The real estate market remains a comfortable seller’s market, as home prices have surpassed record highs in two-thirds of American cities. While that may leave many Americans skeptical of a repeat of the 2008 subprime mortgage collapse, the economy still shows room for growth, especially on the supply side.
According to some economists, residential remodeling activity is expected to increase anywhere between 6-8% this year. With a low home inventory, a prime opportunity exists for home flippers to enter the market and make a huge profit.
Unfortunately, the rapid rise of home prices could also pose a major obstacles for home flippers if they’re not careful what projects they choose to undertake. If you’re looking to spread out your investments with a home renovation project, there are some considerations you should take to decide whether it’s profitable flip.
Look A Comparable Properties
Comparables, or ‘Comps’, are similar properties recently sold in your area. Generally, they share a set of common characteristics, including size, age, design, etc. You can use comparable properties to determine which upgrades are the hottest in your area and add the most value.
The key to home flipping is not over-renovating. Have your real estate agent complete a comparable market analysis (CMA) or comparable homes in your neighborhood to determine what the average house in sold for. Use this to mimic upgrades that houses have undergone in your area to add the most value. One thing to consider about a CMA is that it doesn’t account for housing condition.
Calculate the ARV (After Repair Value)
To estimate how much your profit margin will be from a home flip, you’ll need to calculate the expected ARV of your home. First, add the expected costs you’ve been quoted by a contractor for repairs to the price that you purchased the home at. Then, subtract this value from the price of comparable homes in your area to determine the expected ARV. You can also access a multiple listing service (MLS) for more information on home pricing in your area.
Once you have pinpointed the ARV of an expected home renovation, you can choose which projects will generate the most profit. But you’re not done yet.
There’s other costs, such as taxes, closing costs, ghost fees, etc. that you will have to account for at the end of the sale. You will need to determine which party will be forced to eat the closing costs and whether this will be factored into the listing price.
In terms of repair costs, most agents follow the ‘$20 per square foot rule.’ This essentially means that you can expect to pay $20 for every square foot of repair.
After all of this, you’ll need to determine your route of financing to make the most money off of your investment. A short-term loan is ideal to save money on interest rates and there are loans for fix it and flip it. There are also hard money loans that enable you to pay off your property as soon as possible.
Honestly, making the repairs is the easy part of home flipping. The real challenge is mitigating costs along the way to make the most profit off your home flip. Being a hot seller’s market, home flipping is sure to attract more people to the space this year.