Many residential real estate investors with a fix-and-flip objective do not meet their investment targets because they fail to strategize the timelines and coordinate the efforts. The profitability in real estate investing is not about curb appeal. It is about handling the process and the unknowns encountered in the renovation scope where value is created.
This article will focus on organizing the timelines and allowing for the unknowns that will lead to additional costs. The path to a profitable fix-and-flip project involves a realistic plan and agility to handle the unexpected.
Key Takeaways
- Time and resources are limited in fix-and-flip projects
- Profit is predicated on a realistic timeline and allegiance to a conservative budget
- Any delay in a work schedule will quickly dilute profit
- A slow and measured approach to a construction schedule will save time and money
- An investor’s attention to detail does not end at the closing
- The goal of a fix-and-flip objective is to create value greater than the cost of the work
Factors that Disrupt a Timeline
House flipping can be profitable but, unlike TV, time and resources are limited. The support of a renovation project is predicated on the cost of the property and the financing terms. The profitability of the investment is predicated on a realistic timeline and allegiance to the budget.
Everything works on paper, but let’s focus on the real-world delays that can quickly dilute a profit.
All projects need:
- a realistic evaluation of the renovated spaces,
- consideration of alternative living spaces,
- realistic planning,
- an honest assessment of one’s skill in the DIY arena and the hiring of professionals,
- informed estimates of lead times for deliveries,
- a realistic budget, and
- access to capital.
Let’s consider each of the above factors separately.
1. The Renovated Space
The spaces within the house to be renovated will have the most impact on a timeline. Larger, open areas may require more materials but less fixturing. Smaller rooms, like a bathroom or a kitchen, may require less building material. But the fixtures, cabinetry, and finishes will require the skills of professionals for installation and permitting.
The time of the actual renovation is different from the estimate for the lead and delivery times of the materials and supplies.
2. Disruptions in the Construction Scope
Some investors opt to live in the house during the renovations—some with families. In a fix-and-flip project, time is of the essence, and a contractor performing their scope around residents’ lives will certainly disrupt the process.
Another essential factor is that some lenders and insurers may not allow the investor to live in the house before, during, or after renovations. The loan programs and insurance policies offered on owner-occupied and investment properties differ significantly. A breach of these definitions can lead to default or rejected claims.
3. Realistic Planning
Approaching a renovation in a slow and measured manner will allow for identifying small problems before they become large, expensive problems. While intuitively it seems like a faster approach to a work scope will save time, often time is not saved—neither is money.
There is a progressive path to recognize and measure when the scope is broken down into phases. At or near the end of each phase, time should be taken to clean up, evaluate, and prepare for the next.
This thoughtful and organized approach will save time and money.
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4. DIY or a Contractor?
Investors experienced with home renovations should reconsider the DIY approach to their properties. Of course, consideration must be given to the extent of the scope.
Although experience with rehab projects will help in the estimation of timelines and to recognize potential problems, the investor’s time will be better spent meeting with Realtors about placing the home on the market for sale before the completion of the work scope.
The fix-and-flip objective has many moving parts, and time is not a friend to the investor. Any lengthening of the time period will quickly dilute profits.
Regardless of an investor’s aptitude for renovations, hiring an experienced contractor with the labor and systems in place to handle the unknowns and keep the scope on track is the best practice.
The investor needs to focus on the marketing the property for sale.
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5. Delivery of Materials
An important factor in a project’s timeline is the availability and the lead times required for the materials. Experienced contractors know how to source vendors to meet the schedule and avoid delays.
There will be different lead times for the materials needed for each phase of the rehab scope. There will be an overlap in the delivery for one phase and the ordering for the next.
6. Cost
The cost of any renovation can become out of control from unknowns and changes. This is where conservative budgeting and a healthy contingency of at least 15% become essential.
Progress will halt if the contractor and the vendors are not paid.
7. Access to Capital
The quick closing time of the acquisition and the construction loan is important, but this is only one-half of the financing. The other half is access to the funds withheld for future monthly draws as the renovations proceed.
An investor needs to pay strict attention to the draw process. Accessing the draws will affect the timeline if there are delays in paying the contractor or the required deposits on materials.
A proactive approach to funding the draws is to ensure an understanding of the lender’s requirements and that the contractor is aware of this process. The information needed to complete a draw request will come from the contractor.
Often, a contractor will not front the deposits for supplies and materials. Therefore, these deposits must be made from the investor’s equity or timed with the next draw request.
Guidance to Reduce the Project Timeline
A renovation project has many parts moving simultaneously. This is true regardless of the size of the house and the budget. There are four essential parts to a renovation:
- Researching,
- Planning,
- Pre-construction, and
- Construction
Below is an explanation of how each part can improve a work schedule if adequately handled.
1. Researching
Researching the costs and the elements of a renovation scope will help anticipate the timeline and the team of professionals needed to complete the work. The more information obtained from sources and team members, the smoother the renovations will proceed.
2. Planning
This stage is for the benefit of the contractor and the investor. A contractor needs a clear idea of what is to be accomplished and the budget within which to work. From this, the investor can produce documents, contracts, and material lists to keep track of progress in real time.
This coordination between the investor and the contractor will show the lender that the project was planned correctly and the budget was created from realistic numbers.
3. Pre-Construction
This stage is preparing and gathering all necessary documents and drawings for the permit. A lot of this work should begin when the property is under contract so that the permit package can be submitted as soon after closing as possible.
This step also includes ordering materials and supplies with the most extended lead times. Be sure to know the amounts of any required deposits so that they can be included in the proceeds funded at the closing.
Again, the pre-construction planning and the readiness of the permit submittal package will sit very well with the lender.
4. Construction
This is the step where the timeline is the most affected, and the success of the investment is determined.
Both the contractor and the investor must stay within the budget and the work scope with the flexibility to pivot when necessary.
Any delays and the longer the debt is serviced, the lower the profit will be on the investment. Investors need to realize that only their profit will be negatively affected. The contractor and the lender will get paid pursuant to the agreements in place, regardless of any delays or changes in the timeline.
Conclusion
It takes just as much planning for a renovation scope as it does for the closings of the acquisition and the construction loans. The renovations should create value higher than the cost of the work. This is why the budget is so important.
If construction delays the property from being offered to the market for sale, then the investor’s overall profit will be disproportionately decreased when compared to the cost-per-day of the delay.
There will be changes and unknowns, which must be a part of the budget and the schedule. The goal is for delays to happen despite the investor’s preparedness, not because of poor planning and the lack of realistic goals.
