It is a crucial step in the real estate investment space
The following article is supplied by Nate Zielinski, of RCN Capital.
Creating a renovation budget and a financial plan is a crucial step when undertaking a fix and flip project in the real estate investment space. Often a race to the finish, fix and flip properties are completed on time and flipped for the biggest profit when there is a sound plan in place. A well thought out budget helps ensure that investors allocate their resources effectively and maximize potential profits. Investors must do their research and rely on their preferred form of organization and budgeting in order for this to truly work. Here are a few steps to help investors create a renovation budget and stay on track during their next renovation project.
Assess the property and project
The first step is to take a step back and review the property in its entirety. Start by thoroughly inspecting the property and identifying areas that require renovation or repair. Take note of any structural issues, outdated features, or necessary upgrades.
If some of these repairs require professional help, be sure to seek that out very early on in the process. Assuming the condition of structural components of the house can be a dangerous game. Calling in a property assessor should be worked into the budget in cases where an investor wants to be certain about what they are getting involved in. Once the property review is complete, an investor can feel comfortable moving towards specific plans for the renovations and how much everything will cost.
Prioritize renovations
Determining which renovations will have the most significant impact on the property's value is the next step for an investor. Another factor to consider is how long each repair will take. If there’s a longer project that needs to be completed, starting that early and completing it in phases can be a big help.
Next, focus on essential areas such as the kitchen, bathrooms, flooring, and curb appeal. Allocate a larger portion of your budget to these high-impact areas. Potential buyers often focus on these rooms and are looking for certain features when assessing these areas of a property, so investors can be confident in the fact that these areas are worth the most time and effort.
Calling in a professional at this stage isn’t always a must, but it can offer peace of mind to an investor. A project manager or general contractor would be happy to help during this stage and look to provide value instantly. This way, they are hoping to form a relationship with the investor that will lead to more work later on in the project as well as future projects.
Research costs
An investor can perform this step individually or with the help of the aforementioned general contractor or project manager. Either way, researching the costs associated with the renovations you plan to undertake is paramount. Investors should shop around for quotes from contractors, suppliers, and other professionals to estimate the expenses accurately.
Shopping around can take some time, but it can also save the investor a lot of money once they find the right deal. In some instances, it’s even okay for investors to let the contractors and suppliers know they’re shopping around. They won’t always be willing to give you the best deal, but sometimes the contractor will be willing to sell at a discount if it means earning an investor’s business. An investor should consider all factors such as materials, labor, permits, and any unexpected costs that may arise.
Create a detailed budget
Once you have gathered cost estimates, create a detailed budget that includes all the necessary expenses. This is where an investor needs to dial in on what works best for them in terms of organization and strategy. An Excel spreadsheet can be an option, but technology has come to the forefront in this industry and there are a number of budgeting apps out there that can help investors. According to Nerdwallet.com, here are the 8 best budget apps in 2023.
Categorize your budget into different sections, such as materials, labor, permits, and contingency funds. Be sure to account for any miscellaneous expenses that potentially come up during the renovation process. Preparing for the worst-case scenario isn’t always prioritized, but renovation projects can be unpredictable so the investors that have back up plans are usually the most successful.
Renovation projects often encounter unexpected issues or additional expenses. As a rule, investors should allocate a contingency fund of around 10-20% of the total budget to account for these unforeseen circumstances. Throughout the renovation process, investors should closely monitor expenses to ensure they stay within the allotted budget. Keep track of all receipts and invoices, and regularly review the budget to make any necessary adjustments.
Set realistic expectations
While it's important to aim for a high-quality renovation, it's equally important to set realistic expectations within the budget. Avoid overspending on unnecessary upgrades that may not provide a significant return on investment. Keep every aspect of the property and renovation in mind when deciding what to upgrade. For instance, if there was significant structural damage that needed to be repaired, saving on light fixtures, appliances and furniture may be what is required to stay on budget.
There is a delicate balance for investors when it comes to transforming a renovation project into the perfect investment property, but every aspect must be considered and sometimes sacrifices need to be made. Having the right expectations going into a renovation project and being able to adapt throughout is a key to success for investors.
Find a property and start planning today
Remember, creating a renovation budget requires careful planning and research. It's essential to strike a balance between investing in quality renovations and staying within your financial limits. By following these steps and consulting with professionals in the industry, you can create a renovation budget that sets you up for a successful fix and flip project. Reach out to RCN Capital today with any questions regarding the plan for your next property and we’d be happy to offer guidance on your journey to success.
