Avoid a Flop: How Much Does it Cost to Flip a House?
How much does it cost to flip a house? Check out our guide for estimates and best practices to ensure you get the best ROI for your purchase.
Flipping a house is an exciting project to take on. It can be extremely rewarding to see your vision come to fruition after many months of hard work and plenty of well-spent money.
But there’s also the reality of the cost to flip a house and what it entails. As a first-time property investor, the last thing you want is to be caught off-guard when it comes to creating your vision. You want to face this reality, head-on before you get started on your project.
For a full breakdown of the main costs associated with flipping a house, this guide is for you.
What Does It Cost to Flip a House? Facing the Reality
There are a few main cost areas that go into flipping a property. They include the cost of acquisition, closing costs, repair costs, carrying costs, marketing costs, and sales costs.
This being said, there are also a number of different variables that affect these individual costs. Most of the time, it boils down to the location of the property, the type of property, and the extent of renovations.
All in all, you want to budget about 10 percent of the home’s purchase price for total house flipping costs. However, this amount can vary from one project to the next, and it’s this factor that makes house flipping so appealing. It’s possible for most people to achieve a great outcome, even with a small budget.
Let’s take a closer look at the main cost factors of flipping a house:
1. The Property Purchase Price
When we talk about property acquisition this refers to how much it costs to buy a property. But often, it’s not just about the actual price of a home, it also includes the closing costs on your purchase.
What are closing costs? They include certain fees that must be paid during the real estate transaction settlement. As well as title insurance fees, transfer taxes, and financing fees.
The purchase price of a property includes the home itself, as well as the designated land surrounding it. Depending on whether you choose a single or multi-family home, this has a big impact on price.
Property price also doesn’t include taxes or property insurance — these are separate costs you’ll have to cover.
When purchasing a property to flip, you want to remember the 70 percent rule. Basically, it’s wise to consider a property if you’re paying 70 percent of the after repair value, minus all the repairs needed. In other words, you want to pay 70 percent of the value of a home after it’s been repaired.
As a first-time property investor, you want to purchase a property that only needs cosmetic repairs. This makes it easier to work with the 70 percent rule-of-thumb. However, this is merely a guide — you don’t have to stick to this recommendation if your budget allows otherwise.
2. Property Closing Costs
As mentioned, closing costs are part of the deal when you purchase a property. You may not have to pay the full brunt of the closing costs as they’re typically divided between the buyer and the seller. However, you will be responsible for some of them:
- Transfer taxes
- Your share of property taxes
- Property insurance
- Title company fees
- Title insurance
Bear in mind that if you’re financing your property with a loan, you will also need to pay the costs associated with the type of financing you opt for. Your lender should provide you with a clear breakdown of these closing costs.
If you’re looking for an estimated amount on closing costs, you want to set aside about 5 percent of the property’s overall purchase price for closing costs.
3. Rehabilitation of the Property
This is where a decent chunk of change will go when you flip a house. But bear in mind that these costs vary depending on the extent of the renovations that the home needs.
Variables that impact renovation costs include the extent of rehab, the size of the property, and labor costs associated with the local region.
Cosmetic Repair Costs
These are the best types of repairs you could hope for when you purchase a property to flip. Essentially, they’re just minor improvements or repairs that will enhance the value of your property.
You can complete cosmetic repairs in a short time frame, which reduces the carrying costs of flipping a home — so it’s a win-win. Your labor and material costs will also be far less, saving you even more money.
However, most homes that only need these minor repairs will have a higher acquisition cost to start with. If you’re looking at how to budget for cosmetic repairs, a good rule-of-thumb is to go with an average of $30 per square foot of the home.
You may only end up spending $5,000 – $8,000 on these types of repairs.
Cosmetic repairs include the likes of repainting the interior or exterior, replacing carpeting, or refinishing floors. You might need to replace or repaint cabinets or update hardware and lighting fixtures. While the yard might need basic landscaping to improve curb appeal.
