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Courtesy of NWREIA Preferred Vendor Merchants Mortgage
In the US, house flipping activity is rising. And no wonder, considering the average gross flipping profit in Q2 of 2020 was $67,902.
But how much does it cost to flip a house? Well, that’s a tricky question… When budgeting for a flip, any number of variables can negatively (or positively) affect your perfectly balanced spreadsheet. For example, when purchasing a house to flip, you may need several hundred thousand dollars or almost no money upfront. The house’s location, condition, and your credit score all impact how much money you’ll need. Keep in mind that no two projects are exactly alike, so your costs will vary from project to project. You’ll never know exactly how much money a flip requires until you’ve completed the process, but estimating as accurately as possible is critical. Keep reading to learn more about the costs associated with house flipping and how to finance your first flip.
Cost of Purchasing
There’s no one-size-fits-all formula to estimate house flipping costs. There are personal preferences to consider, as well as unpredictable variables to take into account. And, as no two properties are alike, the cost of a flip will vary from market to market—as well as property to property. The cost of flipping a house depends on too many variable expenses for investors to come up with a comprehensive answer. However, there are general expenses that cannot be pinpointed. You must work these into your budget—even if you don’t know exactly how much they will be.
There are several costs to consider when buying a house—not only the initial price. The purchasing cost is a combination of several expenses—the highest of which is the purchasing price. However, other charges you’ll incur include:
• Paying off liens
• Property taxes
• Title search fees
When buying a house, you have to pay property taxes while you own it, as well as taxes on short-term capital gains on any profits. Federal short-term capital gains are taxed at the same rate as personal income. Some states will also take a cut off capital gains taxes, but you will pay federal tax no matter where you decide to buy.
When you include rehab and repair costs, the cost of flipping a house increases dramatically. Renovation costs are often the hardest to estimate, as a typical rehabilitation could have anywhere from a few reno and repair costs to countless expenses. While you shouldn’t rush renovating your house flip, you don’t want the house to sit around on the market too long. For this reason, look for a property that will only take four to six weeks to rehab. Owning a house for less than two months helps you keep costs such as interest and taxes at a minimum. The key to your success is to find contractors who do quality work efficiently. So, do your due diligence before onboarding one. Don’t make the mistake of going with the first contractor you find, but interview at least a few. Ask for the license number, references, and an estimate. Further, be wary of contractors who ask for money in cash upfront. They’re not playing by the rules and may try to run off with your money.
To give you an idea of what renovation costs you should expect, let’s go over some everyday renovation expenses throughout a house flip.
When all said and done, the cost of selling a house can amount to several thousands of dollars. You can’t forget to factor these into house flipping costs.
Financing a Flip
Are you still asking yourself, “How much money do I need to flip a house?” Most investors will tell you to set a goal to make a 10% to 20% return on your investment. So, you’ll need to do the math. Research to determine how much your property will sell for when you’re done by looking at comparable properties in the same neighborhood. If you find that a move-in ready home in your area sells for $200,000, lower that price by three-quarters for a run-down property (75% of $200,000=$150,000). Then, subtract the cost of repairs (if you estimate $30,000 for repairs, then $150,000-$30,000=$120,000). In this example, you shouldn’t pay more than $120,000 for your flip to walk away with a decent amount of money.
If you’re wondering how to get a fix and flip loan, speak with a private investor. A fix and flip loan is generally easier than buying a home the traditional way. They’re popular with people renovating and selling houses who prefer not to go through the trouble of taking out a 15- to 30-year mortgage.
Please feel reach to reach out to us with any questions or if you’d like to inquire about financing a fix & flip loan. In the meantime, take care.
The Merchants Mortgage Team
Northwest Real Estate Investors Association1050 25th St SE #12945, Salem, OR firstname.lastname@example.org managed by Public Affairs Counsel
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