As I shared with you in an earlier post, I have decided to start flipping houses as an additional side hustle to enhance my retirement savings. Yesterday my business partner and I closed on our first sale. As I reflect on the overall experience, I can definitely say that I learned a lot and will certainly be a much wiser investor going forward. I am very excited that I made a profit on my first house! Today I want to pass on to you the Top 10 things I learned from my first deal:
No. 1 You Make Your Money When You Purchase
I have read many blogs on house flipping, listened to countless hours of podcasts, and have read most of the leading books on the subject. One thing that really makes sense to me now is the saying, “you make your money when you buy.” My first house had many unforeseen repair problems and the renovations cost much more than anticipated. That said, I used the following three popular formulas to decide how much to pay for the property:
- Profit= Sales Price – Purchase Price – Fixed Costs (taxes, closing costs, holding costs) – Rehab Costs
- 70% Rule = 70% x Completed Sales Price – Estimated Rehab Costs = Maximum Purchase Price
- 50% Rule = Purchase Property at 50% of retail and it will be sufficient to cover renovation and holding costs
I used all three formulas to determine whether my purchase was a good deal. I ended up purchasing my property for just 42% of sales price! At the time I purchased it I thought I was buying it for around 50% of as-completed value but ended up selling it for more than anticipated!