Understanding how much it costs to flip a house is key to successful real estate investing. Basic house flipping costs involve the purchase price, holding costs, renovation costs, and selling fees. A clear understanding of the cost components is crucial for ensuring your house flipping is a lucrative investment strategy. Otherwise, your budget will quickly disappear, along with any profit.
Flipping houses has gained popularity, with TV shows showcasing the process and potential profits. However, these shows often gloss over the cost of flipping a house. This can leave aspiring startup real estate investors unprepared for the financial realities.
Are you wondering, “How much does it cost to flip a house?” This comprehensive guide to house flipping costs explores crucial factors to consider before purchasing an investment property. At the end of the article, you will understand the actual costs of house flipping.
Importance of ARV in House Flipping Costs
Calculating the after-repair value (ARV) is the most crucial step in house flipping. You need to know how much money you’ll get after renovations and improvements. When you know the ARV, you can better understand all the costs associated with a house flip.
The best way to figure out ARV is to find three to six comparable property sales—also called comps—in the same area. Look for sold properties of similar size and features. The average selling price of the properties gives you a ballpark figure of the expected sale price for your investment property.
Here are a few things to keep in mind when comparing comps to determine the ARV:
- Sales only: Only look at houses sold, not ones just for sale.
- Recent sales: If possible, look for comps that have sold within the last six months—ideally, 90 days or less.
- Bedrooms and bathrooms matter: Adjust the price upward or downward, based on bathroom and bedroom numbers.
- Compare amenities: Look for updated features like upgraded kitchens and bathrooms, heating systems, or new roofs. Adjust upward or downward accordingly.
- Similar lot size: Look for other properties with similar lot sizes to your investment property. Remember to factor in other benefits like water views.
What if you cannot find comps for your ARV calculation? You can estimate the potential sales price of a potential flip by following this simple formula:
- Find a property with similar amenities.
- Divide its sales price by its square footage.
- Multiply the price per square foot by the number of square feet in the fix-and-flip property you want to flip.
This method can give you a good estimate. However, it’s still best to find several comps as close to the flip property as possible. This gives you the most accurate, up-to-date comparable sales data.
However, a lack of comps in the area could be a warning sign. No recent sales can mean that the housing market conditions are poor or houses are not selling due to overinflated prices.
How Much It Costs to Flip a House: The Factors
Armed with your ARV, it’s time to delve into the true cost of real estate flipping. The four basic costs of a house flipping project are initial costs, rehab costs, holding costs, and selling costs. However, the final cost can depend on housing market conditions, the type of house, and borrowing costs.
Let’s break down the various costs involved in a typical house flip.
The cost of purchasing an investment property is the biggest expense for house flippers. Your goal is to purchase a property at a reasonable price, pay for renovations, and sell it for a profit. Therefore, experienced flippers look for foreclosures or distressed properties with excellent resale potential.
Here are the main factors in the acquisition cost:
- Purchase price: Home acquisition is the biggest expense in a fix-and-flip project. Therefore, look for low-priced or undervalued properties. Remember, the purchase price also includes a down payment of 15% to 20%. Also, the loan terms, your credit score, and other factors can affect the acquisition cost.
- Agent fees: You may have to calculate real estate agent commission in the initial costs. However, in many cases, the fees are part of the purchase price. And in most cases, the seller pays the fees at closing.
- Closing costs: You must pay closing costs when buying an investment property. The average cost when completing the deal is 3% to 6% of the purchase price. The costs include lender fees, appraisals, title, search, and attorney fees.
- Inspection: Arranging a home inspection is always a good idea in the house flipping process. The inspector’s report gives you an idea of the property’s general condition. You can use the data to help make a rehab cost estimate.
Renovation & repair costs
Rehabbing a fix-and-flip property is the next major expense. Average renovation costs vary greatly, depending on the extent of work. If you are new to house flipping, starting with a property that doesn’t need extensive repairs is best. However, lucrative house flips that only need cosmetic repairs are hard to find.
Because distressed properties are the most lucrative, you must calculate repair estimates accurately. Otherwise, your profit margin will disappear to nothing.
What is involved in the cost of repairs? Here are a few factors to consider:
- Renovation expenses: All house flips require rehab—some need moderate repairs, and others require extensive home repairs. Therefore, you must calculate the cost of building materials to flip the house into a salable condition.
- Labor costs: House flipping is cheaper when you do the work yourself. However, you may need to outsource some jobs to professionals. Therefore, the cost of labor can include electricians, plumbers, HVAC technicians, and other professional contractors.
- Unexpected expenses and contingency budgeting: A contingency plan for unforeseen additional costs is an excellent investment strategy. Generally, have a contingency budget of 10% to 15% of the house flipping project.
Holding costs when house flipping are expenses you have until the house sells. Also called carrying costs, these additional costs include property taxes, utilities, homeowners association (HOA) fees, and insurance. Holding costs increase the longer you “carry” the property.
