4 Overlooked “Reserve” Red Flags
When it comes to a fix and flip, we all know it is possible to come across issues that we may not have budgeted for. For example, a project may take longer than expected or it may cost more than you originally had in mind because of an unforeseen issue. But, how do you know how much to keep in your back pocket “just in case”? Once again, ZINC is here to help! We recommend that investors keep 10-30% of the project scope in reserves (savings that will be there after you close on a home). While this is generally a good rule of thumb, it is also important to consider your rehab budget. If you are planning on getting a loan for the rehab costs, you can expect to receive rehab financing that is around 30% of the purchase price. This means that if you come across any unplanned projects that are not included in that 30%, it will come out of your own pocket (reserves).
What costly projects should you look out for when evaluating your flip? Here are 4 “Reserve” Red Flags that can increase your rehab budget and in turn, increase the amount of reserves you may need:
- Swamp Cooler- If you come across a property with a swamp cooler, keep in mind that you will have to convert it to HVAC. This can cost anywhere from $4,500 to $6,000 and if ducting is needed that will be another $5,000. This can potentially drain your reserves. Therefore it is important to look out for swamp coolers when evaluating a flip.
- Cracks in the foundation- If you notice small cracks in the foundation, this is generally a sign of a larger problem. This could signify major structural problems and can be very costly. Large cracks in the foundation can cost up to $15,000.
- Single pane windows- If you purchase a property that has single-pane windows, it is important to note that all windows will have to be replaced with ones that are double pane.
- Curling Shingles- Look out for curling shingles! This issue will likely result in a roof replacement. This adds another $12,000-$15,000 to your rehab. It is vital to thoroughly evaluate your flip and budget for roofing costs.
ZINC recommends that investors lookout for the caveats listed above and try their best to steer clear of them. These projects add up quickly and can take up your entire rehab budget forcing you to have more in reserves. Staying away from these commonly overlooked red flags can save you the embarrassment of asking family and friends for funds that you don’t have in reserves. If you are unsure whether or not you have enough in reserves, contact ZINC today, our team members are always here to help!