’d purchase the property in the same way we discussed above, all of the same numbers and repair items apply. In the case of a rental property, you might make some different choices on your finishes and opt for more durable products. When your project is done, rather than selling, you can refinance out of the hard money loan and into a conventional loan. If the numbers work right, you now have a rental property for very little money out of your pocket.

Here’s how it would look (assume the property is finished and ready for a tenant to move it):

  • The property will be appraised (again). Let’s assume it comes back at the same, 225k.
  • The bank will lend 75% on the appraised value for a conventional loan. In our case, $168k.
  • I close on the refinance with a conventional loan with more than 15% equity in the house. I take on regular monthly payments around $1200/mo.
  • Based on conservative rental comps in the area, I can get $1300-1500/mo for my property so this would cashflow a few hundred dollars each month. This doesn’t sound as sexy as an almost 50k profit of flipping, but remember, I have less than 5k of my own money into this deal, so my cashflow of $1,200-3,600 per year would have me recouping my initial investment pretty quickly. And since the property is COMPLETELY updated and repaired, the likelihood of maintenance issues that will come up in the next few years is very low.

Having the option to convert an intended flip project to a rental if necessary or desired makes me feel even more comfortable about taking on the risk of this purchase. If you want to read about other ways I’ve financed rental purchases and rehabs, check out my previous posts about my rental townhouses. {LINK to townhouse wrap up post and the very first amy’s grand adventure one on the old website.} If you want to talk to Brad Nolan at Bell Banks about using this refi option, you can reach him here.

Phew. That was a LONG one! If you have specific questions, or want to get started with buying your first flip or finding a rental house, please drop us a line. Our agents are experts in this stuff and will happily sit down to discuss your goals and help you through the whole deal!

Thanks for reading guys!


Amy Ranae

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