Rehabbing a home is more like a business than a hobby, as such when a person decides to become a professional rehabber or flipper, then you need to approach it like a business. Most professional businesses use budgets to determine the future and success of the company. This practice should be used by even the most part time of rehabbers. Determining your budget and knowing how much you have to put into each project home will help in keeping you project from becoming a problem as well as save you plenty of headaches.
Where does the budgeting process start? It starts even before you buy the home. The first step is to examine how much money or capital you can place into the project. This will include your personal funds, any investment from partners or family members, and then how much more you may get in loans from the bank. This then will tell you how much you can use in your project home. There are no set rules for how much should be divided up between the purchase price of a home and the budget to fix the home. As a general rule though, develop what works best for you. If you are just starting out, beginning with a small budget might be the best advice. The reason for this is that you want to get experience without placing yourself in a bad position. Remember the 2008 financial meltdown began because of those in the real estate market overextended themselves. Additionally, starting small and building up will give you more control over the financials saving plenty of financial worries.
When looking at a house, know how much you will need to purchase the house first. Set a budget and if you are using debt to finance it know how much of a down payment you will need as well as a good safety cushion. Always have at least 6 months of payment in your cash reserves for debt payments; this is a good rule of thumb. This should be money that will never leave the bank but is there to pay the payment on the house if the project runs over your planned time period. Most flips will be done within a few weeks- the reason is that the sooner you can have the house ready to sell the faster you will be in making your money and not having to worry about making monthly payments. In addition, the longer that a house sits on the market, the more value it could lose. Thus, what would have been a profit is now a losing flip.
When looking at your budget know what you want to do to the project. This will allow you the opportunity to have the budget ready to go and get the house rehabbed without having to wait on the market. This means develop your materials needed for the rehab from the start. This will also help in developing your budget and maintain strict financial controls on your investments. Basically, you will be setting out all the money you have to invest in the project form the get go- defining your total budget from the beginning.
What does all this mean in the end? When flipping or rehabbing homes, knowing your budget can make your operation and rehab more successful.