Getting started with fixing and flipping can be intimidating – there are lots of moving pieces, so having a rock solid plan at the start is key. There are certainly lots of benefits for everyone when it comes to fixing and flipping. Many are put to work and jobs are created or strengthened – including agents, contractors and other hard-working people. The community is strengthened as a property formerly in a state of disrepair is restored and turned into someone’s home. However, at the end of the day, lets face it, flippers are in the business to make profits on their flips – and theres nothing wrong with that!
Key to making your flip profitable (and being able to stay in the game and keep on flipping future projects) is having a solid financial plan in place. What is the cost to flip a house? The answer depends on multiple variables, chief among them your purchase price and renovation budget. But that’s not all, there are other significant and important costs to flip a house – and understanding, planning for, and minimizing them often make the difference between a successful flipper and fix and flip failure.
But don’t worry, In this comprehensive guide, we’ll break down the various costs associated with house flipping and provide insights to help you budget effectively.
Understanding the Cost to Flip a House: An Overview
The total cost to flip a house can vary widely depending on factors such as location, property condition, and market trends. However, most house flips involve several common expense categories:
Let’s dive deeper into each of these categories to give you a clearer picture of what to expect when budgeting for your house flip.
Purchase Price: The Foundation Of Your Flip
The purchase price is typically the largest single expense in a house flip. When considering the cost to flip a house, start by researching property values in your target area. Look for properties priced below market value that have potential for improvement. Remember, your profit margin begins with a good purchase price.
Key factors affecting purchase price:
-
- Location: The old real estate adage “location, location, location” holds true for house flipping. Properties in desirable neighborhoods or up-and-coming areas generally command higher prices but may also offer better potential for appreciation. Consider factors such as proximity to schools, shopping centers, public transportation, and employment hubs. A prime location can significantly increase your purchase price but may also lead to a higher resale value.
-
- Property size: The square footage of the house and the lot size play crucial roles in determining the purchase price. Larger homes and lots typically cost more but can also offer more opportunities for value-adding renovations. For instance, a spacious lot might allow for additions or outdoor living spaces that could boost the property’s appeal. However, be cautious of oversized properties that might be considered out of place in the neighborhood, as this could limit your potential buyer pool. Adding bedrooms or bathrooms while keeping the property the same overall size can be a great strategies for flips, creating better value from the same overall space.
-
- Current condition: The state of the property at the time of purchase greatly influences its price. Homes in poor condition or those requiring significant repairs are usually priced lower, which can be advantageous for flippers. However, it’s crucial to accurately assess the extent of necessary renovations. A property that appears to be a bargain might hide costly issues like foundation problems or outdated electrical systems. Always factor in a thorough inspection when evaluating the true cost of a fixer-upper, especially if you are a newer investor.
-
- Local real estate market trends: The overall health and direction of the local real estate market can significantly impact purchase prices. In a seller’s market, where demand outpaces supply, you may face higher purchase prices and increased competition from other buyers. Conversely, a buyer’s market might offer more affordable properties but could signal potential challenges when it comes time to sell. Stay informed about local market indicators such as average days on market, price trends, and inventory levels to make informed decisions about your purchase price.
Renovation Costs: Where the Magic Happens
Renovation is where you add value to the property, but it’s also a significant portion of the cost to flip a house. Expenses can include:
-
- Labor costs (contractors, electricians, plumbers): Skilled labor is often one of the largest expenses in a house flip. General contractors typically charge 10-20% of the total project cost for their services, which include project management and coordination of subcontractors. Electricians may charge $50-100 per hour, while plumbers can range from $45-200 per hour depending on the job complexity. Remember that rates can vary significantly based on location and demand. It’s crucial to get multiple quotes and check references to ensure you’re getting quality work at a fair price.
-
- Materials (flooring, paint, fixtures): The cost of materials can quickly add up and significantly impact your overall budget. Flooring costs can range from $3-22 per square foot, depending on the material chosen (e.g., laminate vs. hardwood). Paint typically costs $15-40 per gallon, with designer brands costing more. Fixtures like faucets, light fixtures, and hardware can vary widely in price based on quality and style. To manage costs, consider mixing high-end finishes in key areas with more budget-friendly options in less prominent spaces.
-
- Permits and inspections: These are often overlooked but essential costs in a flip. Permit fees vary by location and project scope but can range from a few hundred to several thousand dollars. For example, a general building permit can generally costs 0.5% to 2% of the total project value. Electrical and plumbing permits often have separate fees. Inspections, which are required at various stages of the renovation, may incur additional costs. Factor in both the direct costs of permits and inspections and the potential time delays they may cause in your project timeline.
