Mark: So Jesse has a question. This is actually from the afternoon, he had it before we even started, about adding square footage and basically about additions. He says, “Hi, Justin. I’m local here in OC”, Orange County, “and see quite a few potential deals that work if we can add an additional room and/or bathrooms. We are trying to stay busy, but don’t have experience with additions.

“Obviously, we will have to account for additional time and holding costs. But are there any other pitfalls you have seen with additions? Are you exploring this strategy in your business model with decreased inventory? And lastly, if we wanted to wholesale as an exit strategy, what potential we have are straightaway from projects like this?”

Justin: All right, Jesse, I was about to tell you, yes, stay away from them, because I am in Orange County too and I want to buy them all. But then you mentioned wholesalers, and I thought, “Hmm, Jesse could sell them to me.”

No, that is a fantastic strategy right now. In fact, we are doing that quite a bit. With adding square footage, you are in Orange County, so to add square footage, it takes roughly $70 to $100 per square foot. It is a very easy calculation.

I use a $20-per-square-foot formula to rehab a house, as many of you guys know my $20-per-square-foot rule. So, a quick calculation is 70 to 100 square feet. Now, you do not want to add square feet in an area where the houses are worth $100 per square feet. If that is your area, then don’t mess with that.

However, here in Orange County, as Jesse knows, it is closer to $3, $4, whatever, crazy-dollar-per-square-foot, so you can add square footage. It is a great thing to do.

A few things to watch out for. You want to make sure that the setbacks, of course, that the plot of land that you have is big enough to add square feet. So you want to make sure of the setbacks, check all that stuff out.

Let’s see, what else? You already nailed it, Jesse. I would tell you to make sure that you’re adding for the additional holding cost, and whatnot. The way I do, if we are adding square feet, you know usually I will shoot for 13% and I am going to confuse everybody here, Mark, I know it, I will usually shoot for a 13% annualized return on the total invested capital into a deal.

That is if I can turn it in three to four months, because my annualized return is going to be close to 40%. So if it is a property that I’m adding square foot, or the City is going to be involved in any way, I need to pull permits, I am going to plan on at least six-month turnaround time.

Adding square feet, you know, you might even be at seven, depending on what city you’re in and how long it takes. But using that 40% annualized return model, you are going to want to make sure that you’re getting at least 20%. Because that is going to help cover your holding cost. You just want to make sure that you have a bigger profit overall on a bigger project like that.

So, no, I will not shy away from that. You are in Orange County; any house you get under contract that makes sense, where you add square feet, send it my way. Send it to [email protected], and we will be happy to answer your inquiries.

If you would like to download a PDF of this transcript, please use the button below.

[wpdm_file id=68]

Subscribe!

Subscribe to our podcast on iTunes and, if you would be so kind, leave a 5 star rating and review so that others can find this great house flipping information!

The post HF Q&A #1 – What are the pitfalls of adding an addition to a rehab? appeared first on House Flipping HQ.