Investment in residential real estate comes in many forms. Some prefer the relatively passive and long term rental investment, while others look for more fast-paced and demanding rehab and flip options. Rehabbing a property to flip is perhaps the most active form of real estate investment, especially if you are doing it yourself. Hiring a contractor usually cuts too deep into your profits for the whole job to yield any favorable results.
But if done right, it’s also one of the fastest yielding investments. You can turn a neat profit, usually within four to six months. The keywords here are "if done right": That includes everything from finding the right asset, thorough evaluation, accurate rehab cost projections, quality of the rehab job, and finally, selling the property as soon as possible. The longer it sits on your hand, the more expensive it becomes, especially if you take out a short-term loan to fund the rehab.
The quality of rehabbing and sourcing cost-friendly materials are important factors in a flip, but they aren’t the reason why most flips fail. Two of the primary reasons why many flips fail, or don’t turn as much profit as investors projected they would, are:
1. Overly optimistic ARV
2. Miscalculating the cost of rehab
If you are planning a rehab and flip endeavor, you can save yourself a lot of effort and money (in case the project fails), by properly evaluating the rehab deal and realistically projecting your rehab cost and ARV. This is something where a property investment analysis (Pro Forma) report can come in handy. This detailed report, prepared by a team of professionals who have been in the business for long enough, can really help you understanding and refining your property evaluation technique and cost-projection calculations.
What’s In The Report?
When you evaluate a property for rehab and flip, you have to do more than just analyze the property itself. This is one of the first mistakes most new flippers make. No matter how beautifully you can renovate a property, or how "technically” perfect the flip is, you can’t sell it for a lot more than the property value in the area. In other words, flippers don’t find enough comps (comparable points) to project a realistic ARV.
This will be part of the report, so you can learn how, with a lot of comps, you can find the fair and expected value of the property. Secondly, how to calculate the rehab cost, and how it, the purchase price, and closing cost sit with your financing. If you don't factor in the closing costs, both at the time of purchasing and selling the property (after the flip), your returns might be way off the mark.
And lastly, a report like this can help you understand how long you can hold on to a property before it becomes a liability. Unlike BRRRRs, home flips are supposed to be a short term investment. The quicker they are off your hands, the better. But the market doesn’t move on investor’s whims, so you have to have a plan B, and a realistic assessment on how long you can hold on to the property, instead of selling it below your projected ARV.
Like any other form of investment, real estate is also a knowledge and numbers game. The more you know, the better. And these reports can significantly augment your knowledge and understanding of the market, and evaluating a flipping prospect.
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