How to Maximize "Flip" Profits Through Smart Renovations

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flipprofits.jpgThere are countless changes, upgrades, and updates that can be made to any given property. What separates successful, long term real estate investors from the rest is the ability to maximize their resources (time and money), and in turn, their profits. This has become more important due to the relatively thin profit margins available in today’s real estate market compared the margins available over much of the past decade. Thinner profit margins leave a much smaller margin of error. In order to assure a much greater chance of success on a flip property, it’s absolutely crucial to maximize every ounce of your available resources for your flip project. No matter their timeline or their bankroll, investors doing flips always have limited resources because time equals money due to mounting carrying costs, and the more money expended on renovation equals less available profit on the back end. Therefore, it is crucial for each real estate investor to understand how to maximize their profits from a flip project. So let’s get started. You’ve followed the formula here and the tips and suggestions here, and you’ve identified a potential flip property. Now on to the planning stage.

Money-in reduces money-out

It’s obviously a no-brainer that the more money you spend on a flip the less room there is for profits. For a flip property, however, this gets slightly muddled, because you have to put money in order to get money out. That’s the whole point of a flip. The challenge is knowing where that equilibrium point is where money-in actually reduces money-out. In economics it’s referred to as the law of diminishing returns. For example, adding a second bathroom in a neighborhood where at least two bathrooms is the norm is an excellent usage of your rehab dollar. In fact, as you’ll see below, it’s one of the best. Inversely, adding a fourth bathroom in a neighborhood where most bathrooms only have two would definitely not earn you a commensurate level of increased home value compared to your dollar investment. This is the law of diminishing returns. At some point you begin to gain less for each dollar you spend. This is what we need to try to isolate.

Of course, this is different for every state, every city, even every street. It all depends upon what the average home on the block has for stats (bedrooms, bathrooms, square footage, garage). I’ll work in generalities regarding these specifics in the interest of broader appeal, so assume the below will fit into the neighborhood, and when doing your own flips, customize accordingly.

Structural Improvements

Structural improvements, if applicable, are the best way to make money in flips, and the first place to start. By structural improvements, I mean two things: adding things, and taking them away. First, adding things. There are countless opinions in all aspects of media which propagate the best return for your dollar on renovation costs, however there is only one true maxim: “The dollar follows running water.” This means that areas in a home with running water are the most important. What are those areas? Kitchens and bathrooms. I’ll get to kitchens in a second, but let’s start with bathrooms. More importantly than almost any other aspect of a home, the number, location and size of bathrooms are a huge factor in the valuation of a home. Lately it has become very popular, almost to the point of a requirement, that each floor have a bathroom. Entertaining in people’s homes has become a very important aspect of home ownership, and therefore people want to be able to offer guests restroom facilities wherever they are in the house.

With this in mind, the very first place to look for an opportunity to spend your renovation dollars is in adding bathrooms. First, look for the possibility of one per floor. If that is not feasible, at least find a way to bring bathrooms up to the standard for the neighborhood. Over time, the renovating of homes has brought a certain disparity among neighborhoods that used to have houses all nearly identical. Now it is important to equalize your property with that of the surrounding neighborhoods because that is how potential buyers will evaluate it. They’ll look at your property and say “well this has an additional bedroom, but one less bathroom” or “this has a fancy kitchen, but not enough bathrooms (or too small of bathrooms). The size, location, and number of bathrooms is a must, and should be the very first place to invest your renovation resources.

The second aspect of adding involves additional bedrooms. This is usually the most attainable through finishing an existing attic or unfinished (yet feasible) basement. As I mentioned earlier, the sweet spot for number of bedrooms is really neighborhood specific. Conforming with the neighborhood average should be your goal.

Now to taking things away. Sometimes it’s a wise move to actually remove rooms in order to make more important rooms bigger. There is no better use of this than increasing the size of the kitchen. Many homes built over the past 100 years incorporated small, closed off formal dining rooms. They are usually attached to the kitchen, yet walled off. There’s two things that can be done with such a room, and they depend upon the available space in the rest of the house. If the house has a large amount of extra space available, then knocking down the entire wall between the two and doubling the size of the kitchen is a great idea. However, if the size of the home requires that you keep that room a dining area, the best usage of your existing space is to remove half the wall, for example, and create a breakfast bar. This not only preserves the existing dining room space, but it adds additional seating around the peninsula breakfast bar, and most importantly, it opens up the kitchen to give the illusion that it is bigger. I discussed a perfect example (about halfway down the article) of this that our company did awhile back while renovating a 1920’s bungalow. The results were phenomenal, and the kitchen became every buyer’s favorite feature, by far.

Another great use of taking something away is removing a small bedroom and turning another small bedroom into a master suite. The effects of this addition greatly outweigh the loss of a bedroom. Again, however, the value of such a renovation is highly neighborhood dependent. If your neighborhood has no master bedrooms, then removing a bedroom, no matter the size (because it is likely that all the bedrooms in the neighborhood are similarly sized if the houses were built around the same time) would be more detrimental than positive.

Aesthetic Improvements

I personally find aesthetic improvements, or non-structural improvements that merely improve the look of the house, to be the most fun improvements to make. Smart decisions on the aesthetics of a house can net you the biggest bang for your buck. The number of possible visual improvements that can be made to a property is massive, and each style of house (ranch, bungalow, split level, two story, modified two story, etc.), from each historical era (victorian, craftsman, etc.), will have its own list of potential aesthetic improvements. There are a general number of improvements that our company has found to be profitable across the board, however, and we prioritize them in the following order (assuming a property would need all of the following, which most do):

  1. Paint

  2. Light fixtures

  3. Kitchen and Bath fixtures

  4. Flooring

  5. Appliances

  6. Windows and Doors

First, the paint. We have a general rule regarding paint color. First, especially in smaller houses, we paint the entire house the same color. We’ve found this to be important because it promotes a certain feeling of continuity throughout, which has a tendency to create a psychological sense of ease for potential buyers. It also tends to make each room flow better into the next, which results in a feeling that the house is bigger.

