Building margin into every property development project is a fundamental principle understood by every successful flipper.
This margin protects flippers from all the variables and unforeseen circumstances they may encounter throughout the project.
California’s real estate market is one of the most lucrative in the country.
But it is also a high-cost, high-friction market with many contrasts and nuances that can catch the underprepared off guard.
Permits, labour, holding fees and resale timelines rarely go exactly to plan.
When they don’t, it costs you money.
Experienced flippers cater for speed bumps in all their projects by building margin these into their business plan at the start.
These are the potential costs of any unexpected blips.
This process is knows as “protected margin”.
Projected profit vs Protected margin
Entrepreneurs seeking funding love talking about projected profits.
It’s a nice big number with a bunch of zeroes, designed to secure capital.
It’s the same for flippers.
A flipper can draw up a business plan for their project that promises a very tidy projected profit.
That’s until something goes wrong!
That’s when a projected profit becomes meaningless and a protected margin becomes critical.
A projected profit relies on best-case scenarios.
A protected margin is about risk management.
It is constructed around worst-case scenarios, observing the fundamental requirements of building margin.
It allows for blow-outs due to:
- project delays
- rising labour costs
- a softening market
- appraisal surprises
Protected margin is a defensive strategy which builds margin into every facet of the project, acting as a buffer that keeps you solvent even when hit by a perfect storm.
It also makes you a much more attractive proposition to lenders.
Where margin is commonly lost in California flipping projects
Making money requires careful planning and execution.
Losing money is much easier.
Over-improving for the local buyer pool is an all too common mistake made by flippers in California.
That is why thorough research and an intimate knowledge of local buyer trends and desires is so important.
Those trends can vary markedly in California from one neighborhood to the next.
Luxury upgrades with high-end features in mid-tier or working-class areas are rarely rewarded.
Instead, flippers are better off redeveloping with a view to appeal to as many potential buyers as possible.
This usually means functional and updated designs offering additional accommodation.
Sustainable housing features such as solar panels, batteries and hot water systems along with other energy efficient additions are also extremely attractive to buyers in California.
Holding costs are the other big killer for California flippers.
That’s because they chip away at their ROI (return on investment).
There are many different types of holding costs with the biggest being utilities, property taxes, insurance and loan servicing.
They can impact flipping projects in several different ways.
Permit delays – You’ve bought your property, designed your improvements but the project has ground to a halt as it awaits permit approvals. LA is among the worst offenders with basic permits often taking weeks for approvals.
Draw delays – A draw schedule drip feeds funds for projects in various stages and is designed to protect the lender to ensure the profitability and success of a project remains on course. Delays often occur due to finance issues or poor planning resulting in unrealistic timelines or budget estimates. Supply chain or subcontractor issues may also trigger draw delays, bringing projects to a standstill.
Financing structures – Many loan types can increase holding costs of a project because they bind borrowers to rigid terms that lack flexibility, require appraisals prior to loan closures and discourage early exits with exorbitant penalty fees.
How financing impacts margin
It is critical to source the right loan for your flipping project.
As borrowers, flippers undertaking short-term renovation projects don’t have the same needs as those purchasing a home.
When your loan fails to complement your needs as a flipper, it can quickly erode your profits and reduce your margin.
The key features flippers should be looking for when sourcing a loan is:
Speed – When you find the perfect property to flip, you need money fast.
Interest-only repayments – Flippers need short-term loans which may be repaid in as little as nine months. They don’t need loans that demand repayment of the principal loan, eating into their cash reserves.
Flexible terms – Loans that encourage rather than penalise early exits.
Reliable draw schedules – Draw delays extend projects and cost you holding fees which is money down the drain.
Why hard money is the best solution for flippers
Hard money loans are a perfect match for flippers.
Traditional loans come wrapped in red tape that add uncertainty and unwanted variables to your project.
They make the task of protecting margins that much harder.
Hard money loans deliver certainty because they make the task of building margin into every deal so much easier.
They allow serious operators to construct a business plan using conservative assumptions that deliver a guaranteed minimum margin.
And they provide flippers with fast money to secure target properties, reliable draw schedules and flexible terms with a focus on rapid loan exits.
Get finance and support today
There are riches to be had in California’s real estate market.
But flippers in the Golden State are rewarded when they exude discipline rather than optimism.
Like many other forms of investing and entrepreneurship, uncertainty is the only certainty.
That’s why building margin into your business plan is imperative.
The most successful flippers in California design deals that provide a guaranteed margin, even when things don’t go to plan.
On the rare occasion they do go to plan, that margin is even greater.
But knowing exactly how to allow for all the traps and pitfalls of the flipping game can be overwhelming, especially for those new to the business.
That’s where Equidy can help.
Equidy has an intimate and personal history with all aspects of property development in California and has done so for well over 40 years.
They can assist you with your property finance plan, helping you build one with a protected margin that will deliver you a profit under any set of circumstances.
It will allow you to maximize the return on your investment without putting yourself at unnecessary financial risk.
Equidy is a hard money lender who can finance flippers and developers in as little as 48 hours.
It makes them the ideal partner for every flipping project in California.
They stand by their core belief that anything is possible and they strive to prove it every single day.
Even in challenging economic times, they love to reward entrepreneurship and resolve to help their clients realize their wealth creation dreams.
Equidy enjoys long and established relationships with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimize the risk to all parties.
Contact Equidy today to book your free strategy call.
