Flipping houses can be an exciting and potentially profitable venture especially here in Pueblo, but it’s important to understand the expenses involved when flipping houses to ensure a successful outcome.This post won’t be talking about how to find off market deals like foreclosures and auctions, but if you want more info on finding off market deals especially foreclosures view our recent blog posts!
In this blog post, we’ll explore the essential expenses associated with house flipping, providing you with a comprehensive guide to budgeting effectively for your next project.
Acquisition costs
The first major expense in house flipping is the acquisition cost, which includes the purchase price of the property, closing costs, and any fees associated with obtaining financing or working with a real estate agent. Unless you are paying with all cash you will most likely fund the purchase with a hard money loan or a real estate investment loan. If its a hard money loan you want to make sure that you compare at least two other hard money lenders against each other.
You want to make sure it’s clear on the loan term, the fees paid at closing (lender fees) and make sure the interest rate is between 11-14%. There are a lot of scammers when it comes to hard money lenders so make sure you do your research.
The other cost most often not calculated into the overall costs would be utility costs. Gas, electric,water as well an insurance. You just want to make sure you calculate those as it could be tight if your margins were already tight to begin with.
Renovation And Repair Costs
One of the most significant expenses in house flipping is the cost of renovations and repairs. This includes things such as materials, labor and the cost of permits if any. This is one of the areas where we see new investors really overspend. Make sure whether it’s a contractor or a handyman that you make sure you get a line by line rehab budget.
It’s also best and saves a ton of money if you are able to buy the materials yourself. There are so many contractors out there that will offer to buy the materials and then they make up the cost of materials by 15-20%. 15-20% just for them having to buy materials and pick it up.
You also want to make sure that each job you are hiring for has a contract or something in writing to save you on any potential issues.
Holdings Costs
Holding costs can quickly add up during the flipping process. These expenses include property taxes, insurance, utilities, and loan interest payments if financing is involved.
Flipping projects often take several months, so it’s crucial to account for these ongoing expenses when calculating potential profits.Its really best to give yourself a conservative timeline when selling these homes. If the project will take you 2-3 months to complete its best for you to add a month to that. And factor in the house taking 2-3 months to sell.
If you are conservative with your rehab timeline, and your sales timeline and you would be profitable in those current scenarios then its only gravy if the project takes less time, or the sale takes less time.
Marketing And Advertising
To attract potential buyers and sell the property quickly, you’ll need to invest in effective marketing and advertising strategies. These expenses may include professional photography, staging of the home and you need to factor in the costs for the real estate agents and if there are any concessions required for the buyers loan. So generally you are looking at 6% just in realtor fees. 3% for the buyer and 3% for the sellers agent.
Finding a realtor is also something that you want to make sure you shop around for. Some realtors here in the area actually hire a photographer on their own and pay for it out of their own pocket. Others offer staging services as well. You would be surprised how many realtors don’t offer any services what so ever and they take crappy pics, etc.
Contingency Funds
In the unpredictable world of house flipping, unforeseen expenses are bound to arise. It’s wise to set aside a contingency fund to cover unexpected repairs, delays, or other unforeseen circumstances. Aim for a buffer of around 10-15% of the overall budget to mitigate potential risks.
Things that could come up could be unexpected repairs, repairs that for some reason cost more than others due to unseen factors, as well as things that come up that you weren’t planning on fixing at all.Its nice to just have a buffer.
Flipping houses can be a rewarding and profitable investment strategy, but it’s crucial to account for the various expenses associated with the process.
By thoroughly understanding and budgeting for acquisition costs, renovation expenses, holding costs, marketing, transaction costs, and contingency funds, you’ll be well-prepared to tackle your house flipping project with confidence.
Remember, meticulous planning, market research, and effective budgeting are the keys to a successful house flip.