How much would it cost to flip a house? This is the question you should be asking before diving into the mainstream of real estate flipping. Going with this approach would give you the necessary security to mitigate any chances of running into ROI risks with Getting Started Flipping Houses.
To state it simply, the cost of the flipping involves 4 key factors.
- The acquisition costs
- Renovation costs
- Carrying costs
- Marketing costs
However, with these factors, the location of the house and the market dynamics also greatly influence the overall flipping costs. Generally speaking, it can be somewhere between 5% to 10% of the MAO or the Maximum Allowable Offer – the price paid to acquire the property. Let us delve into the details.
1. The acquisition costs
These costs include two things:
- The purchase price
- The closing costs
You can calculate the purchase price or the MAO by paying 70% of the final sum we get after subtracting the repairing costs from the After-Repair Value.
The closing costs are mainly the amounts that have to be paid for transfer taxes, property taxes, insurance costs, and the financing, which according to the rule of thumb stays between 5% to 8% of the property price.
2. Renovation costs
Renovation costs are the ones that have to be met when you’re going to repair the property for sale. The final payable amounts would vary according to the condition of the fixer-upper you have because that would determine what type of materials you need and how many labors you’d have to hire.
Also, it would also determine the carrying costs of the property. If the house needs moderate to extensive repairs, although its acquisition cost will be low, considering the timeline of the renovation, its carrying costs would increase. That means you’d also have to account for the monthly financial or utility payments during the renovation period.
To know how much renovation costs would affect your ROI,
- Add up the purchase price and the repair costs;
- Minus (a) from the expected sale price;
- And then divide the result of (b) by the (a) and multiply it by 100.
3. Carrying costs
Depending on the duration for which you own the property, you’d have to pay certain monthly costs. Those can include the following:
- Financial costs – the costs that are related to the money borrowed for the acquisition. They might comprise of hard money costs (payments associated with the money lent by some private company); Homestyle Renovation Loan (the loan that is acquired combinedly for both the acquisition and the renovation); and all cash (the cash you have for the whole flipping process. You’d have to consider additional costs and unexpected costs).
- Property taxes
- Insurance costs
4. Marketing costs
Either hiring a realtor could do the marketing or you could do it yourself. In the first instance, realtor fee is something you’d have to pay added to the marketing fee, while in the latter, you’d only pay for the marketing costs. These can include online marketing, flyers, sale signs, and every associated with the process of letting the buyers know of your property.
Once you find the buyer, you would have to pay the closing costs that arise when the property is transferred to the buyer. These costs are not paid upfront but deducted from the profit.
While flipping can be a lucrative business, you’d still have to consider each and every cost that you’ll incur in the process. When you do consider them, your budget, and expected ROI, you can successfully foresee if it is worth flipping a property or not.