Hi all,

I am a new member to REIN. I am currently getting my Real Estate license in Calgary. My intent is to expand into doing more real estate flipping. My thinking is that with my own license I will have access to more information in making smart purchase decisions. Also the license will reduce my flipping costs on the resale side.

I am new to working with brokerages. Are there any real estate agents out there that could tell me about what costs I should expect to pay to a brokerage. I have heard they vary widely from commission based to flat fee. I am looking to do almost exclusively personal trades. Are there brokerages out there that cater to this type of agent. What costs will I likely incur with such a brokerage? I am in Calgary, Alberta. Local info is greatly appreciated.

Anyone have experience in this field? I have concerns that I will not be able to do enough volume to making having my own license worth while. My plan is to be flipping only 1-2 houses at a time for at least the first 1-2 years.

I also am looking for information regarding the best way to finance houses for the flip. Average house prices here are 400-500k. I have enough cash for 25% down on two houses plus flip money. What is the best way to finance the rest? I assume standard mortgage is unusable due to short term penalties. I am planning 2 month maximum terms on each flip. What interest rate is one likely to pay on these short term loans. Any wisdom on the best way to finance is appreciated!

Thank you,

Chris Scott

Hey Chris,

You have an interesting business plan here. I really like that you have looked at your biggest expenses and a way to minimize them. Sounds like you are a seasoned veteran at renovations. Do you have a background in multiple trades? Do you have a crew?

The big challenge with flips in a flat to down market is that you need to buy worse dogs and do more than just cosmetic changes to actually ensure you have enough of a buffer to make your time worthwhile. Especially in Calgary, the replacement cost of the building value on the property is often less than 50% of the property value (the other 50% + is land value). Land value is a lot more volatile to economic conditions. In the short term, replacing a building is just what it costs. Construction material prices are not going to drastically change in a short time frame. It sounds like you have thought through all of this, I'm just writing this for the benefit of anyone who stumbles on this thread and thinks this is the golden goose they have been looking for.

Financing: I work on this for much larger scale deals and we are able to obtain a construction loan during development. You provide a professionally validated estimate of costs and the bank will fund those costs plus the cost of interest. You can look at commitment fees from the bank anywhere from 0.6 - 2% of the face value of the loan. That is a cash cost up front cost. We don't sell our product, we convert it to long-term rentals so we obtain a longer term take-out loan. That loan repays the construction loan (and hopefully releases some cash back to us so we can lower our cash equity investment).

In your case here, I will follow this thread to see what the financing opportunities look like. My suspicion is that you can obtain a construction loan from the bank but they will not fund anything beyond hard cost materials ie. no wages.

I put together an analysis here based on a $400k purchase and $27k renovation with permits. It looks to me like the break-even property value you need to achieve is $457,563 (before taxes). This would enable you to pay yourself $20 / hour and pay for a real estate agent to sell the property afterwards. In my opinion, all real costs need to be budgeted and having a realtor sell the property is a real cost, even if you choose to do it yourself. There isn't really a property margin unless you can make money after all services to develop the property are paid for.

If you are hoping to make a 10% return on cash equity invested, I think you need to sell the property for $490,000.
- buy for $400k
- put in $27k renovation materials and permits
- pay financing costs
- pay labour at $20 to yourself
- earn a 10% return on cash after taxes

Here is a soft copy of the financials

https://docs.google.com/spreadsheets/d/1zdFrcyVGbzAWKrblMwCx1yTnOcJzemEob84XxjNpVKI/edit?usp=sharing

Hard copy of financials:

Flip Analysis Worksheet
Acquisition: sources of capital
Initial value 400,000
Down payment (cash equity) 100,000
Short term financing 300,000
Acquisition costs
Inspection 450
Legal 1,250
Acquisition cash equity costs 1,700
Development: sources of capital
Renovation materials (before labour) 25,000
Permits and inspections 2,000
Construction costs 27,000
Construction loan (70%) 18,900
Construction cash equity (30%) 8,100
Pro forma
Initial value 400,000
Acquisition cash equity costs 1,700
Construction costs 27,000
Short term financing (10%, 2 mo) 5,000
Construction loan financing fees (0.5%) 95
Construction loan interest (5%, 2 mo) 158
Development cost (before labour) 433,952
Labour ($3,200 / mo, 40 hrs @ $20/hr) 6,400
Development cost 440,352
Disposition: real estate fees 17,211
Project cost 457,563 (break-even value property must be sold for)

