Well, I know it’s been a while since I last posted, but I’m still alive!
I know I haven’t been writing for a while but, truth be told, I kind of ran out of things to say. Everything sort of fell into a routine, so there was nothing to say…real estate investing is quite boring, which is a good thing I suppose.
However, it’s been a busy summer for one of my old rentals is a small house. When I ran the numbers on it’s value, I decided that it didn’t make sense to keep it as a rental anymore as I could potentially sell it and buy at least 2-3 more properties with the proceeds.
Thus began an adventure, going where I didn’t want to go in real estate investing, of flipping a property. In this article, I’ll share some tips on how to avoid “budget creep”
The house in question is nearly 100 years old. I’ve had it rented since the day I bought it, but the last tenants I had didn’t treat it very well. Instead of fixing it up again, I looked at the value of similar places and decided that it may be worth fixing up to sell it…okay, so it’s technically not a flip, but it definitely was an adventure.
Back in those days, houses weren’t built square…or level for that matter. I think the house had been “added onto” at least twice before I bought it, and whomever did it, took some shortcuts.
When you are renovating to rent a property, you have a different mindset than when you renovate to sell. When renting, you aim for “good enough” and well done, for selling you need to pay attention to EVERY detail. So instead of laminate flooring (rental), you go for real hardwood. Instead of a new countertop, you go for granite. The yard needs to be immaculate, the paint has to be trendy, the work, perfect.
All the while you worry about getting things right, you still have to watch for “budget creep”. Of all the unsuccessful “flippers” I talked to, the number one reason for failure was it cost a lot more than they were expecting. Knowing where to spend the money and where to save a buck is the key to any investment. One of the keys to success is smart shopping.
The first thing you need to do is set a budget. For a rental place, I know I can basically redo an interior for about $5000 in materials. For this flip however, I knew we needed to spend a lot more. Most flippers I know budget a minimum of about $50k to renovate a house, which means about 50% of that is your supplies. It’s a good idea to break these costs down into specifics like flooring, wall tiles, cupboards, electrical, lights, plumbing, windows, paint, doors, landscaping, etc. Set an amount and aim to go under that amount, especially since some unexpected and costly items are sure to come up. Don’t forget the miscellaneous section, this should probably be at least $5000 as little things like screws, sandpaper, drywall mud, special tools, etc. quickly add up.
With this flip, we decided that we needed to redo nearly the entire place. One of the obvious first steps was the windows. Anyone who has replaced windows knows this can be very costly. Fortunately for me, I found some incredible deals like the sliding doors. A local hardware store discontinued a line of doors and marked them down for a “blowout” sale…at the same time, they had a regular sale on all doors and windows. Instead of paying over $1000 for a patio door, I got it, brand new, for around $200. For the other windows, I shopped around a local recycled building material store. About once a year, some local window companies donate truckloads of new windows to them and I lucked out at being there as they were unloaded. Not only did I save a bundle, I managed to find the exact sizes I needed. As usual, luck has a hand in investing.
With the windows out of the way, the next big focus was on the kitchen and bathroom. Sinks, countertops, and cupboards can quickly run up your budget. Once again, it was off to bargain shopping. Decided to go with the meatball cupboards (I’m sure you can figure out which store I bought them from), they are relatively cheap, good quality comparatively, and come with many options. We avoided the basic white, and went with the black wood finish, adding in a few black glass doors to upscale it even more. Fortunately, I hit the time that they came on sale as well. For a sink, I actually went down to their “AS-IS” section and found the exact sink I wanted at 60% off because it didn’t have any mounting hardware. Ironically, once you purchased it, you could go over to customer service and they’d give you the mounting hardware for free, but they had to mail it to you.
For the bathroom, I waited a few weeks for the meatball bathroom sale and got the counter and sink on sale as well.
Kitchen counters however were a different matter. We wanted something high end and decided on granite. This stuff costs a lot of money, but the upgrade is worth it. If something looks cheap, you leave the impression that you were cutting corners in the buyer’s mind. One of the reasons we didn’t go with the cheapest cabinets as well. This doesn’t mean I wanted to spend a mint either, so I started to call around different suppliers. Costs ranged from $50/sq.ft. (limited selection) all the way up to $300/sq.ft. or more. The cheap stuff were from pieces no one really liked either. Then we got the idea to maybe buy broken or recycled counters and cut them ourselves…granite isn’t all that hard to cut (especially since our sink sat on top). While we checked out these options, I happened to stumble across another supplier who was basically offering this exact service. Total cost, cut and polished, was $19/sq.ft. Countertop problem solved.
While doing renovations, I kept an eye on kijiji for stainless steel appliances, and a stacking washer/dryer. People often need to sell their appliances for various reasons, so why not get something close to new at a good price. Since I wasn’t in a hurry, I was able to pick up all the appliances (except a dishwasher which I bought new on sale) for less than $1000. They were about a year old. I bought the dishwasher new just because I’ve found that they break easily these days and used ones are a gamble.
Tile flooring, hardwood and wall tiles are also something to look for on kijiji. Plenty of people are selling high end leftovers at significant savings. Another good source are the big box stores which get in special truck load sales. Overall, we were able to find these items at less than $3/sq.ft.
There are some items where we didn’t try to scrimp on, this was the area of lights (we went LED everywhere) where you need to be modern and stylish, the tub (people like a nice big tub), paint (good quality paint saves you so much trouble) and some of the decorative items (we installed a barn door on the bedroom closets, the hardware for this isn’t cheap). Even though we didn’t scrimp, we still looked at recycled stores, sales and other places to get the best prices. In our case we managed to find some lights on sale and the actual barn doors at a recycled centre for significant savings.
Because I own several properties, and have many supplies on hand, it’s often easy to just grab some supplies and think you’re not adding to the costs of the renovations, since you didn’t spend any money on them for this project. This isn’t a good way of thinking, as you did actually pay for the item at one point. Every time you use an item, make sure you budget it in as a cost. This also goes for your time. Remember I said most flippers I know budget at least $50k with half being supplies, well that other half is for labour. If you hire professionals that’s one thing, but don’t fool yourself in thinking you’re saving money by doing it yourself. You need to account for your time. If you only pay yourself $20/hr, but it takes you 4 times as long as a professional to do the work who only charges $50/hour then you are losing money.
A couple of other tips which could save you some money…
Use a cash back credit card. all this spending does add up even at 1%.
Apply for contractor status at stores. Many hardware/paint stores offer savings to contractors.
Wait for the promotion cycle to come around. Many stores cycle through saving by department, flooring sales, doors and windows, kitchen and bathroom, paint, etc. When you are renovating, you often have to do things in a certain order (paint the ceiling before installing the floors for example) to avoid problems, however it doesn’t matter if you redo the kitchen or the bathroom first. So, if the stuff isn’t on sale, change what order you do things in. If the stuff is on sale early (let’s say flooring which is done last) pick it up and store it until you need it.
Lesson: Shop smart, set a budget and try to come in below it on most items, avoid “cost creep”, and remember to budget for “free” stuff and your time.