A budget is a critical tool for any fix and flip project, as it allows you to plan for and track the costs associated with the renovation and sale of a property. It is also a vital component when looking to secure financing. You probably already know this, but let’s review and explore a few reasons why a budget is important for a fix and flip project:
- Planning and forecasting: The obvious is that a budget allows you to estimate the costs of the renovation project, including materials, labor, and other expenses. This can help you to plan for the project and make sure that you have the necessary funds available to complete it. But most importantly this will make sure the project works as financially feasible and worth your efforts.
- Tracking expenses: A budget can help you to track your actual expenses during the project and compare them to your estimates. This can help you to identify areas where you are overspending and make adjustments to stay within your budget. If you have outside backers (or if you ever want outside backers, either debt or equity), this can be the way you make sure everyone (yourself included) is fairly compensated - and that you are reimbursed for materials. And of course the tax guy is interested. You (obviously) want to make sure that you are not paying excessive taxes, rather only on the difference in all-in costs and the final sales price. But as any accountant will tell you (including the ones that work at the IRS): without a receipt or other documentation, the expense does not exist and cannot reduce your cost basis, so you’ll be paying more taxes. Spreadsheets can track these expenses and help reduce taxes.
- Staying profitable: Keeping track as you go will help to ensure that you will be able to make a profit on the sale of the property at the end. Because bottom-line, that’s why you’re doing the project. All of those little change orders or upgrades can really add up and it’s a nasty surprise to be unaware until the end. Think of this as the Costco-shopping-cart-problem: adding all of those little “great” deals to your cart can lead to quite a shock when you only intended to get a couple things and ended up with a $300 tab.
- Identifying potential problems: A budget can help you to identify potential problems with the project before they occur. For example, if your budget indicates that the cost of materials will be higher than you anticipated, you can take steps to find ways to reduce other costs and stay within budget. Planning ahead can also help you make timely purchases which can mitigate last-minute up-charges for rush orders on forgotten materials, or shortages.
- Help you to decide what to prioritize: A budget can help you to decide what to prioritize. During the process of building your budget you need to set priorities about where you can save money or where you need to put more money to make the renovation or restoration more profitable.
- Get funding from potential investors: A budget can also be an important tool when seeking funding from potential investors (debt or equity). Demonstrating the feasibility and potential profitability of the project makes a new, potential project more attractive to investors. And being able to show past successful projects with real numbers will demonstrate your experience and show credibility.
- Communicate with team members: A budget can also be used as a communication tool to share goals and expectations related to the renovation project with your team members. This ensures that everyone is on the same page and that you are all working towards the same goal of profitability.
Overall, a budget is an essential tool for any fix and flip project. It allows you to plan, track, and manage the costs associated with the renovation and sale of a property, and helps you to stay profitable by ensuring that your costs don't exceed your potential sale price. It also helps to identify problem areas and communicate with the team, so everyone is working together towards the same goal.
Now that you are reminded of the importance of budgets, how do you do those budgets? A spreadsheet can easily be used. What this does not need to be is overly complicated and involved; what it does need to do is keep track of revenues and expenses, as well as the timing of each of those. Those who have spreadsheet budgets usually are ones that take their efforts to the extremes: either not tracking anything or building an unwieldy mother-of-all-spreadsheets. In reality, you just need something that is use-able. We have one that we use here that has some handy shortcuts in it that I’d be happy to share and even walk through with you if you’d like.
Good luck in the new year! I am sure there are going to be plenty of real estate opportunities out there. Just remember to plan, budget, plan some more and then execute. That way you come out on top, not buried by the unexpected.