Cash Equity Required (note: construction loan interest funded by interest carry)
Down payment (cash equity) 100,000
Acquisition cash equity costs 1,700
Construction cash equity (30%) 8,100
Short term financing (10%, 2 mo) 5,000
Construction loan financing fees (0.5%) 95
Cash equity required 114,895

Minimum 10% return on cash equity 22,979 (after tax)
Tax (30%) 9,848
Minimum 10% return on cash equity 32,827 (before tax)

Break even property value to achieve 10% after tax return on capital
Project cost 457,563
Minimum 10% return on cash equity 32,827
Project cost (after 10% return) 490,390 before taxes

Thank you for your evaluation. I see you anticipate short term financing to cost 10%. That is higher than I would like (was planning for) and will have to consider it as a significant cost. I do have experience in renovation and have contacts with good tradesmen. I see what you are saying about land value and it is something I have been concerned about. My thinking was to try to stay in a sweet spot of late 80's-90's houses where land value would at least be marginally lower. I have been working in the flip and hold area but have been finding the after renovated value is too high to make the "hold" work. Am I the only one seeing this? The rent to value in Calgary for me just doesn't make it pay. I have started looking at multi family commercial buildings but even with this extreme low interest rate the cap rates don't make sense. Im sure there is the diamond in the rough out there, but generally that has been my experience so far. Thoughts?

Chris Scott

Chris Scott said:

My thinking was to try to stay in a sweet spot of late 80's-90's houses where land value would at least be marginally lower. I have been working in the flip and hold area but have been finding the after renovated value is too high to make the "hold" work.

Chris Scott

Click to expand...

The catch-22 is that the older the house, the higher the land value as a percentage of property value and the more likely that big repairs provide a big upside. The newer the property, the less likely the property will need substantial repairs, so the lower the % land value but the smaller the ability to make substantial renovations. I see what you are saying that it may be the sweet spot for the late 80's - 90's houses.

The big missing piece I see in the financial analysis / your description is carrying costs waiting to sell the property. Presumably, you will not be able to show the property properly until renovations are substantially complete. So even if you are schedule efficient during construction, you may be 60 days out to an initial deposit and another 30 until final cash receipt. So make sure you run those cash flows.

I work in land development and just for your own benefit I'll share a few things we are hearing about the Calgary market:
- RSL (front attached garage lots) are sitting. Nothing is selling
- A number of builders are not starting to even build these products unless they are pre-sold
- this is your proposed product: the $460 - $550k final product. These are not selling very well at all right now.
- aggressive marketing for new lot sales: $10k landscaping giveaways, $5k on furnishings with a brand new house
- If it is between an extra 15 - 20 minute drive and getting a new house or a renovated house in a mature neighborhood a lot of people right now will choose the new house. Builders are going to get a lot more aggressive. Consumer has a lot of negotiating power right now

The housing market in Alberta is going to get worse before it gets better. I haven't spoken to any builders or land developers who are suggesting otherwise right now. Even rents in Edmonton are facing some downward pressure. In about 6 months time, expect to see CMHC announcing that average rents in Alberta have dropped.

As far as your second note on holding renovated property, it depends on the income you can generate from the property. You need to go legal suite and try to sub out as much work as possible or do it yourself. It can make sense in Edmonton. But we can actually buy property for $325k here, suite legally for $40, and reappraise at $390k. Where? Mill Woods. Highest % growth area in Edmonton in the last 5 years. Excellent properties, family-friendly community.

I appreciate your thoughts on this and the information you provided. I was particularly interested in adding legal suites to existing residences because I feel this to be a increasing market. Primarily due many people unable to afford living alone in the now average 500-600k home. I see what your saying however that Edmonton allows you do tap into this market with much less overhead. I think what your saying is key. I need to evaluate my flip as a product and how it compares relative to the market. I get that it is going to be tough with new homes now being pushed and in direct competition.

Chris