House Flipping 101: Rehabbing Houses, Analyzing and Finding the Best Property to Flip

How to Analyze the Deal on A Flip House

When it comes to flipping a property or buying a rental property for investment, you must thoroughly learn how to analyze the deal, calculate rehab costs, calculate your ARV (After Repair Value), your MAO (Maximum Allowable Offer), calculate other fees like holding costs and closing costs, and have a good grip on the range of your potential profit, ideally BEFORE you even look at the property. Finding the right property can sometimes mean analyzing 20 properties or more before you find the right one. Rehabbing houses can be a daunting and money draining task if you don't do the math ahead of time, but if done correctly you can make a good profit.

Formulating A Good Real Estate Investment

Estimate Your Rehab Costs

When we analyze a property we run the numbers of about 4-5 potential properties through our software that can give us a rough estimate of materials and labor. Doing this will help narrow down the property before you even see it. If you'd like us to email you our free cheat sheet to make your own a quick estimate for labor and materials, contact us here. Once you have your flip houses analyzed, then you can go see the properties in person, and take your contractor to get a real estimate before you buy it.

Estimating Repair and Remodeling Costs of A Flip House

Walk the property and take notes. To make it easier and not to forget any items, carry an itemized checklist with around the property with you. If you don't have a contractor you will have to learn how to do estimates yourself. Make sure to look for any big problems, such as a cracked foundation, mold, HVAC, roof repair and termites.

After you view the property and have taken notes, group into categories to get estimates. Ex. Flooring, siding, paint, framing, etc. You can call local stores and providers (like your local flooring installers or sheetrock repair companies) to get a price per square foot estimate. Another important step is to factor in extra costs beyond materials and labor. Be sure to include the cost of obtaining city permits, cost for demolition/haul away services.

Calculate Your After Repair Value (ARV) and your Maximum Allowable Offer (MAO)

Make a list of your top 3-4 potential investment properties. Once you've made a list, you'll want to run the quick estimate numbers on each one of them. Then you can compare the investment houses by the numbers alone.

The ARV, or After Repair Value is the value of a property after it's been improved, renovated, or fixed up. It's the estimated future value of the property after repair. ARV is determined by referencing nearby comparable properties (comps) in a rehabbed condition, with similar age, size, build, and style that have recently sold. Most investors try to find at least 3 comparable properties that sold no more than 90 days prior. You will occasionally have to go back 6 months if there are not enough comps. It is very important to also know what other finished houses in the area look like as well as what will make it marketable. Having an idea of what the property needs to look like after rehab and what that will cost is important to thoroughly understand. If you're in the Austin, Texas area and you'd like us to send you some recently sold comps (comparable properties) in the area from our database, contact us here. The comps will be a very important step in being able to analyze your property.

Market Value of the House After Renovations = After Repair Value

The 70% Rule in Real Estate Investing

The 70% rule is a guideline in the real estate investing business that states no offer price at the purchase of an investment house should exceed 70% of the ARV minus estimated repair costs. Here is the formula: (ARV x 70%) – Estimated Repairs = Maximum Offer Price For example, if a property has an ARV or After Repair Value of $300,000 and the estimated repair costs are $50,000, you as the investor would use the formula: ($300,000 (ARV) x 70%) = 210,000 - $50,000 (Estimated Repair Cost) = $160,000 (Maximum Allowable Offer)