Next, light fixtures are both a very important area of improvement, as well as a tricky one. Anyone that has walked through a lighting store knows that lighting can very quickly become ludicrously expensive. The key here is to find lighting that has a visual appeal, however is economical at the same time (unless you’re flipping a multi-million dollar luxury home, in which case you’re in an entirely different league than most flippers). We typically find lights of this caliber at the big box home improvements stores like Home Depot or Lowes. If possible, placing fans in the bedrooms and the main living area is a very good idea. Also, if you’re going to overspend anywhere on a fixture, I would do so over the dining room table, if possible. This particular fixture tends to be a very visual focal point, so it’s important to accentuate it accordingly.

Kitchen and Bath fixtures can do a lot to add to the modernization of a home, no matter the era. Bright white toilets and tubs give a very clean look to a bathroom. Brushed nickel faucets give bathroom and kitchen sinks a modern and expensive look. Oversized shower heads can be purchased for a fraction of the several hundred dollar “rain” ones, and look and work much the same. Large sinks in kitchens are very appealing to anyone that has ever prepared a meal or washed a dish. Finally, pedestal sinks are an excellent way to open up a smaller bathroom, as they don’t carry the bulky feeling that cabinet mounted sinks have, and therefore give the bathroom an airy feeling which can dramatically reduce a feeling of an otherwise cramped space (a major negative now days with a bathroom).

Flooring is very very important, and I really should place this in first or second place on this list. Nothing can date a home more than ugly flooring and/or flooring in terrible condition. In all of our flips we implement very similar schemes: hardwood flooring wherever possible (usually only if existing -- and we just refinish it), laminate flooring in areas where hardwood is not feasible (e.g. finished attics, living rooms and dining rooms that were previously carpeted, bedrooms), tile in the kitchen, bathroom, and entry ways (usually stone tile in the bathroom, ceramic in the entry way, and slate in the kitchen, but it’s really a personal preference), and a nice carpet in the basement. Flooring can very quickly eat up your budget, but trust me, a buyer’s perspective of a property always starts at the floor and works up.

Appliances are always a crap shoot because every property we renovate has a different quality and type of appliances. Lately, like most other renovators, we’ve been going exclusively with stainless steel appliances in the kitchen. Definitely nothing fancy (no flip needs a subzero or viking monster), but the main key is that they match. No matter what color of appliances, matching the color is an absolute must. The interesting thing about buyers is that a lot of their review of a home is psychological. If all the appliances match, maybe they notice them, maybe they don’t -- but if one of the appliances is a different color than the others, it’s the very first thing that they see, and will completely draw their attention away from your new sink, fixtures, flooring, and etc.

Windows and doors are really more of an “as needed” renovation. A coat of paint can really do a lot to spruce these things up, and therefore we only spring for the (usually extraordinary) extra costs of these things. If you have the luxury of space in your budget to pick and choose, the front door is the first and foremost place to start. You can’t read about general real estate tips today without hearing about curb appeal and its important effect on the sale of a home. A buyer’s first impression of the property is so absolutely crucial and obvious it is beyond elaboration. An attractive front door plays a very serious role in this. Depending upon the location, the same goes for the garage doors (i.e. garage doors in midwestern cities play a much more predominant role in the overall look and appeal of the exterior of homes, while less so in the south).

Conclusion

The renovation of a house is really more like a hobby than a job. Ask the average investor and they’ll disagree, but I know this from experience, and say this because it’s actually a rather subconscious thing. It’s a natural human reaction to want to make something better. For some reason, it’s engraved in each and every one of our brains. This is great on so many levels in all aspects of life, however it has a tendency to get in the way of the true purpose of flipping properties -- to make money. Now, for those of you reading this that flip properties in order to “give back” to the neighborhood, city, state, or society as a whole, I applaud you. This does not apply to you. But to everyone else, flipping properties is a business, and one that involves your very hard earned money and time. You absolutely cannot afford to do anything less than maximize your resources on each and every flip. And this is why human nature gets in the way. When you purchase a property to renovate, it’s a blank canvas. The list of potential renovations is nearly endless. It’s actually one of the things that makes flipping houses so exhilarating. This is where you must exercise the most restraint, however. While everyone would love to replace that bright blue ceramic tile in the bathroom with hand picked venetian marble, and the refrigerator in the kitchen with twin sub-z’s, it just isn’t feasible. It is absolutely important that you understand before making these decisions what you can get for your dollar in the form of return, and then follow the most profitable path. It might sound like a no-brainer right now, but believe me, especially if you have yet to do your first flip, the urge to “over do it” is nearly unbearable. Stay strong, and cash those profit checks with a big smile on your face. Then, when you’ve made your fortune, you can switch things up a little, for fun, and start “giving back.”


In conclusion, if I can impart one simple phrase, it’s to carefully and meticulously plan ahead on your flip, and do it smartly. If done right, flipping properties is a profitable business no matter the real estate market, depressed, downturn, neutral, or hot. Use our company’s prioritization schedule above to help you allocate your rehab dollars, and maximize your homes potential for the neighborhood. As always, there’s no time like the present to make money in real estate, so get started, and GOOD LUCK!!

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