As she flipped through the channels on TV, a nice lady who owned a franchise of clothing stores felt like she had a light bulb moment. She felt inspired and decided to venture into house flipping. Let’s name her Susan. Susan opened up a bank account, borrowed money, and loaded it in. She also opened up a credit card account. She feels financially ready to start her business. By the end of the year, Susan tramples into tax problems and issues with her investor. So where’s the fumble?
With all the television hype, it’s easy for the regular viewer to think, “that looks straightforward enough. I can just buy a property for $100,000, make improvements worth $50,000, and then sell it for $180,000 to earn $30,000 profit. I can do that.” Unfortunately, this is an overly simplistic and dangerous way to do the math for house flipping. When it comes to working with numbers in this industry, there are multiple variables and possible changes to account for. Without the proper know-how, you can be dooming yourself to heavy loss.
Retirees and professionals from other industries tend to jump into house flipping without sufficient construction or remodeling knowledge. Shelling out $20,000 to “learn the basics” from house flipping seminars, then spending a lot more on the actual property purchase, then going into home improvement without the experience to accurately anticipate possible causes for delay and manage additional costs, and then staring at a stack of paperwork, losing track of overhead, taxes, and all the incoming and outgoing bills to be paid in each step of the process – these hopeful flippers are bound to be overwhelmed. They soon painfully realize that sometimes, you just don’t know what you don’t know, and that this business goes way beyond the edited confines of a 30-minute episode.
Real estate agents always stress “location, location, location,” which is definitely an important element in house flipping – but this industry also requires careful attention to one more crucial practice: doing the math right. From the very beginning, this will help you while picking the property, and planning for costs and pricing. Here’s how it’ll go:
First, researching on the location will give you an idea on the price range of the neighboring properties, and whether it’s stable or fluctuating due to multiple factors (nearby schools, upcoming development, crime rate, etc.). Note that fluctuations can happen unexpectedly too, so that should be accounted for along the way. Additionally, the area will help pinpoint the demographics of the market you will be selling to – whether it’s more for retirees, or for young families that want to live within the vicinity of the schools.
The condition of the property will help you choose the improvements you can make within the budget, neighborhood standards, and market preferences. Do you want to improve the curb appeal of the property? Do you want to focus on kitchen and bath remodeling, as those areas are often deemed to sell the house? Do you want to make it more family-friendly? Do you need a lot of structural repairs – electrical, plumbing, insulation, or pest control? What are the essentials?
When you properly factor in all the information at hand, you can decide if the property is worth the flip.
You can compute for the after repair value (ARV) and the maximum buying price you can offer the seller, and negotiate this as well. You can set sufficient allocations for the entire home improvement process (cost of goods sold, labor, overhead, closing costs, etc.), padding for additional costs and unforeseen delays, and of course – profit, which should ideally be at least 30% of your purchase price.
Now, picking out a property and setting a refurbishing budget is just the start. You’ll need to get down with a plethora of details as you move forward. Here, all the construction processes and project accounting terms come in. House flippers who have no prior experience in the building industry can easily get lost in the bulk of paperwork, records, bills and requirements that they didn’t even know about. Not being aware of what they needed to prepare for can cause major planning and financial setbacks.
As you might notice at this point, the bulk of house flipping is essentially construction and remodeling work.
Having a strong understanding of construction materials, applicable tax laws, proper insurances, general liability, workers’ compensation, and how they all tie up in your records will help you organize your project in a timely fashion. You can manage each individual contractor job without getting any of them in each other’s way, and arrange for maintenance costs for the entire duration of the rehab. Time is money, and proper budget allocation will help keep you on track. However, of course, not all house flippers have a professional background in construction project accounting.
Thankfully, there is a simple, yet often overlooked solution to safeguard your investment from start to finish; the key strategy is to outsource your project accounting needs to construction bookkeeping specialists.
This melds construction know-how and bookkeeping expertise into one go-to service bundle that keeps you focused on your project, knowing that every dollar in your investment is properly accounted for. Plus, with an efficient record-keeping system in place, you’ll have all the documentation you need for tax reduction, as you back up your claims to real estate investment deductions.
Founded by builder-remodeler Mike Bruno, Contractor Business Solutions has emerged as a smart choice for bookkeeping in the building and remodeling industries. House flippers can transfer this office grind to a team of certified bookkeepers who are equipped with the right knowledge and skills to help you stay on top of your numbers. This way, you can make well-informed decisions, and price the property based on measurable costs rather than be tempted to overprice based on emotional involvement in the project. After all the blood, sweat and tears, the house might feel like a masterpiece, but the fact of the matter is – for the buyers, it’s often just another option with pros and cons to weigh.
As you come close to reaping the fruits of your labor, keeping a good record of all renovations will help you showcase all the highlights of your newly improved property. Prospective buyers can have a better understanding of the value of the house, and visibly match it to a fair cost. At the end of the day, the simple yet rewarding business practice of outsourcing your construction bookkeeping services makes all the difference. You don’t just make computations and keep receipts; you let the experts take care of all the numbers.