Moderate Repair Costs
Moderate repairs are a little more extensive, although they’re still not going to take months on end to complete. With moderate repairs, you can add a good amount of value to your property, overall. For these types of repairs or upgrades, you may need to hire contractors and laborers to get the job done. With this, you’ll also need to cover material costs.
The overall acquisition price of the home will generally be a little lower if the property needs moderate upgrades. If you spent only $5,000 on minor repairs, you can expect to pay an average of $15,000 on a $100,000 home.
Moderate upgrades might include replacing kitchen countertops and cabinets, appliances, and new flooring. You might need to update the bathrooms and plumbing fixtures and add new tiling. The exterior might need an overhaul with contractor repainting and a good amount of landscaping work.
Extensive Repair Costs
If you purchase a property that needs extensive work, you’ll generally bag yourself a decent deal on the acquisition price. However, you will end up paying far more on material and labor costs, as well as your carrying costs as these types of repairs take time.
So, what constitutes extensive home repairs? Most of the time, a property may be structurally unsound. You might need to replace the roof, do foundation work, replace all the flooring, or construct new annexes onto the property. You also may need to add a garage if this is a requirement in your neighborhood.
On average, you can expect to pay about 25 percent of the overall acquisition price of the home. So, if you paid $100,000 for a property, you could pay approximately $25,000 on extensive home repairs.
4. Property Carrying Costs
Let’s talk about carrying costs. When you purchase a property you own it and are responsible for it — even if you’re not living in it or renovating it. This means that there are recurring costs you’ll have to cover during the time you spend on flipping it.
You’ll have to pay these costs on a monthly basis and they include property taxes, property insurance, and property utility bills.
5. Financing Costs
Not all first-time property investors can afford to purchase a property with cash. And that’s perfectly okay — this is where property financing comes in. Property financing involves borrowing money from a lender, generally through a private money loan.
Most home flippers might choose to front the costs of repairs and renovation with a credit card and pay it off over time. However, there are great loan options out there that also include the cost of home rehab and sale costs. You just have to find the right home flipping lender.
If you don’t want to pay extra financing fees, you might want to avoid hard money lenders and home renovation loans. Most of the time, these loan types include fees at closing and high-interest payments.
6. Marketing and Closing Costs
Once your home renovation is complete and you want to sell your property, you’ll have to think about marketing it to a relevant audience. This also costs money.
But, if you choose to sell your property with a real estate agent, you won’t have to pay out-of-pocket marketing fees. Instead, they’re deducted from the home settlement proceeds, i.e. what you end up selling the home for.
On the other hand, if you aim to sell the home yourself, you’ll have to pay your own marketing fees upfront, but won’t have to worry about agent commission.
Lastly, you want to keep closing costs in mind. Yes, you’ll have to pay a portion of these fees twice — first when you buy, then again when you sell.
These are the fees you’ll have to pay when you reach a settlement during a real estate transaction. In short, when the title of the property transfers to a new buyer, you will have to cover these fees.
You won’t have to pay out-of-pocket for closing costs though. You can simply subtract these fees from the overall sale price of the property. Most of the closing costs you pay will come from real estate agent fees — if you choose to sell with an agent.
You might also be responsible for outstanding property taxes, utilities, and transfer taxes. You want to budget 2-5 percent of the sale price of the house for closing costs.
Looking for a Private Fix and Flip Loan?
The cost to flip a house depends on a host of factors. But if you’re a first-time property buyer, there’s one main thing you want to keep in mind — how much time and resources do you have to spend on a property? You don’t have to over-complicate the decision, but it should always fit in with your maximum budget.
If you’re in need of a fix and flip financing, Orchard Funding is your go-to. As a private lender, we offer perfectly tailored fix and flip loans that not only cover property acquisition but renovation and sale costs too.
Get in touch with our team to discuss your options.