When flipping a house, the ultimate goal is to make money. Unfortunately, you do not make any money until after the process is complete. So, to figure out how much you will be making, you have to start with the end in mind. Typically, this potential money made is given in terms of a percentage, called the return on investment (ROI.)
For most house flipping projects in this current real estate market, a 10% - 20% return on investment will yield good results. Anything above 20% is very good and anything below 10% is typically not worth the time and effort in any real estate market. This range can also vary depending on the current state of the real estate market. This range was as high as 30% - 40% in 2005. In 2010, a 5% ROI would have been a great yield for your house flipping project.
With this new found understanding of ROIs, figure out how much money you want to make. Now that you have that figure, you need to determine how much money you need to spend to make that money. The more money you want to make, the better you should plan your spending habits during the house flipping process.
It is critical to determine your overall budget for the house flipping process.
You set your overall budget by your own financial history and your ability to provide credit and the amount of cash you have available to pay for this process. If you are really interested in house flipping, look over your personal finances and talk with your lending institution and your financial advisor to see how much you can afford to spend on your house flipping project.
Now, let’s go over an example to showcase the point of strategic planning. These numbers are provided for example purposes only.
For our example, we want to earn a 10% ROI. We also know that we have set up a total budget of $200,000 to spend on all three phases on the house flipping process over the span of 2 months. The three phases of the house flipping process are the buying of a house, the home improvement/renovation phase, and finally the house selling phase. Two to three months is a typically timeline for a house flipping project.
Breaking down our $200,000 budget, we have $185,000 is set aside for the home purchase, $12,000 is set aside for the construction costs, and $3,000 is set aside for the marketing and sale of the home. These activities should take approximately 2 weeks, 4 weeks, and 2 weeks, respectively.
For our example, we will assume we are paying cash, in full, for all three of these phases.
In summary, we have spent $200,000 over 2 months.
As a reminder, we set out to make a 10% ROI at the beginning of this flip. Therefore, if sell our flipped house $220,000 we will have stayed on course. This means we will make $20,000 in 2 months!
Imagine if you kept this pace up every year. That's 6 houses a year which is $120,000 per year. It sounds like a lot of money, but really, even the most novice of home flippers could achieve this goal.
Obviously, to complete multiple house flipping projects throughout the year - let alone one - is challenging and not every house flipping project is successful. However, if you plan a realistic budget and schedule you will be well on your way to making thousands of dollars with house flipping.