Ever since I started my real estate investing career back in 2005, I had always wanted to do a flip, and experience the satisfaction of taking something old and bring it back to its former glory. I call it my ‘HGTV induced false prophecy’.
I had seen so many ‘house flipping virgins’ find a relic, turn it around and make it a modern masterpiece, all while eek’ing out a nice little profit, and I wanted to try it.
So, in 2018, 13 years after my first real estate investment, I came to the realization that, I had to do a flip. And, if for no other reason, doing it would finally quell my insatiable curiosity of house flipping whether I made a giant profit, or lost my overalls.
First off, doing a flip is not for the faint of heart.
Let me start by saying, HGTV makes it look so easy. Oh, there are those few cursory shows where the investors vouch never to do a flip again, but for the most part, “On to the next flip” is the message they leave you with. Maybe they’re really professional flippers, dressed up as novices, who knows.
For starters, unless you’re subbing out all the work, your human labor will likely be required in order to turn a profit. Subbing it all out sounds great and all, but if profiting is your objective, then paying someone else to do everything is sorta pointless. You may as well just watch the ‘pawns’ over at HGTV entertain you with their flips.
Now, I’ll admit, I’m no Bob Villa
But, Aesthetically, My first flip turned out well as you can see from the before and after pictures. But, the process wasn’t as smooth as the pictures make it out to be.
The Backstory on doing my Flip.
I secured this gem for the price of a top-of-the-line Tesla Model 3. It was 1310 square feet set on 1.5 acres in Rural Tennessee. The For Sale By Owner (FSBO) price was $85,000, but, since you typically make your profit on the initial purchase of any investment property, 85K wasn’t going to leave much wiggle room.
- I offered $50K, and was quickly rejected, so I countered at $54k, rejected again.
- She countered at $58K, oooh she’s in the game…. I rejected, and countered at $56,500.
- She waved the white flag, the deal was done. Let the games begin.
How much capital do you need to flip a house.
It’s important to be conscious of how much capital you will need to flip a house. Renovations can get away from you rather quickly. And, when money is easily accessible, it makes over-spending on a renovation that much easier.
According to moneycrashers.com, you should pay no more than 70% of the After Repair Value, minus expenses for the acquisition of the property.
Let’s analyze this 70% benchmark by itemizing all the costs involved in my deal and at the end I’ll grade my performance. My target After Repair Value was $150,000, which meant I had $93,500 to work with which included my potential profit. The more I spent, the lower my profit was going to be..
I’ve put together a Google Sheet to help others calculate their Expense to Profit Ratio, and have included some screenshots below
Starting from the top.
No sense on fixing anything inside if the roof still leaks.
New Roof $5500
Since very little of the inside was salvageable, my demolition was a big part of the project. However, because I was able to do this myself, this was an area I was able to save some money on. I really just had to have it hauled off and taken to the landfill.
Once I got everything down to the studs I decided to reconfigure the layout by adding a bathroom off of the master bedroom. This means I needed to steal some space from the existing hall bathroom. Fortunately, I was able to reconfigure it enough to add two 5×8 bathrooms,
Next came: Bathroom framing, new electrical throughout, new plumbing for both bathrooms, drywall, insulation and fixtures.
Moving to the kitchen was next on the list. It was important that I replace it with modern fixtures and cabinetry. No one would have bought the house had I not paid close attention to the kitchen. In fact, According to fortunebuilders.com, for every dollar you spend on kitchen repairs can yield a 98.7% average ROI.
Kitchen Reno $10,685
I tried in vain to save the windows, even going so far as to sand them down to get them ready for new paint and hardware. But, the smell of nicotine, lack of efficiency of the glass, and just overall aesthetics, made keeping them less than ideal. I made the decision to just replace them and move on.
14 New Windows $5650
I replaced all the floors in the common areas with a pre-engineered hardwood, then went with carpet in the 3 bedrooms, and tile in the bathrooms. I had some experience laying floors in the past, so I elected to save some money here by doing the floors myself.
New Pre-engineered Floors $1350
New Carpet $850
New Tile $350
Moving outside. I tore off all the wrought-iron on the front porch and replaced it with nice 1×6 facia board. Then repainted it with a more modern paint color.
Wood and paint for front porch $375
Once I fixed the front porch, it made the existing orange brick stand out like a sore thumb. So, I elected to paint the entire structure, to give it a more modern look. I was able to find a retired Fireman, who was looking for extra work, paint it for me.
Cost of Painting the exterior $450
Staying outside, I replaced some of the landscaping, tore out some old shrubs, and brought in dirt to fill in an area where there was an old pool.
There were some additional material costs, I didn’t yet cover, I’ve added these to a ‘Miscellaneous’ category.. Things such as lighting, kitchen hardware, wiring, tools, nails, screws, fireplace painting and cleaning, and minimal staging are all included in this category.
There are also, the holding costs. The cost to service the mortgage debt for the duration of the project, along with insurance costs and taxes. I’ll include these under ‘Miscellaneous’ as well.
Total cost of all repairs
Now, for the Moment of Truth…..
Did I maintain the 70% rule for house flipping expenses?
My After Repair Value (ARV) and final sale price ended up being $159,000. Which was $9000 over my initial projected sale price.
My total Repair Costs were $49,530
The Purchase Price-$56,500
Which renders a 51.61% Expense to Profit Ratio. 18.39% below the 70% Rule. Moneycrashers should be very proud!
Looking for a way to evaluate a property you’re interested in buying?
I would give myself a grade of a B+ to an A- for this project. Getting $9000 over my projected ARV was very helpful, and keeping my expenses low by doing a lot of the work myself was also key. However, the project took 9 months which drove up the holding costs.
If I were doing another flip, I would likely hire out a few more of the projects. I think by doing so much of it myself, slowed the process and caused my holding costs to increase. Perhaps, just paying someone to complete the job in a fraction of the time it took me, would have saved me money in the end. It certainly would have saved me in aggravation.
I also calculated my hourly wage for the time I spent on the project. I estimated I spent 172 total hours doing ‘destruction’ and ‘construction’ related tasks, and also finding and meeting with contractors, fixing landscaping, and cutting grass. This brings my hourly rate, after closing costs to $307.96 per hour (way more than I’m paid at my 9-5 job)
In the end, I’m glad I did the flip. That said, I’m not rushing out to find the next deal, but if one finds me, I’ll make sure to strive for the grade of A+ on the 70% rule for house flipping.