Fix and flipping is a great way to make extra money or make a living if you take the time to learn the business. But if you jump into flipping without knowing the costs involved, you can lose a lot of money. There are the basic costs like down payments and repairs, but there are many costs that investors miss when fix and flipping. You must account for financing costs, closing costs, carrying costs, repairs and selling costs. You must also account for your time and effort you put into the fix and flip. If you are doing all the work on the repairs, then you must decide what your time is worth.
It takes some work and experience to accurately figure the costs when flipping. If you want software to make the process easier, check out houseflippingspreadsheet.com.
What financing costs are involved in fix and flipping homes
I love to buy long-term rentals because they provide cash flow month after month. Long-term rentals also are fairly easy to finance, at least compared to fix and flips. Banks do not like to loan on fix and flips, because they can only charge interest for a short period while you own the house. If you can find a bank to finance a fix and flip, they will most likely charge a higher interest rate and more upfront costs than they would on a long-term loan. I have a great relationship with my portfolio lender and they charge 5.25 percent and 1.5% origination fee with 75% loan to value ratio on my fix and flips. It will be very difficult for a beginning investor to find these terms without a proven track record of fix and flipping.
Hard money lenders are another option for fix and flippers, but they will charge much more than my bank. A hard money-lender will charge a higher interest rate around 15% and higher origination fees like 4%. However, A hard money-lender may finance more than 75% of the purchase price and some of the repairs. Here is a great article with more information on financing fix and flips.
Here are the minimum and maximum financing costs on a fix and flip that will be held 6 months.
$75,000 cheap bank loan (my terms)
Origination charge: $1,125
Interest over six months: $1,969
$90,000 expensive hard money loan:
Interest over six months: $6,750
What are the buying costs of a fix and flip?
There are more costs needed to buy a fix and flip than financing costs. Some sellers like HUD do not pay title insurance or closing fees for the buyer. There are recording fees, closing fees, and in some cases the insurance and taxes may need to be paid when you buy a house. Some banks may require an appraisal, flood certification and other fees as well.
Most buyers will want some type of inspection done on a home before they buy it. An inspection can cost $200 to $600 depending on the location and size of the house. With a HUD home the buyer will have to pay for utilities to be turned on as well for the inspection.
Estimated buying costs on a fix and flip: $500 to $2,500
What are the carrying costs on a fix and flip?
When you buy a fix and flip, there will be many carrying costs for the time you own the house. You will need to pay insurance, taxes, utilities, HOA dues and yard maintenance until you sell the home.
Estimated carrying costs on a $100,000 house for six months:
Yard maintenance: $600
What does it cost to sell a fix and flip?
Selling a house is not cheap, you have to pay real estate agents and many costs at closing. Each state has different costs to sell a house so be sure to confirm what it costs to sell a house in your state before you buy a fix and flip. I wrote a very detailed articles on all the costs associated with selling a house, and I wrote why you should always use a real estate agent to sell a house as well.
Here are the estimated costs associated with selling a $150,000 house in Colorado (all commissions are negotiable). You may notice the price increase on the home, it doesn’t make much sense to fix and flip a house if you sell it for the same price you bought it for!
Real estate commissions: $6,000
Title insurance: $800
Recording fees: $200
Closing fee: $200
Buyer’s closing costs: $3,000
Total selling costs: $10,200
What are the total costs involved to fix and flip a home?
The total costs that go into a fix and flip may surprise you. $17,093 to $30,850 is needed just to take care of the financing, carrying, buying and selling costs on a fix and flip. These costs do not even consider the repairs and out-of-pocket cash that will be needed to complete the flip. Once you figure on repairs, you are going to spend at least $25,000 on a fix and flip purchased for $100,000. The more expensive flip you buy, they higher those costs will be. If you are thinking of buying a fix and flip, make sure you account for all the costs and have the money available to pay for these costs. I made almost $50,000 on the last fix and flip I did, but I had to have a huge margin between the buying and selling price on that home.
For more information on how to fix and flips homes including how to find properties, how to finance them, how to repair them and how to make the most money fix and flipping, check out my new book Fix and Flip Your Way to Financial Freedom. The book is $9.99 and available at Amazon as a 171 page eBook here. You can also buy a PDF version of the book in the InvestFourMore store here.