Fix & Flip Key Considerations

Symon He
A free video tutorial from Symon He
Author | Investor | Entrepreneur | Stanford MBA
4.5 instructor rating • 12 courses • 230,291 students

Lecture description

When flipping a property you have many variables to conside

In this lecture,we'll review the detailed financial analysis model and how each assumption works.

Learn more from the full course

Intro to Analyzing Rental Income Properties

Learn the fundamentals of investment analysis specifically for rental income property investments

06:20:26 of on-demand video • Updated November 2020

  • Understand key metrics for evaluating rental income properties
  • Confidently evaluate rental income property investment opportunities
  • Use professional-grade investment models to evaluate their own flip or rental deals
  • Understand the core concepts of real estate investing
  • Understand professional real estate investment strategies and techniques
  • Confidently evaluate fix & flip investment opportunities
English [Auto] Hate in this lecture we're going to go over the key investment considerations for fix and flip investment opportunities the things that every investor who's looking at some flips should think about. So the way we're going to talk about those consideration is we're going to use the investment model that you're going to download two years from now and you're going to use that model to do the case study. But I'm going to use that model now to just highlight what those considerations are because those important considerations are the same considerations that now the model that I'm giving you will allow you to factor into your investment analysis. So don't worry about the model right now. What I want you to do is just pay attention. Just follow along here. You're going to be able to download it and work with it into lectures. OK. So when you do download this model and open it up you're going to see something like this. Make sure you have Excel 2007 or a later version. If you have to excel 2003 this model will work. It just might look a little weird because of the formatting is going to be different. So if you don't mind the formatting feel free to use Excel 2003 but if you wanted to look the way it's intended use something that's a little bit newer. So you're going to what you're going to see is you're gonna see two yellow highlighted sheets here. The third one here I'll discuss a little bit later. But two primary sheets that you're going to work with are these two right here at the construction cost estimator and the main assumptions worksheet these worksheets are highlighted yellow and they have cells that are highlighted yellow the cells that are highlighted yellow are the only cell you're going to be working with those of a cells that you can add and put and change numbers. But the other cells you're not going to be editing them they're meant to stay that way for a reason just to help you organize your analysis. OK. So first let's start with the first worksheet construction costs estimator. When you open it up you're going to see something like this has a lot of yellow hided themselves. And the goal of this worksheet is to help you organize and think about what kind of renovations you're making where you're making those renovations for that property and how much you're going to be spending. This way you could see your entire budget and see how it breaks down. Now the numbers here right now that are in the model they are there just for the case study we're going to be doing. But you can override them when you are evaluating your own investment opportunities. So just to show you how this works is it calculates the total construction budget based on the numbers that you put in but where ever you put it when you visually look at it you can see where you think you're spending your money. So let's look at this for example maybe there is a major hallway that requires some tearing down the walls and putting in some sort of chandelier in that hallway. This is a huge home and estimating I'm putting $3000 there. So that's where I put it here. But if if I change it if they say you know what I'm not going to do any work there I'll just leave it as is I'll put it at zero. And you see that the number here automatically updates. That's what this is. Worksheet is here for it is to help you estimate and organize your renovations. So as an investor and if it's some flip you need to have a clear idea of what kind of work you're doing how much you're spending and where within the property you're doing the work. Maybe some of it is not necessary and some of it is unnecessary. So this is what this worksheet is here for you to do is to be able to organize your renovation costs. The next part of the model and the important consideration is we're going to talk about is here you go to the main assumptions worksheet and you're going to see a lot of numbers but you don't need to worry about those yet. What you need to worry about just the yellow highlighted portions. So let's start with the first section here. Okay purchase assumptions a big part of your investment analysis is going to depend on how much you buy the asset for. Right. So here is where you can enter assumptions around your purchase. Here's the purchase price your purchase date the date is not necessary but if you want to be able to later have the PNL and the numbers kind of reflect the correct dates for you then you want to put the correct purchase state here and closing costs so between purchase price and closing costs you have the purchase assumptions. Right. Next is the actual renovation assumptions. Now recall that in the construction costs we had estimates for let's see what is 27000. So that gives you an idea and then you could put those here and you'll see that right here it says estimated to be 2075. This is being pulled from the work that you just did. So I would just do that. The reason I don't have it automatically fill is because I want you to actually decide what you're going to put into that. All right. Maybe you're going to put a little bit more just to have some sort of contingency funds. All right. It estimates to be 27 but I'm going to be safe for going to put in 30 K for that. So that's what that is for. And if there's different costs associated at different times for renovations maybe there's some extra Permatang and approvals and you need to get some expert to help you get through approvals and it's going to cost you fifteen hundred and one month there then. Then that's where you can put in the assumption. And if there's any kind of pre-construction work maybe this is a major major renovation and you really need to have some architects and engineers to help you make sure everything is according to code and everything's perfect before you could