You might remember a discussion on different ways to Put Together a Budget for Your Flip. House flipping has some expenses associated with it that can affect your bottom line if not accounted for. You may have to move quickly when deciding upon a purchase. So using some generic calculations can quickly help to determine if the property would be a good buy. These expenses should be part of your overall budgeting even though they may not be directly tied to the repairs. Besides the actual cost of the property, here is a break down of three main categories of expenses before you even get started. Acquisition, Holding and Sales Costs.
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When purchasing a property to flip, you’ll be responsible for some of the closing costs pertaining to acquiring the property. These costs will include:
- transfer taxes
- a pro-rated share of property taxes for the year
- property insurance
- title company fees
- title insurance
If you’re financing the purchase with a loan, the financing will have its own costs too. Prior to closing you will be provided with a breakdown of those fees by your lender so you can include those in your costs as well.
A conservative rule of thumb is that a buyer’s closing costs will be 5% of the property’s purchase price. If you purchased a property for $200,000, expect to pay around 5% of $200,000, which is $10,000. So the $200,000 property has now cost you $210,000. These costs will affect the budget and your ROI. So it’s imperative to remember to include them when calculating how much it costs to acquire a house to flip.
When you are calculating the expenses with holding the property make sure to include your insurance fees. Property insurance will provide reimbursement to the homeowner for the structure and contents if damage or loss occurs. Insurance is to protect you and any lenders who have a financial interest in the property. When a property is being renovated or flipped to sell, the insurance will need to be a vacant or unoccupied policy. Which is different from a standard homeowners policy.
This covers the property during the flip, if it’s vandalized, broken into, or suffers damage from a storm. Vacant and unoccupied insurance costs vary based on the property location, expected length of vacancy, and property value. However, the premium us typically higher than traditional policies so estimate 150.00 to 200.00 per month.
Utility costs relevant to a property flip include water, electric, and gas. These expenses need to be factored into your monthly carrying costs.
Billing can vary based on usage, size, and condition of the property. Contractors can’t work without water and electricity. So make sure the utilities are transferred or started as soon as the closing is completed.
Once you have finished the project and found a buyer you are going to incur a final round of expenses. There will be closing costs which are the fees paid at the closing, or settlement, during a real estate transaction. These fees arise when the title of the property is conveyed to the new buyer. They are not paid upfront but subtracted from the sales price of the property.
The largest portion of the sales costs will be the commissions paid to the seller’s agent and the buyer’s agent. Usually 5.4 to 6% of the sales price. These fees will be paid from the proceeds of the sale.
The other closing costs that the seller is responsible for include:
- outstanding property taxes and utilities
- credits the seller gives the buyer
- transfer taxes in most states
Typically, closing costs equate to about 2% to 5% of the sales price of the house.
Determining How Much it Costs to Flip a House
Start with potential ARV and work backward to keep all four of your major costs in line. (Purchase, acquisition, holding costs and sales expenses). If you know what your target sales price will be, you will know how much to acquire it for, the budget for rehab costs, and your budget for carrying costs, marketing, and sales.
Knowing how to break down the expenses associated with the purchase before you submit the offer, will help you make the best decision. Both on the offer price and whether or not the project is one that is profitable. Being equipped with the knowledge is the first step to a successful flip.
The Next Step: The Property
Now the next step is making sure that property is a good one to purchase!! I’ve got you covered with my 8 Things I look for When Purchasing a Home. Click here to download it.
My Step-by-Step Method
That first property flip can be very scary and overwhelming… relax! I’ve done it 150+ times and I can be your guide and share all my best tips and step-by-step method to making profits with home renovations. I have a brand new course that will walk you through the process and give you all the confidence to take on your first project! Just get on my waitlist here. I’ll let you know when I am accepting new students!
Leave me your questions in the comments? I’d love to answer yours next time!!