-
- Unexpected repairs or updates: Even with thorough initial inspections, surprises often crop up during renovations. Common unexpected issues include hidden water damage, outdated wiring, or structural problems. It’s wise to set aside 10-20% of your total renovation budget as a contingency fund for these unforeseen expenses. This buffer can help prevent budget overruns and project delays when unexpected issues arise.
On average, renovation costs can range from $15,000 for minor updates to $100,000 or more for major overhauls. But this is very dependent on many factors such as area, property size or target market (i.e. luxury flips versus basic starter homes). Labor costs can be very high in states like California, however sale values also tend to be elevated, so its always smart to budget out the whole picture. Evaluating a smart rehab budget always depends on lots of factors more than a simple dollar figure.
The key is to focus on improvements that add the most value relative to their cost.
Popular renovations that can boost property value:
-
- Kitchen updates: The kitchen is often considered the heart of the home and can significantly impact a property’s value. Updates can range from minor tweaks like replacing hardware and painting cabinets to major overhauls involving new appliances, countertops, and layouts. Even small changes like updating light fixtures or adding a stylish backsplash can make a big difference. A well-executed kitchen renovation can typically recoup 60-80% of its cost in added home value.
-
- Bathroom remodels: Bathrooms are another high-impact area for renovations. Updates can include replacing outdated fixtures, retiling, adding modern vanities, or improving lighting. For master bathrooms, consider adding luxury features like double sinks or a walk-in shower. In smaller bathrooms, focus on maximizing space and functionality. A bathroom remodel can often recover 60-70% of its cost in increased home value!
-
- Fresh paint (interior and exterior): A fresh coat of paint is one of the most cost-effective ways to transform a property. For interiors, neutral colors can make spaces feel larger and more inviting. Exterior painting can dramatically improve curb appeal and protect the home from weather damage. When choosing colors, consider current trends and the neighborhood aesthetic. This relatively inexpensive upgrade can yield a return on investment of up to 100% or more.
-
- Landscaping improvements: First impressions matter, and landscaping plays a crucial role in curb appeal. Improvements can range from basic yard clean-up and new plantings to more extensive projects like adding a patio or updating walkways. Consider low-maintenance, drought-resistant plants to appeal to busy homeowners. Well-planned landscaping can add up to 20% to a home’s value and significantly reduce time on market.
-
- Energy-efficient upgrades: These improvements not only add value but also appeal to environmentally conscious buyers and those looking to save on utility costs. Consider upgrades like installing energy-efficient windows, adding insulation, or replacing old HVAC systems with more efficient models. Smart home features like programmable thermostats can also be attractive selling points. While the upfront costs can be significant, energy-efficient upgrades can recoup their costs through increased home value and reduced utility expenses.
Non-Financing Holding Costs: The Silent Budget Eater
Holding costs are ongoing expenses you’ll incur while you own the property. These can significantly impact the total cost to flip a house, especially if the project takes longer than expected.
Common holding costs include:
- Property Taxes
- Utilities
- Insurance
- Homeowners Association (HOA) Fees
Estimate holding costs based on your projected timeline, and then add a buffer for unexpected delays. A good rule of thumb is to budget for 1% of the purchase price per month in holding costs.
Selling Costs: Getting Your Flip to Market
Once your renovations are complete, you’ll incur costs to sell the property. These expenses can eat into your profits if not properly accounted for in your initial budget. Selling costs typically include:
- Real estate agent commissions (usually 5-6% of the sale price)
- Closing Costs
- Marketing Expenses
- Staging Costs
- Potential Buyer Concessions
Factor in approximately 10% of your anticipated sale price for selling costs when calculating the total cost to flip a house. Many successful flippers are licensed real estate agents or make up a partnership with someone licensed and skilled in this area. This can make a very significant difference in the costs to flip a house since saving 10% of your sales price is often a huge number! Oftentimes, it could even mean the difference between a profitable or money-losing flip!
Check Out Our Resources Center for Real Estate Agents friendly to Investors – including fix and flippers!
Financing Costs – Using Hard Money Loans to Flip A House
Many flippers utilize loans, typically called “hard money loans” to cover the vast majority of the costs to flip a house. Many aspiring fix and flip investors are surprised to learn that you don’t have to save up all the costs to purchase and renovate a property to do a flip. In fact, while you can’t really flip a house with no money, you can typically finance 90% or more of your costs, even with little experience!
Hard Money Loans typically come with three main costs:
-
- Interest The majority of costs of financing a fix and flip are interest cost. Hard Money loans generally have interest rates between around 9 and 12 percent. However, they are often always “interest-only” loans, meaning you don’t have to pay down any principal until you sell, so the overall monthly payment only includes interest (unlike, traditional long-term loans, like DSCR Loans). While these rates can be high, the loan term is often only between six and twelve months, and no prepayment penalties, so quick flippers can pay hard money loans off quickly, avoiding too many interest payments and any early payment fees.
