Updated: Oct 6, 2021
Whether you are planning to venture into real estate flipping or you are simply curious about how it works, the one billion worth question would always be: "How much does it cost to flip a house?" Let's be straightforward.
Flipping houses don't have an exact calculation. You will either spend less or above your budget since estimates are not always accurate with the actual. More specifically, each project's costs vary based on the property value, rehab costs, insurance, location, purchase price, and some other expenses associated with the property. There are abrupt changes in the material costs that you cannot steer clear of as how it highly affects the overhead.
However, to know more about how flippers/investors handle the flipping budget, let's chew over the 4 key factors that will ascertain the cost itself.
In flipping houses, the purchase price is one of the deciding variables that will give you an overview of how much the properties will cost. It will somehow set the stage for the flipping costs. However, the purchase price only refers to the cost of the property itself and the land it sits on that you pay for, except for condo units as it sits in a building and does not include the land. Primarily, the taxes and insurance don't make up the purchase price, but this cost may encompass some assets such as furniture and fixtures, etc., depending on the arrangement. However, if you happen to purchase a property at a relatively high price, you'll end up climbing mountains. Flipping houses is not after the selling price after some months of renovations; remember, you make money when you buy the house and not when sold.
Associated with purchase price is the 70% rule. Basically, this rule states that an investor/flipper should not pay more than 70% of the After Repair Value (ARV) of the flip property. For instance, the property you would like to purchase has a $250,000 ARV and $35,000 repair needs; therefore, the 70% rule says that you should pay $140,000. Going into details, $250,000 x 70% is $175,000 less the repair needs of $35,000 is equivalent to $140,000. Hence, purchasing a house at $140,000 with $250,000 ARV seems to be a good deal, but don't let all other costs associated with the fix and flip slip.
Additionally, when you purchase a property to flip, you will be liable for some of the closing costs. Primarily, you will have your share of the property taxes, insurance, and, title insurance and companies' fees apart from the purchase price. However, if you apply for financing, they'll have their own closing costs as well. If we have the 70% rule before purchasing the property; at closing, you have to bear in mind the 5% purchase price's closing cost. So, if you pay $140,000, expect to pay around $147,000 ($140,000 x 5% = $7,000 so, $140,000 + $7,000 = $147,000). You have to be mindful of these costs as they will affect your ROI and flipping budget.
Technically, rehab costs are the costs associated with property rehab and renovations. These costs are by far the most complex to budget and plan for as they vary depending on the property size, condition, labor rates, and materials. Basically, despite the property size, if it requires a more extensive repair, you will probably end up spending more than what you expected. Therefore, you will need to take control of all the costs so you can also be in control of your profits. Let's dig deeper into each variable.
1. Materials and Labor Costs
Calculating materials and labor costs must be on top of the list as rehab cost is concerned. Associated with the materials' cost are the delivery fees and sometimes, labor. Delivery fees vary depending on the location that is another determining factor in calculating materials' expenses. Take note of some materials that need to be installed by professionals adding up to your carrying costs. Labor rate, more specifically, varies depending on the area where your property is sitting. General contractors, plumbers, electricians, painters, and other laborers' rates vary depending on the workload demand. Keeping an eye on these two will keep you ahead of your game.
2. Home Repairs
Basically, home repairs can be categorized into 3: Minor, Moderate, and Extensive Home Repairs. Having a grasp of these repairs will help you manage your flipping budget even more. Each of these home repairs has its relative costs you should track to keep up with your expenses.
Digging deeper, minor home repairs refer to the beautification of the property. These include but are not limited to furniture and fixture replacement, patching walls, painting, etc., as property aesthetic is concerned. Meanwhile, moderate home repairs primarily mean upgrading the property to increase its value. These may include but are not limited to changing exterior paint colors, bathroom and kitchen upgrades. Lastly, extensive home repairs cover major renovations concerning the structural and architectural aspects of the property. These may include room expansion, tearing down a wall, adding rooms/garage, etc.,
These costs are paid monthly from the time of purchase. These costs include but are not limited to property taxes, utilities, insurance, financing, and other recurring costs.
1. Property Taxes
Commonly known as a millage rate, this is the ad valorem tax on the property value. States and municipalities in the US have their own property taxes. And when you purchase a property to flip, you will have to pay for the property taxes in the course of ownership as well as the federal short-term capital gains taxes. Considering the property taxes is a huge factor in attracting potential buyers.
2. Insurance Costs
Whether you purchase a property to flip or for personal use, insurance is essential as it will protect you, the property owner, the property structure, etc., as it will compensate for the damage or loss if necessary.
3. Utility Costs
Obviously, each property has a recurring monthly cost for utilities -- water, electricity, oil, and gas either it is a flip or not. Utility bills will vary per household consumption. Likewise, during renovations, contractors will need water and electricity to execute all the work thus, adding up to your expenses.
If you decided to borrow money to finance your flip property, there are two options you may choose from --- outside financing or personal financing. Since real estate flipping will require a good funding source, you must have substantial financing covering all the costs. (You may refer to this article to learn more about funding source).
Marketing & Sales Costs
Most investors/flippers venture into this type of real estate investment to sell. However, some of them will have their properties rented after few months of renovation and rehab. If you are one of the investors who make money from selling flip properties, you have to add in your flipping budget the marketing, sales, and realtor fees. If you prefer to market the property yourself, you'll have to shoulder the marketing expenses; if not, and you plump for a real estate agent, you will save more as the marketing costs are minimal.
These are just a brief overview of the flipping budget. Above all, the cost to flip a house varies depending on the property acquisition price likewise, several factors such as project timeline, execution, location, property size, financing costs, and carrying costs.
The bottom line is, you cannot come up with accurate costs relevant to what is planned and estimated. As each variable varies, the expenses vary, as well. What matters is how you control your expenses since this will determine your profit.
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Please check the series of this topic!
Part 1: Cost to Flip a House Part 1 | Buying Costs
Part 2: Cost to Flip a House Part 2 | Holding Costs
Part 3: Cost to Flip a House Part 3 | Rehab Costs