To flip houses you will need enough money to cover the purchase cost, cost of repairs, carrying costs, marketing costs, and cost to sell the property. How much you will need depends on how much repair is needed, where the property is, and the type of property. The cost does average about 10% of the purchase price of a property.
Property Purchase Cost
The purchase cost includes more than just the price the property is sold for. It also includes all of the other costs associated with purchasing the property. These include closing cost, fees, title insurance, financing fees, and taxes. Depending on how the seller is listing their home this may or may not include light fixtures, window treatments, and appliances.
The cost to purchase the property is simply how much the seller agrees to let it go for. In the case this is a family home (single or multifamily) the structure and property will be included in the purchase price. IN contract when co-op or condos are purchased the land is not generally part of the purchase price.
A good guideline for calculating what you should pay for a property is 70% of the value after repair subtracting the costs to rehabilitate. That means if you’re looking at a property with a price of $100,000 you will offer $70,000 minus what you think it will cost to rehab the property. It’s easier for beginners to choose properties that just need minor repairs such as new carpet and paint. These rehab costs are easier to calculate.
Include The Closing Costs In Your Plan
Closing costs include property insurance, fees to the title company, title insurance, transfer taxes, and a portion of the property taxes. It’s important to consider this as part of how much you will need to loan to flip a house. Closing costs generally run about 5% of the purchase price of the property. That means on that $100,000 dollar property you’d be looking at an extra $5,000. So now you’d need to estimate $105,000 for how much you’d need to flip the house.
Property Rehabilitation Cost
How much it will cost to rehabilitate a house varies. It goes without saying that the more the house needs to be sold the more it will cost and the longer it will take. Include both the cost of labor and the materials needed to fix the problems with the property you’re considering.
Labor & Material Costs
Decide which items need to be rehabilitated to resell the property as a ready to live in “turnkey” property. This will include the building materials, appliances, and all fees for delivery and installation. If any of the items will need to be special ordered, work that into your timeline to ensure you borrow enough to cover carrying costs.
Most of your costs will fall into one of two categories, appliances and building materials. Carefully inspect the property’s appliances, HVAC system, floors, walls, hardware, paint, and tile.
How much you should budget for when it comes to labor is the cost for you or subcontractors to come and do the work. Ensure you have a contracted amount before you authorize work from any specialized labor. Most fix and flips will include services from landscapers, painters, plumbers, electricians, handymen, and if the project is big enough a general contractor.
Beginner Cosmetic Fix & Flip Costs
For the new fix and flipper it’s not a bad strategy to choose properties that only need cosmetic rehabilitation. These fix and flips take less time which reduces the cost to carry the property. In addition the labor and material costs are not as high. The one downside is your purchase price is likely higher as the property is valued higher.
Common projects for cosmetic rehabs include, patching and painting walls, refinishing hardwood and replacing carpet, and taking care of remodeling in the bathroom and kitchen. Cosmetic rehabs also typically include cleaning up the landscaping to bump up the curb appeal and value.
ROI For Cosmetic Fix & Flip
When you fix and flip a property that just needs some cosmetic repairs you should be shooting for about a 10% ROI. An example of how that would look is if you purchase the property for $100,000 and put in $5,000 in cosmetic repairs your new sale price should be $105,000. To calculate your ROI take the difference between your purchase price and your new rehabilitated value and divide it by your new value. Then multiply that by 100 to get the percentage of ROI.
ROI For Moderate Fix & Flip
When you consider doing a moderate fix and flip it will include more involved repairs and upgrades that might require the hiring of licensed contractors. While taking on properties that need more involved updates and repairs the potential ROI is attractive.
Examples of moderate repairs include: kitchen remodeling that replace countertops, appliances, lighting fixtures, along with bathroom remodeling, improving the landscaping and lastly painting the outside of the house. You should be shooting for an ROI on this type of project in the range of about 18%.
ROI For Extensive Fix & Flips
Fix and flips that need more involved rehabilitation will require more time, more skilled labor, higher carrying costs, but do offer an opportunity to get the best ROI. These properties typically have known larger issues that lower the value of the property. This allows you to purchase at a lower cost and get better ROI for your efforts and investment.
Common rehabilitation projects include: fixing foundation cracks, adding bathrooms, adding more rooms, and putting in a garage. You should be looking to get an ROI of about 23% or more for extensive fix and flip rehabilitation projects.
Cost To Own The Property
While you are rehabilitating the property there are costs of ownership. These include the payments on the loan, insurance, utilities, and any property taxes. These costs are generally paid monthly while you’re fixing and until you sell it.
Marketing & Sales Costs
There are costs to market, sell, and close when you’re done fixing and flipping the property. You’ll need to decide if you’re going to market and sell the house yourself or if you will use a realtor.
Realtor Costs
Most real estate deals consist of the seller’s realtor and the buyer’s realtor. Each of these realtors are typically paid by the seller. While its customary for realtors to get 6%, any amount can be decided by the seller and realtor. While this fee isn’t something paid out of pocket it should be expected and planned for as part of the settlement process.
Cost To Market The Property
When using a realtor the cost of marketing your fix and flip is minimal. However if you decide to purchase the property to yourself there will be some out of pocket costs. The marketing approach may include some or all of the following: open houses, flyers, signs, and online posting.
These costs must be added into your carrying costs to have an overall picture. Without the right marketing you may not sell your property quickly and increase your carrying costs. The more people that are marketed the property you’ve fixed the higher chance you’ll sell it.
Find A Fix & Flip Loan in Phoenix
If you’re a real estate investor or fix and flipper that needs a loan for a prime property; Brad Loans can help! Our team knows the local real estate market in Phoenix and offers hard money loans and bridge loans for the fixing and flipping houses. To learn more please read about our loan programs or start your loan application now!
