Buying, rehabbing, and flipping houses is capital intensive and can be risky when done wrong. It’s like real estate day trading in that you plan to buy a house, rehab it, and resell it immediately.
Buy the wrong house for the wrong price, have the wrong team of contractors, finance it the wrong way, or miss something on your comps, and your flip can quickly become a financial flop.
On the other hand, if you do everything right… you can create a very big payday for yourself!
Here are 3 specific ways to mange your capital and save big when rehabbing houses.
1. Save Thousands on Materials
Materials are a huge piece of the total investment capital required to rehab and flip houses, and there are a lot of opportunities to save big in this category.
Instead of paying your contractor to supply labor and materials, consider having him only supply the labor. This way your materials don’t get marked up, and you can be confident in the materials being used at your houses.
To save money on materials, you can learn to purchase materials like builders and general contractors do. Professional builders take the time to build relationships with key material suppliers on big ticket items such as kitchen, bath, flooring, siding, windows, etc.
Typically professional builders are buying these materials from distributors and lumber yards. These type of suppliers often allow you to set up a credit account, buy materials via the phone or email, and provide volume discounts for you.
This will save you a lot of money and a lot of time getting materials delivered to your job sites.
For everyday miscellaneous purchases, you can rely on neighborhood big box stores like Lowe’s and Home Depot.
You can also save a lot at these stores by using a military discount of 10% (if you’ve served), a 5% discount if you use their commercial accounts, or a full 10% off every purchase using their store coupons, which you can get online or buy directly on sites such as Ebay.
2. Save Thousands on Labor
If you have the skills and time available, you can use licensed subcontractors (Class B and C) to save a lot of money. Class A contractors are typically 10% more expensive then the lower class contractors. You’ll save a lot of money provided you build a strong, reliable team of subcontractors.
Your subcontracting team may include an electrician, HVAC/mechanical, plumber, framer, drywall/finisher, painter, landscaper, etc.
You should always verify contractor licensure, insurance, and plan to use a good contractor agreement and indemnification to protect your interests.
I’ve seen many investors get in trouble with payment schedules and down payments. More then once I’ve heard contractor horror stories of an investor providing a large deposit to start a job and then the contractor literally disappears.
The benefit of using subcontractors who provide only labor is they should be able to start your job with little to no money on the front end.
Running your own job site requires that you manage the entire project closely, so you have the right contractor on site at the right time and you coordinate the delivery of the materials to the site.
It does take time and planning, but can lead to significant savings if you have the skills, time, and experience to run the whole job yourself.
3. Rehab Your Financing
The way you finance your investment has a huge impact on your bottom line. Many investors get into the business of flipping houses by relying on hard money lenders. It can be a great way to get started, but you will soon realize that your hard money lender is taking a big piece of your overall profit.
Hard money is considered to be “hard” because the points and interest are typically high, and it can be painful to absorb the high cost of this type of financing.
Some hard money lenders will provide 100% financing, but more are trending toward requiring the borrower to put skin into the game in the form of a down payment or by not funding all of the repairs for the property.
Typically hard money lenders will charge 3 – 8 points. A point is equivalent to one percent of the mortgage amount. The total mortgage amount usually includes the price being paid, closing costs, and the renovation fix-up expenses.
For example, if you were buying the following property:
|Total mortgage amount||$100,000|
If the hard money lender charges 5 points, that would be $5,000 in this example. You also need to watch out for the high interest rate. Many hard money lenders charge between 12 – 18% interest only.
In this example, if the hard money loan requires 15% interest, the monthly payment will be $1,250 per month. If the borrower pays 5 points and keeps the property for five months, the total interest will be $11,250 on this $100,000 investment. The total interest is a lot to absorb, which is why it’s called “hard money.”
As a savvy real estate investor you have access to great deals and you can offer great returns for your private lender of 8 – 10% interest and no points.
This financing tweak turns the overall profit margin upside down when compared to using hard money. If you use the same example, so the total loan amount is $100,000 and borrow at 10% interest the monthly payment will be $833.33 per month. For the same five-month period, the total interest paid will be $4,166.65.
Hard money loan interest: $11,250.00
Private money loan interest: $4,166.65
Which loan would you rather use?
Rehabbing your financing can save you thousands on each and every flip you do!
Flipping houses is a transactional business. It takes work and planning, but when done right, it can create great paydays.
The key is to learn to connect the dots, build a great team, save on your materials, save on your labor, and save on your financing, so you can maximize your own personal payday!
What are your experiences flipping houses, working with contractors, and rehabbing houses for profit? Leave me your comments below!
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