Here are details of some of the common costs associated with holding a property:
- Mortgage payments and interest: You must pay financing costs unless you use cash to finance a real estate investment. These include interest payments and monthly mortgage payments.
- Property taxes and insurance: You are liable for property taxes until you sell the property. You may need to purchase homeowners insurance, liability insurance, and builder’s risk insurance.
- Utilities and maintenance costs: You must pay for gas, water, and electricity during renovations. Maintenance expenses could include snow removal, lawn mowing, HOA fees, and security.
The cost of selling an investment property also adds to the cost of flipping a house. Therefore, the fees and agent commission will be deducted from your profits.
Here are some of the selling costs you incur:
- Agent fees: Calculate 5% to 6% of the selling price for real estate commission. Although this seems a lot, a good real estate agent can help sell your property faster and save you money on soft costs.
- Marketing and staging: Selling your property yourself requires spending money and time on advertising. Therefore, evaluate marketing costs and the potential reach of marketing strategies. Marketing ideas include an open house, social media marketing, yard signs, flyers, and internet marketing.
- Potential closing costs: Apart from the agent’s commission, you may incur extra costs like legal fees, escrow fees, appraisals, loan payoff fees, and transfer taxes.
Additional Factors Impacting House Flipping Costs
Hidden costs and unexpected events are the biggest pain points for house flippers. Therefore, knowing potential pitfalls in the real estate industry can help you avoid potentially costly mistakes.
Here are a few things to remember when calculating how much it costs to flip a house for profit.
Location and market trends
Location and market trends greatly affect the potential for profit in real estate investing. Therefore, locating areas with strong demand and potential for appreciation is crucial. This requires the same due diligence for any type of investment property.
It’s also necessary to look at market trends. For example, suppose the real estate market takes a downturn. In that case, a buy-and-hold strategy or turning it into a rental property can maximize profitability in a dynamic real estate landscape.
DIY vs. hiring professionals
There are pros and cons to doing the rehab work yourself or hiring contractors. Both scenarios can significantly impact the cost of flipping a house successfully.
On the one hand, a DIY rehab can save you money. But you may not have the skills to finish the job on time or to a high standard. However, a reputable contractor has the skills and expertise to ensure a professional result. Remember that contractor costs will eat into your profits.
Ultimately, you must have a cost breakdown to determine the best strategy. Many startup house flippers tackle the simpler parts of demolition to save money. They then do cosmetic renovations like painting after professionals have completed the major rehab.
When using contractors, make sure you have a good timeline and schedule, and that everyone is on board and understands their responsibility in the renovation project.
Time frame and holding period
The time frame and holding period significantly impact house flipping costs. Longer holding periods mean increased interest on loan payments, property taxes, and utility expenses. Swift renovations minimize financing costs. However, they require efficient project management. Balancing these factors is crucial to optimize profits and ensure a successful house flip.
To ensure the holding period doesn’t wipe out your flipping profits, prepare for the worst and expect the best when estimating property costs. This way, you can absorb additional costs if the property doesn’t sell when expected.
Strategies to Control Costs
Newbies in the house-flipping market find that costs can quickly spiral out of control. Common mistakes include underestimating the scope of work, delays, inflation, or project mismanagement. A clear strategy to control costs will maximize your potential profits.
Here are three areas where strict control can save you money on house flipping costs.
Create a detailed budget
Creating a detailed budget and sticking to it will help you be successful. A house-flipping budget should include the acquisition, rehab, holding, and selling costs. Additionally, it’s vital to have a contingency budget for unexpected events.
Here is a list of items for a detailed budget:
- Purchase price
- Closing costs
- Financing costs
- Home inspection
- Real estate agent fees
- The cost of permits for demolition or construction
- Demolition costs
- Architect and engineer fees
- Insurance costs
- Property taxes during the holding period
- Interest payments on money loans
- The cost of construction materials and labor
- Upgrades to key systems like electrical, plumbing, and HVAC systems
- Bath and kitchen upgrades
- Roofing expenses for repairs or replacement
- Interior finishes and cosmetic repairs
- Staging costs when marketing the property
- Marketing strategy
- Contingency fund
Of course, other items could be added to the list, depending on the property type and scope of your rehab.
Experienced house flippers understand the importance of negotiating prices every step of the way. Negotiations start with the purchase price and go through to the cost of buying raw materials. Remember—every dollar saved when flipping houses is a dollar more in your pocket.
Here are a few ideas to maximize your profit by getting the best prices:
- Ask the seller to cover closing costs.
- Negotiate with suppliers to get discounts for buying materials in bulk.
- Get discounts from contractors by using them for multiple projects.
- Shop around for the best financing rates from various money lenders.
Efficient project management
Project management can make or break a lucrative house-flipping project. Renovation delays can disrupt the entire process, increasing holding costs and other expenses. Therefore, setting reasonable timelines, budgets, and quality benchmarks from the start is vital. Also, contractors should be aware of their accountability and consequences for delays in the project.
