The Most Crucial Considerations for House Flipping
Flipping Kailua Kona real estate can be incredibly lucrative. If you’re just getting your feet in the water, though, it can also be incredibly daunting. There are several critical facets of house flipping—purchasing Kailua Kona real estate below market value, determining necessary repairs, calculating remodels costs, determining a legitimate selling price, and more—that are complex in their own right. When you begin a house flipping operation, you are committing to thoroughly educating yourself in several arenas, from financing and repair processes to projecting profit margins and conducting successful in-person consultations. It can be overwhelming to try to master so many skills at once.
Thankfully, there are several resources available to novice house flippers that can simplify the process. J Scott’s renowned The Book on Flipping Houses is a comprehensive guide for investors with little to no background in house flipping. Joining local Real Estate groups and attending meet-ups will allow you to establish connections with experienced individuals capable of advising you in the process.
Below we explore the most critical elements of flipping Kailua Kona real estate —the steps and calculations that you absolutely cannot afford to mess up. Following the steps below will help you to determine whether or not a rehabbing venture will earn you money. If you can master these critical elements, you are well on your way to successful investing.
Crunch Your Numbers: Determine ARV
First, you must determine what you can expect to pay for Kailua Kona real estate and how much you can sell it for. The goal, of course, is to sell at a price that far exceeds your input costs. It’s just a simple exercise in subtraction, right?
Well, not necessarily. Once you determine your costs and expected sale price, deciding whether or not to flip a property is a no-brainer. However, ascertaining your projected inputs and sale price can be incredibly complex. It requires extensive research, careful calculations, and often the services of educated professionals.
The first value you will need to obtain is your projected After Repair Value, or ARV. In order to figure out the ARV, compare your property to “comps,” or nearby properties of similar size and condition. You can do so by consulting the MLS or, if you lack access, by consulting with a reputable real estate agent. Keep in mind that, in drawing your comparisons, you want to examine properties that have already sold instead of properties still on the market, and only properties that have sold within the past six months. The prices of already purchased properties are likely to be more representative of a competitive market price than properties that have not yet sold.
If you can’t find comparable Kailua Kona real estate that has sold recently, be forewarned that the house you are looking to flip may not generate a return on your investment. Inability to identify comps indicates that there is limited demand for the type of property you’re looking to flip.
Crunch Again: Find Carrying Costs
The second value that you will need to calculate is the sum total of your financing and carrying costs. Carrying costs include what you are paying on Kailua Kona real estate while it is in the rehabbing process, including property taxes, utilities, and insurance. Your financing costs are primarily comprised of the interest you pay on your loan between the time of loan obtainment and the closure of a deal. Gauging your financing and carrying costs requires that you predict how long your property is likely to be on the market, and consulting a realtor may be the best way to do so.
You must also predict the amount of time necessary to rehab your Kailua Kona real estate. If you’re rehabbing a property for the first time, consider hiring a contractor to determine necessary repairs. A contractor can estimate both how long repairs will take, helping you predict your carrying costs, and how much they will cost. Once you have the buying price, financing and carrying costs, and rehab costs projected, you will need to compare the total value of these expenses to your ARV. If the ARV exceeds your total costs by a profitable margin, you’re looking at a good deal.
Should I Hire an Agent?
Unless you’re incredibly well versed in assessing the Kailua Kona real estate market and selling efficiently, you will want to work with a real estate agent. Working with an agent can be pricy, as they typically charge 5-6% commission. However, they will be able to sell your house far more quickly than you could on your own. Thus, agents reduce your carrying costs and significantly simplify the selling process. Furthermore, not having to sell on your own gives you more time to conduct other deals. Multiply your ARV by .055 to predict the commission you will pay to an agent. Then, factor that value into your total costs before deciding to buy.
Important Considerations
There are a few things to consider beyond cost calculations that should influence whether you decide to rehab a property. Among the most critical is location. A great property in an economically depressed, dangerous, or unpopulated place is unlikely to sell and could cost you thousands. Choose properties in desirable locations, like pristine neighborhoods or busy metropolitan areas, where demand is high. Properties located in close proximity to schools, public parks, and shopping centers are even more competitive.
You also want to ensure that the property you’re buying is structurally sound and that you can afford necessary repairs. Some repairs are quick and cheap, like changing the flooring. Others, like treating infestations or repairing dangerous infrastructure, may be prohibitively expensive. Keep in mind that the kitchen and bathrooms are the most important rooms in the house. You want these rooms in pristine condition by the time you put the house on the market.