actually start construction. Then you get add some costs and time to that. These timing assumptions are staggered. So that means this this doesn't kick in until these the one before that is spent and already done. OK. So the way we're looking at the fix some Flip's is in terms of renovations is you got to look at the costs but then you also got to look at the timing. Right. So here I have one month of permitting and approvals in two months of construction and then another month to sell so that the total project time will be four months to sell in here is the sum total of purchase price plus renovations so that will be where your costs are at this time. Now another big consideration for folks and for investors is to think about financing. Are you going to be doing it all cash or are you going to try to get some financing here. So here is built into this model is it allows you to make some assumptions if you do want to take on debt based on the total purchase and renovation costs. So let's say we do 30 percent down then you borrow the rest and it gives you an interest rate here. For some flights we're going to assume that it is interest only. So you can put your interest rate there and your interest costs over that period will adjust accordingly. Okay. Now the other thing to think about Finally after you have your purchase assumptions your renovations and your financing in the other major thing to think about is what are you going to sell it for. What kind of profits you think you're going to make. Right. So let's say here you're putting in just about one hundred twenty five thousand. Now there's a little bit extra cost because you're taking on some loan and as we know if you take on a loan there's going to be some interest costs. So this is your total cost during the entire term of the project. And then here this is where you assume your sale price. Let's say this investor thinks they can sell at 160 5000 and then set aside 6 percent for brokers commissions and marketing costs. And once you have that you basically have all of your assumptions and you can then look at what your returns are going to be. Okay. So then once you have those assumptions then we can look at returns and recall that we are looking at the IRR the cash multiple and Peavey's and then we're also going to look at it on the leverage as well as the unleveraged basis on leverage means we're looking at our cash leverage means we're doing it with debt. OK so here even though we're putting 30 percent here the model is built in such a way that it allows you to look at what the cash situation looks like as well. Okay. So remember for the NPV. It requires you to have a discount rate. So right now there is a default a 7.5 percent. You can put whatever discount rate that you feel is a fit for you. And remember this is your best alternative for a somewhat risk free type of investment. OK so it's not like something that you could do but it's something that you pretty much can be very confident that you can achieve if you don't make the investment in this particular investment. OK. So here are the results for the NPV or based on the 7.5 percent discount rate. But if you change it let's change it to 5 percent. You'll notice that the results here the label automatically changes. So it tells you what kind of assumptions you're making. All right. Now how do we look at the results. Okay so the results when we look at it if you did it all cash based on these assumptions here. This is a pretty profitable investment all cash. You're investing 130 grand but you're making 30 about 29000 profit if you did it all cash and because you get it over a four month period you're looking at about a 24 percent profit margin or 100 percent IRR which is very hard. But you see that your cash multiples is going to be only 1.2 3 meaning for every dollar that you put in you're getting a dollar and 23 cents back. OK. Now the leverage case in this example which is based on these assumptions where you're instead of putting in a hundred twenty some thousand you're only putting in about 40000 of the equity down payment on the total cost. In that case your car's much higher because that debt is helping now and then for every dollar that you put in you're getting a dollar sixty seven back. So in this case the leverage really really helps the returns. All right. So when we're looking at this right now. Just a quick recap of the key investment considerations and how to use this model. All right. The things that you need to think about is what are you spending and how much you're spending for your renovations. OK. That's where this construction cost estimator comes in. It helps you organize those thoughts and notes and gives you a total estimate based on what you put in then the other major assumptions then is what are you what are you purchasing it for. And the your actual assumptions that you that you're going to use for your renovation whether you follow your estimate or not. But if you have very good estimates you should use those estimates and your timing you can be more or less aggressive depending on how experience you are and what you feel the market is. If you think it's selling in a weaker market and it may take you three months to sell them but put the extra three months there to sell ok whatever is a good fit. Now once you have your purchase assumptions and your renovations assumptions you need to know whether you're going to take on financing for the investment or are you going to take on some sort of financing during the three or four months when you're doing the flip and the financing could come from another investor who's willing to finance you for a certain interest rate maybe you're going to give them 10 percent interest. Whatever that may be. And finally the last thing that you need to think about and it's very important is the exit assumptions how much you're going to sell it for. OK. And minus the cost of sale usually it's somewhere between five to six percent for a cost of sale. But this costs sales but this sales assumption has a huge impact on your returns for obvious reasons. This is a fix and flip this makes all the difference between purchase price and your sale price that difference is what determines your returns if sales price is very close to your purchase price. You have very low profit margins and then you wouldn't have very high returns. But if you're exit as high but your purchase is also high you have the same thing right. So these are the big categories of considerations that go into your investment analysis. So in the next lecture we're going to look at the economics of an actual case for a fixed flip. We're going to look at the cost we're going to look at the renovations and then we're going to look at how you use the model to make the analysis. All right.