When flipping a NJ home, the money you make will be determined when you purchase the property. If you pay too much for a home, you will lose your money and time. If you pay the right price, you will make money, and make it worth your while. In order to determine the price you can afford to pay for a home you intend to flip, you must use the following formula:
ARV – ((ARV x .25) + Cost of Repairs) = Purchase Price
ARV stands for After Repair Value. For a home that needs $125,000 worth of repairs and will be worth $350,000 after all repairs are completed, the equation will look like this:
Step 1. $350,000 – (($350,000 x .25) + 125,000) = Purchase Price
Step 2. $350,000 – (($87,500) + $125,000) = Purchase Price
Step 3. $350,000 – $212,500 = $137,500
Purchase Price = $137,500
The .25 (or 25%) is the recommended profit margin that should be worked into every flip purchase. Depending on the costs and current market environment, some investors use a 30% margin, while others use a 20% margin when flipping a NJ home. In the above example, you will need to account for $125,000 in repairs, as well as the $87,500 profit margin. The purchase price of $137,500 takes both of these into account. Buying this home for more than $137,500 will erode the your margins and reduce your profits.
How Do I Calculate ARV?
In order to be able to use this equation correctly, you need to know what the value of the house will be after all repairs are completed. The best way to do this is through a comparable market analysis, also known as a CMA. To find the closest matching properties for the CMA, think about how your investment property will look after all of the renovations are completed. Use recently sold homes that are a close match to your predicted outcome. Use a minimum of 3 for the report. Average the results to obtain the ARV for the subject property. If you are a newer investor, we recommend consulting with an experienced real estate agent in your area to make sure that your numbers are not wrong. You cannot be too cautious, as the ARV is what you will base your entire purchase formula on. It always pays to be conservative, no pun intended.
How Do I Estimate the Cost of Repairs?
Determining the cost of repairs can be complicated, and it is not something that can be learned overnight. For those who are contractors with experience in home renovations, this is something they already know how to do. For a new investor, not so much. If you are a new investor, you really only have two choices; 1. Bring an experienced contractor with you to give you an overall estimate based on the repairs you need to do for the house. 2. Learn how to do estimating yourself.
We recommend starting out with choice number 1 while you start the process of learning how to estimate the cost of repairs yourself. There are many resources online that you can use to start the learning process, and we recommend starting with a google search on the subject. Additionally, once you have flipped a few properties, you will have a better handle on how much things cost, since you will have already been through the process multiple times.
As you get involved with flipping homes in NJ, you will find that the process of determining the purchase price starts to become easier. Now that you know the equation for determining the best purchase price, you will have to start finding homes to flip. There are many ways to do this that include mailings, networking, and other lead generation techniques that we will cover in our next article!
In the interim, contact us below for more advice on flipping a NJ home, or other real estate investment related questions.