Losing money on rehab costs is the number one reason why many investors fail to prosper on their handyman specials. To avoid the same mistakes, you need to understand how to analyze your profitability to make sure your fixer upper is truly a gem and not a money pit. New investors are intimated by calculating rehab costs. A simple way to determine whether your rehab is profitable is to use a rehab calculator. You can find software downloads online. Excel spread sheets can also be used to calculate your costs. Getting Started So here is what you need to get started. Use a three part analysis. Best case scenario, worst case and realistic. Enter your purchase price. Next add in your purchase costs including purchase price, loan origination fee, appraisal costs, credit report, title insurance, escrow and recording fees and any other closing costs. Get estimates from three title companies. Total that up and that gives you the total property purchase costs. Next category is the price you expect to receive after flipping your home. Enter the three price ranges from high, low and median under each category. Enter your sales costs for real estate commissions, title fees and documentary stamp tax transfer fees and subtotal. Then add up your holding costs for taxes , insurance and utilities and sub-total. Now add up your rehab fix up costs and subtotal. Subtract the sales costs, holding costs and rehab costs from the projected sales price. Now subtract that figure from your original purchase costs and what is left over is your profit or loss. The calculator will do the work for you, but you now have an idea of your profitability.
There are some cost cutting rehab projects that you can do cheaply to get your house marketed quickly so you can move on to the next project. Paint, new flooring and changing lighting fixtures and hardware as well as outdoor landscaping are the easiest and least expensive ways to jazz up your property and make it attractive to your buyer. Stay away from homes that need major systems repairs if you are new to the business because they can cut into your profits, especially if you run into foundation and structural problems. Run the other way. Seasoned investors have gotten in trouble on such projects as well, but they are more experienced in handling handyman specials. Once you get the hang of rehabbing a half a dozen homes, you will be ready to move on to the more challenging projects. When getting estimates, always obtain three. Use a professional contractor when starting out. If you are handy, then by all means do the work yourself. Be sure to get permits so your property is code compliant. Most cities won't allow you to sell your property unless you meet the city or county codes.
Rehabbing is profitable when you take the right steps and budget accordingly. Allow some cushion in your budget because even the most carefully laid plans can go wrong when you are dealing with material costs. Stay as close to your budget as you can to get keep your costs down and your profits high, and you will have a rewarding and profitable rehab experience.
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