Why is it that some people make big money in flipping real estate and others struggle to make any money and yet others actually lose money? The reasons can be many but let’s look at the most common reasons for falling short of profit goals. “Oh, reverse that lets look at this from a more positive direction” as that is how you want to approach all your investments. Positive thoughts in, equal positive results out.
• Have a pre-determined outcome: You want to know going in what you expect coming out. This requires planning, budgeting, having a team in place for all aspects from acquisition to rehab to liquidation. Have a plan in place and execute the plan.
• Get true estimates: You want actual estimates for repair not simply a number you pluck from the air as to how much you will budget for each repair. A random, “I will spend 6k to renovate the kitchen” rarely ever works properly- get a written estimate.
• Expect the unexpected. Seasoned rehabbers know all too well that it is not a matter of will you find an unexpected repair expense that needs to be addressed, it is a matter of how many unexpected expenses will arise. Estimating a property only allows you to estimate what you can see. Often as you start rehabbing you un-cover additional repairs or replacement parts that are needed. Most seasoned flippers will add 15 to 20% to their budget for these unexpected expenses.
This is what separates the profitable flippers from the break even flippers or flippers who lose money. This 15 to 20% can make or break your profit line. When evaluating a property and you find a profitable flip with this built in contingency you have increased the profit big time and reduced the likelihood of losing money.
Last and certainly not least; the contingency plan. Safeguards against losses are paramount to creating a sustainable flipping business. After adding all expenses from start to finish you determine the property to be a good flip, the final piece is to insure that (if you should have to) you can rent the property out for a positive cash flow.
I am an eternal optimist. One thing that allows optimism to flow is to have a great sense of security that you cannot fail. Making decent money on a flip is a wonderful thing. In the spirit of expecting the unexpected you should also factor in what you will do if, for some reason, you cannot expeditiously sell the property. If the economy suddenly changes as it did back in the mid 2000’s can you rent it for a positive cash flow? If indeed the market will allow you to rent it at a rate that will produce positive cash flow then you have a built in fail safe.