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Business & Merchant

By Roger Dolanch, Broker/Owner

Renovation, or “flipping” as we call it, has gotten a lot air of time on TV over the past few years as a great way for real estate investors to make good profits over a short period of time. But renovations can often take a lengthy period of time, and being able to sell the home for a big profit is never guaranteed.

TV shows tend to make the process seem so very easy when it’s not. However, any experienced real estate investor will tell you that a few quick calculations will give you at least a rough idea of your chances for profit, be it large or small. Doing some basic calculations will not only give you a forecast of the potential future value, but also determine whether a particular investment is even worth the hassle. This is a very important step that many first time or new real estate investors will overlook, and it deserves adequate attention.

End Value

An investor can never use the amount of money put into a particular piece of real estate as the basis for a price increase. If you bought the house for $100,000 and did $20,000 worth of work to it, you are never guaranteed to get $120,000 out of it. Understanding this fact is the first step towards arriving at an accurate potential sale price after renovation to estimate your profit.

An experienced real estate agent or broker is your best resource for predicting the potential future sale value. They will be able to tell you the value you will add to the property with the planned renovations. If you are going to add square footage or a finished basement or any other improvement, they take what the home will look like after you are done and compare it with other similar homes that have recently sold in the area. A good REALTOR® will keep you grounded in reality.

The Big Minus

Of course, those renovations cost money, and you will have to include in this calculation every piece of dry wall, every nail, and every hour of labor that you think will be necessary to achieve the desired outcome. After those costs, factor in transaction costs like real estate transfer taxes, REALTOR® fees, closing costs, and property taxes over the course of your ownership.

Your expenses are not limited to the amount of money you put into renovations, giving you much more to think about than lumber and nails when you are calculating potential profit. Incorporate any liens incurred if you borrowed money to fund the renovations. This can be a complicated process, and getting expert help from someone will prove invaluable towards projecting potential profit.

Is It Worth It?

This is the big question that some real estate investors forget to ask themselves. If your profit window is extremely tight and your potential profit may be $10,000 or less, perhaps that investment is not worth the hassle of renovating the home, putting it on the market, and finding a new buyer. You have to decide for yourself what your time is worth.

These simple steps can save real estate investors from getting involved with properties that they are simply not ready for. Think about all of the costs before ever getting involved with an investment and learn to value your time. Doing the math is one thing, but using it to make an informed decision is what separates the real estate investors that fail from those who ultimately thrive.

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