We are back with the next Flipping houses fundamentals: all about the numbers. The real estate investing game in Calgary has been a bit of a bear market lately. This has led us to move toward the greener pastures of Edmonton Alberta real estate where the numbers make more sense. The difficult truth is, that your home turf might be at the wrong part of the real estate cycle for you to make good returns without high risk. Real estate investing is one of the best investments there is due to the fact that you can mitigate the risk much more than you can with alternatives in the investment world.
When you are evaluating a property for renovation for the purpose you need to consider the following:
- What is the ARV or “after repair value”
- What the total cost of renovations will be
- What is the total “burn rate” or monthly costs you will have to pay during the holding period
- Total project timeline from purchase to sale
- How you will market the property
For example, let’s say you buy a house for 450,000 in Calgary and it has an ARV of 550,000
Estimated repairs are 50,000 (this would include updates to the entire house with minor structures such as removing a wall to create an open concept)
The potential spread on this house would be 50,000 (purchase price of 450K+50k=500K leaving 50K leftover)
The common mistake that a lot of investors make is they underestimate costs, and time the project will take. Often you find some extra issues with a home once you get into the project, and these issues take longer to fix than anticipated. Also, the time to sell can take longer than you want- that is a reality.
We have 50K to work within our example to pay for the following:
- holding costs: Mortage, taxes, insurance, utilities = 2000 (this is your burn rate)
if the project takes 3 months to complete and 3 months to sell you will have the following costs to consider:
3 months x2000 = 6000 in holding costs during renovations
3 months of holding costs once renovations are complete 2000×3 = 6000
1500 in legal fees
Realtor commissions of 20,500
Add all that up and we are at 34,000 in costs — 50,000 – 34000= 16,000 in total profit.
This does not take into account any potential price decreases or staging of the home which I would always recommend if possible in your budget.
The above math shows why I like to see 100,000 in a spread for our renovation deals, this is rarely found on MLS where you can get a deep enough discount to make the numbers work in your favor. The above example would be considered a mid-range renovation, which in my opinion are not viable in Calgary right now due to the value adverse buyers market we currently find ourselves in.
Respect The Hustle
Tim Reid