-
-
- Points (Closing Fee) Closing Fees, or sometimes called “points” in real estate lingo, means a percentage of total loan amount paid upfront. This is typically one to three percentage points on a hard money loan. While these fees can be a few thousand dollars and not insignificant, it is usually a worthwhile cost to pay for flippers to secure a deal by with almost all of the needed money coming from the hard money lender.
-
-
-
-
- Other Fees Hard Money Loans will also have some other fees charged at closing that are related to costs around purchasing and setting up a loan. These include things like document fees for legal firms to generate loan documents that are buttoned up and proper, and other costs such as fees around credit pulls, title insurance and other miscellaneous items. These fees will, like the points on the loan, make up a pretty small percentage of overall costs to flip a house in the big picture.
-
-
Putting It All Together: Calculating Your Total Cost to Flip a House
To estimate your total cost to flip a house, use this formula:
Total Cost = Purchase Price + Renovation Costs + (Holding Costs × Months) + Selling Costs + Financing Costs
Let’s look at an example:
Purchase Price: $150,000
Renovation Costs: $50,000
Holding Costs: $1,500 per month for 4 months = $6,000
Selling Costs: $30,000 (based on a $300,000 sale price)
Financing Costs: $10,000
Total Cost to Flip: $236,000
In this scenario, if you sell the property for $300,000, your profit would be $64,000!
Again, this is just a back-of-the-napkin example and when pursuing a fix and flip investment, its always smart to do a detailed budget of all the costs and expected sale price as well as talk to an expert to help you with the numbers!
Tips To Reduce Your Cost to Flip a House
As you can see throughout this article and the above example, there are a lot of different costs when it comes to fix and flips. However, this presents an opportunity for smart investors to maximize profits with multiple areas to save money on! Here are a few tips to lower your costs to flip houses!
Nail The Perfect Purchase Price, Not the Perfect Property
Many successful flippers preach that the profitability and success of a fix and flip is primarily driven by the initial buy – even though it’s just the first step of a months-long project. This is because if you get the deal at a great price, significantly under-market value or just with a savvy eye, you have much more room for inevitable obstacles or surprise costs in your profit calculation. The perfect property to flip may not be the best property to flip if the price isn’t right, or if you get into a bidding war with other investors that drives down the potential profits.
Focus on high-impact renovations
A great thing about fixing and flipping is that there isn’t just one “correct” formula to follow over and over. Investors can have success with many different strategies and types of renovations projects, ranging from quick cosmetic updates to full-on rejuvenations. However, key to flipping success is making the right renovations. This means the right repairs for the property and market. Inexperienced flippers often fail by over-renovating a property that looks great but doesn’t fit a starter home. They also fail by cutting costs on a luxury item that’s popular and essential in the neighborhood. Buyers compare these features to similar properties in the area, leading to poor results.
Choose The Right Lender
Choosing a hard money lender to fund the largest portion of your costs to flip is a crucial decision. Many hard money lenders have similar rates and terms, so picking one can be difficult. One of the most important things to look like is the relationship you have with your lender – are they just there to give you a loan and take interest payments?
Or are they a friendly, reliable partner in your flips, with dedicated account representatives, servicing teams that are responsive, helpful and willing to work through any mishaps or delays inevitable in many flips?
Easy Street Capital is America’s top hard money lender for fix-and-flips due to our commitment to borrower experience. We have a strong history of positive reviews and flexible, common-sense qualification requirements. Our “EasyFIX” loan program has helped thousands of flippers succeed in their journey to financial freedom.
Conclusion: Is the Cost to Flip a House Worth It?
Remember, every flip is unique, and costs can vary widely. Start small, learn from each project, and gradually build your experience and network. With proper planning and execution, flipping a house can be a valuable investment in your real estate career.
Are you ready to take on the challenge of house flipping? Apply for a Hard Money Loan with our quick and easy Web App or simply set up an intro call with one of our dedicated Loan Reps today!
Disclaimer: The information provided in this article is not intended as financial or legal advice of any kind. Regulations regarding short-term rentals are subject to change and all investments are subject to risk. Information included in this article may contain information that has not been verified by licensed attorneys and should be subject to independent verification. Readers are advised to consult with qualified legal or financial professionals prior to investing in real estate investment properties.
About the Author
- How Much Does It Cost To Do a Fix And Flip? (Flip a House) - September 24, 2024
- How to Flip Houses with No Money (Or When You Are Tight on Cash)! - September 19, 2024
- What Are Turnkey Rental Properties? (And How to Finance Them!) - September 17, 2024
Stay in the Loop
Subscribe to our newsletter