Velocity of money is a key variable that many flippers fail to consider when evaluating a deal’s potential profit. Velocity of money refers to how quickly money is moved from one entity to another. This concept, along with scope of work and highest and best use, are how I dictate my plan for best overall returns. 

Common thought is if we spend more money on a renovation, we will make more profit, but that’s where velocity of money comes into play. It’s important to look at what is going to maximize overall return, not just sale price. There is a strategy behind spending less money on the renovation, selling for less, yet still making more money upon exit. As an example, let’s review our recent flip project in Bellevue.  

This property was purchased for $1.35 million. One option would be to put about $300-350k into the renovation to sell it for $2.5 million. Instead, I want to put $125-135k into the renovation and target a $2.1 million exit with the goal of getting out quickly and keeping costs down.  

We are looking at a $200k profit with a 4–5-month turnaround as opposed to a $500k profit with a 12-month turnaround. Sure, you will make more profit with the more extensive renovation, but you will hold onto the property for much longer. This stretches out the deal and can significantly increase costs. Therefore, our overall cash-on-cash return is higher by doing less work.  

This is velocity of money

Getting into the scope of work, on this particular project we are updating the kitchen, flooring, cabinets, doors, trim, electrical, and landscaping. However, we are approaching this cosmetic update differently than a full renovation in order to keep costs under control.  Starting with the kitchen, we know that typically an open concept gives you the highest price. Prior to our purchasing the home, however, the kitchen was fully rewired and re-replumbed. There were newer mechanicals brought in for the range, as well as an updated electrical panel. If we open up the kitchen, we will need to rip it all of this recent work to get the highest and best use floor plan. Since we are hoping to minimize our time and costs, redesigning the kitchen floorplan is not the best option in this case. 

This is where you must adjust your scope of work in a cost-effective way. Many flippers find themselves going over their budget, but most of the time it is their own fault. They are asking their contractors to do too much. Look at your mechanical locations, wiring, and plumbing to see if you can work with what is existing. For this project, we looked at the comps and found that many of them had smaller kitchens that were not open concept. Therefore, we knew we wanted a better kitchen but didn’t need to necessarily move everything to acheive that. We are opting out of moving the mechanicals, wiring, walls and plumbing, and instead upgrading the cabinets and counters to save both time and money. This major scope of work decision brings a $40,000 kitchen renovation down to a $14,000 upgrade.  

Always consider the cost domino-effect before you add to scope of work and review comps to get an idea of what you really need to tackle. In a perfect world, I would rip everything out but that’s not going to make money. You can often design kitchens, bathrooms, and other spaces around what’s already there.  

It is always important for flippers to identify highest and best use, define the scope of work, and put a plan in place to maximize returns. Cosmetic renovations are particularly challenging, because you want to perfect things while remaining within your target budget.  

Remember, velocity of money matters.  

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