Here are the fundamentals of an efficient project management strategy:
- Plan tasks in a logical sequence.
- If possible, order materials in advance to prevent delays.
- Allow enough time for permit approval.
- Maintain open communication with contractors and subcontractors.
- Conduct regular budget reviews.
Ensuring the project finishes on time is the best way to maximize profits in real estate flipping.
The primary objective is rehabbing your flip as fast as possible without compromising quality. This way, you can list it, sell it quickly, and move on to the next one.
How to Determine How Much Money You Need to Flip a House
The amount of money you need to flip a house depends on its sale price. A profitable sale is when you sell the property for significantly more than the purchase cost, rehab cost, and other associated fees. Therefore, you must calculate the maximum buying price to ensure a healthy profit.
The 70% rule
The 70% rule is a benchmark most house flippers use to avoid overpaying for an investment property.
The 70% rule is the maximum purchase price you should aim for to achieve a reasonable profit margin. The 70% rule can help you account for potential unforeseen costs and market fluctuations. At the same time, you have a margin of safety in the investment.
Here is the formula to calculate the 70% rule:
After-repair value (ARV) x 0.7 (70%) – estimated rehab costs = maximum allowable offer
Here’s how the calculation works in a real-life scenario. Suppose an investor finds a below-value property in poor condition, and they calculate the ARV to be $260,000. However, the estimated repair costs are $54,000. They can use the 70% rule to determine that the maximum price to pay is $280,000. Here’s how:
($260,000 x 0.7) – $54,000 = $128,000
Remember, this is only a general rule. You should also conduct a detailed analysis of the specific market and property conditions. Adjustments may be necessary based on factors like location, market conditions, and the scope of renovations.
How to determine your ROI
Determining your return on investment (ROI) is vital for wise investment decisions. The size of the profit you expect should take into consideration your time and effort on the project. After all, a profit of $1,000 on a house flip is poor if the project takes several months.
The ideal ROI for a house flip is 28%. Here is how to calculate ROI:
ROI = (Investment gain – investment cost) ÷ investment cost
Here is how the formula would work for an investment property:
($260,000 – $192,000) ÷ $192,000 = 0.35 (35%)
This calculation shows that on this flip, you recoup your initial investment plus repair costs and fees on flipping and get a 35% profit.
Tips for Cost-Conscious New House Flippers
Knowing where to begin is difficult when starting out as a potential house flipper. Many factors impact the cost of flipping a house, and finding a low-value house with excellent profit potential is just the beginning. Four main principles can help build a solid real estate investment strategy.
Start small and gain experience
The best advice for anyone new to house flipping is to start small and get experience. Flipping houses combines real estate investing, construction, and project management. Therefore, starting with a single-family house that doesn’t need extensive repairs is usually best.
As you gain experience, you can take on more complex house flips. Some newbie flippers also attend courses to learn basic construction skills. This lets them save money on basic rehab tasks and better manage contractors.
Build relationships with contractors and suppliers
It’s crucial to remember that successful house flipping requires an expert team. Therefore, from the start, you should concentrate on networking with real estate professionals. This way, you gain insights and learn from their knowledge and expertise. After all, you have a common goal—to profit from real estate investments.
Here are the main players in your team of professionals:
- Certified public accountant
- Real estate attorney
- General contractors
- Specialized contractors
- Real estate agent
Learn as much as you can about house flipping before diving in headfirst. Flipping is a multifaceted investment strategy. Therefore, you should read books on flipping houses, listen to podcasts by industry experts, and conduct market research.
After gaining the basic knowledge and experience, you can expand your education into other aspects of the business. Here are a few ideas:
- Study the nuances of negotiating to improve your skills.
- Learn the basics of essential trades like plumbing, painting, and carpentry.
- Read up on interior design concepts.
- Learn how to landscape properties and improve curb appeal.
- Join real estate forums.
Use a house flipping calculator
The BiggerPockets House Flipping Calculator is one of the best tools to get started in the business. It can help you assess the cost of a house flip and its potential for profit. This tool uses customizable timelines and includes relevant costs, so you can avoid overspending on your first flip.
House flipping can be a lucrative real estate investment strategy to build wealth. However, success hinges on clearly understanding the costs of flipping a house. From property acquisition and renovations to holding and selling expenses, you must accurately determine how much the investment will cost. Remember, calculating the property’s ARV is key to identifying properties with the potential for a huge profit. If you want to learn more, please check out our definitive guide on how to flip houses.
Your one-stop guide to making a profit with fix-and-flips
A step-by-step plan to succeed in your first or next house flip, this bundle will teach you how to budget and estimate every aspect of your renovation, from cosmetic renovations to complex installations and upgrades. Discover the ins and outs of flipping real estate in any part of the economic cycle, find options for financing your flips, and undertake larger renovation projects.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.