Can My Emotions Have A Large Affect On My House Flipping Business?
There are a ton of decisions that need to be made when rehabbing a property.
These decisions can be heavily impaired through our emotions.
When flipping a property our main goal will be to make a required profit while giving a good quality product.
This is not easy and it will take time to master.
During the course of a flip there will be several decisions you will have to make on finish material.
When you are first starting out, your emotions are going to try and sway you make the property fit all the needs and desires you would be looking for in a property.
The facts are that we are going to have to try and find a happy medium between quality material and price in order to fit a specific budget and generate a profit.
Investors tend to get inpatient in waiting for the right house to flip. Emotions are apart of being human and they are sometimes hard to control. Like any purchase you make, you do your research and come up with a firm number that you are willing to pay. Lets take a car for example, you go on the internet, figure out the right price, determine what upgrades you are willing to pay for. Then you go to the dealership, begin talking to the salesmen and he begins to show you the car with every upgrade possible and at a much higher price. When your trying to make this decision, your emotions always seem to take over and you hardly tend to stick to your initial plan. With this new, shiny, (expensive) car right in front of you, you have a hard time saying no.
Your emotions can take over a decision when buying an investment property, just like when your purchasing a car. It is very hard to eliminate your emotional tendencies all together, but there are certain ways to control them. If you are able to remove the emotional aspect from your real estate decisions, your odds of success are much greater. As we all know, investing in real estate is a number's game and there are certain formula's that you can follow to reduce your risk and the emotions that are involved.
Formulas To Limit Your Emotions In House Flipping
As a rehabber you need to know certain formulas that will dictate your decision to purchase a property or pass. Putting accurate numbers into these formula's is the tricky part. You have to have an accurate number of what you are going to be able to sell the property for.
This will require you to find out the ARV or after repair value of the property when it comes time to sell. This is the most important number that will need to be calculated because this will be the starting point for your calculations.
To find our ARV, we will have to run a comparable market analysis. Now if you are just starting out, we suggest contacting a real estate agent to help you out with this.
Along with the ARV, we will also have to find out the repair costs, holding costs, closing costs & our required profit.
Having a firm understanding of your repair costs and your ARV will drastically improve your odds of a profitable house flip.
The Formula For Accurate House Flipping Numbers
There are several different formulas and short cuts that are used to calculate profits or your maximum purchase price on a property.
The formula we like to use is:
(ARV - Repair Costs - Holding Costs - Closing Costs - Required Profit) = Maximum Offer Price
This formula will cover all the variables of your flip and even allow you to put in your expected profit. This will allow you to know going into the project what you will make if you hit these numbers. The variable I didn't yet touch on is the holding costs.
Your holding costs will be your taxes, insurance, utilities, debt service. Some areas have other variables inside there holding costs, but if you are investing in this area, those are the only variables you will have to consider.
Remember you want to be very lenient with your numbers and give yourself a little cushion because when you take on any project you can almost be sure that:
The project is going to take longer than expected
There will be change orders involved when your contractors begin to open up the walls
The house wont sell for as much as you hoped
If you do your homework and your research, these issues shouldn't be extreme and you should be relatively close to all your numbers you predicted when your project began.
For example, lets say you do your research and you find an investment property. From your research you find that you can sell your home when its all fixed up for 145,000 (ARV). You put together a scope of work, sign contracts and put together a budget and you realize its going to cost you 40,000 to fix the house up (repair costs). You do some more research and find out what the taxes were on the property last year, estimate your monthly utility bills and get a quote for insurance on the home. You also factor in the 6.5% - 7% of commissions and you come up with a holding price cost 12,000.
So for this specific investment property you will want to run these numbers:
145,000 - 40,000 - 12,000 - 30,000 (profit) = 63,000
The 63,000 will be the maximum offer that you will put in for this property.
By following this formula, you will put yourself in a better position to profit on all your flips. This gives you a good cushion for any mistakes that you have made, or if the house wont sell or any of the reasons that we discussed that may eat up your costs. Remember always run the numbers, be as accurate as possible and give yourself a cushion.
Wrapping Up | Don't Let Your Emotions Get The Best Of You
When it comes to rehabbing and selling property, we want to let the numbers speak for themselves. There are specific rules and guidelines we will follow for each property that we do due diligence on. These systems and formulas will allow us to make a profit on every property that we flip and also allow us to feel more comfortable and organized throughout the process.
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