It is known that house flipping can bring in more profits once planned and executed properly. Flipping houses allows investors to have more confidence when they know exactly what they’re getting into, especially having a substantial amount of financing. It starts by purchasing the property and planning to make some cosmetic renovations to turn a profit. All those activities require lawyers, inspectors, contractors, and permits that amount to process and are not talked about enough. So to help investors create a realistic budget and make better financial decisions, we’re highlighting the true cost of house flipping below:
True Cost of House Flipping
Initial Purchase Cost
Budget for the initial purchase cost of the house you plan to flip. For prospective house flippers, the biggest cost is often the property’s price tag which can run into several hundreds of thousands, depending on the location. As a result, most people tend to harp on this cost and completely forget about the closing fees. Other expenses such as title insurance and attorney fees also to be considered. Title insurance protects your home from damages during renovation while attorney fees ensure your contract does not have any loophole. Other additional expenses may include transfer taxes that make your purchase legal are necessary expenses to take note of. So when you’re budgeting for your initial purchase, remember to include them in your expenses report to avoid getting blindsided.
Financing Cost
Find a knowledgeable Baltimore hard money lender who will guide you throughout the house-flipping process, and help you anticipate the right financing costs. Unless you’re planning to buy the property outright with cash, you’ll most likely have to budget for the financial burden of taking out a loan. That would typically include paying interest on your mortgage, which can be up to 12% of your capital if you opt for a hard money loan. There’s also the origination fee you pay to the lender to process your application. Aside from those compulsory expenses, you may also have other costs to consider such as late fees or early penalty settlements depending on your circumstances.
Ongoing Holding Cost
Factor in the property’s maintenance cost during its time on the market. It would be great to be able to flip a house and sell it off within minutes as TV shows like to make it seem. However, in reality, it often takes several months to get your house ready for sale, and even longer to find a buyer. As a result, you’ll most likely need to pay for utilities such as electricity, water, and gas while the property is vacant. Basic upkeep like lawn care, minor repairs, and even property taxes that boost your curb appeal can also add up over time. Consider your timeline for house flipping carefully, knowing that delays could increase your holding cost the longer the property remains unsold.
Evaluating Return on Investment
Calculating Potential Profits
Be prepared for expenses before, during, and after the house-flipping process. Doing this step can prevent you from being blinded by “hidden” costs, but it also helps you create realistic expectations for your ROI. For instance, if you estimated that you’d make $60,000 from a house flip, but forgot to include your maintenance fees and insurance coverage in your expenses, you could end up $4,000 short and run over your budget. Using outdated sales information could also lead to wrong assumptions about your selling price. Ensure you use the recent sales of similar properties in the area to get a realistic estimate and remember to factor in all the necessary costs of house flipping.
Risk Assessment
Conduct a thorough risk analysis for your house flip so you know what to expect. You’ll be surprised how often investors are caught off guard by market fluctuations with no room for adjustment. However, when you prepare for the worst-case scenario, you can still turn a profit during economic downturns. The best way to perform a risk assessment is to ask yourself at every stage, what can go wrong and how do I fix it? That could include creating an emergency fund for unexpected repairs or hidden problems. In addition, it would be best to work with a reasonable window for estimated sales price, rather than a static figure that’s more likely to be wrong when there are sudden changes in the housing market.
Turnover Time
Set realistic timelines to account for potential delays in the sale of your property. It’s not impossible to find a buyer within days of listing your newly flipped house, but it’s always better to prepare for the worst-case scenario. Besides, it gives you some breathing room to avoid rushing your renovations or selling to the first bidder because you didn’t budget for more days on the market. On average it takes 6 months to flip a house, but this timeline could be longer or shorter depending on the season. For example, if you buy a property in spring, you could complete your repairs by summer and sign with a final buyer in fall when demand is higher. However, if you don’t anticipate delays, you could miss the window and need to negotiate in winter when housing demand drops. So if you fail to budget for the extra holding days and lower sales price when your flipped house finally hits the market, you could struggle to break even.
Conclusion
Real estate investors can ensure their success by understanding the true cost of house-flipping projects. Even after binging several property shows, many investors are often shocked when they realize how expensive it is to flip a house. But by then, it is often too late, and they’re knee-deep in the process with no funds to fall back on. That’s why it’s essential to not only consider the upfront price of buying and renovating a house but also the minor fees like your insurance and closing costs. In addition, remember to account for unexpected setbacks that can increase your holding costs, so you don’t run out of money while waiting for a buyer to come around.
