With fix and flip projects, costs can be difficult to predetermine – hidden or unexpected expenses can quickly add up. This is why fix and flip entrepreneurs will project the total cost of a fix and flip as including the cost of acquisition, the cost of any repairs to the property, carrying costs and more so they know what they are getting themselves into.
Typically, these costs will differ based on both the physical location of the property, and the types of renovation or upgrades which are planned. For the majority of fix and flip entrepreneurs, the rule of thumb is that the cost to flip the property should equate to about 10% of the full property purchase price. While these costs are highly varied, and will differ on a case-by-case basis, there are some guidelines and generalizations which can give fix and flip investors a better idea of the true cost:
The Purchase
The cost of acquisition is the original purchase price of a property, and any other closing costs associated. Closing costs can include certain fees payable when the real estate transaction has been settled, such as taxes, insurance, legal costs or other related financing costs. The purchase price will include the physical property structure, the land it is located on and will be based on the type of property it is (such as single or multi-family). Prior to making an offer on a property, experienced fix and flip investors will research similar properties in the same neighborhood for comparable purchase prices.
As a general guideline, many fix and flip investors follow the 70% rule: this rule states that investors should not pay more than 70% of the property’s after-repair value, subtracting the amount of repairs needed. Keep this in mind on future acquisitions.
The Closing Costs
Along with the acquisition cost of property, the real estate investor will also be responsible for the property’s closing costs. Closing costs can include a multitude of expenses through transactions like property taxes, insurance fees, and title company fees to name a few. If the real estate investor is personally financing the purchase, it is important to keep in mind that there will be additional costs at closing. Many fix and flip investors will connect with a local realtor or hard money lender who can provide a detailed brief of closing costs on a specific property.
For fix and flip investors, the general guideline is that closing costs can amount to about 5% of the full property purchase price.
The Renovation
Renovation is one of the fix and flip expenses where it might be easier to estimate a general total. The costs of property renovation or rehabilitation will vary depending on the amount of work needed, the overall condition of the property and the area the property is located in. It is important to note that renovation costs will also include the cost of labor, installations and materials. The estimate for cost of materials should also include delivery and setup fees. To get a better idea about the overall renovation costs, speak to local service providers and compare quotes carefully. The condition of the property will play a major role in the total amount needed to flip the house.
The guideline for renovation costs, is for new fix and flippers: when working with less experience, it can be less daunting to select a property needing more cosmetic rather than structural repairs to keep costs low and manageable.
The Carrying Costs
Carrying costs are the total costs spent from the date of property purchase until the property is resold. These costs are typically recurring and can be monthly for the duration of property ownership. The carrying costs of a property can also include financing costs, such as in the case of a property loan where monthly installments are paid. Another example of a carrying cost is property taxes, which can impact the total flip cost by adding monthly tax costs- this can also include any taxes payable at acquisition.
Financing costs can come in the form of fees payable at closing, interest-based payments or other similar expenses.
The full cost of a fix and flip can be broken down into different pieces. The overall purchase cost of the property, the closing costs, renovation costs and carrying costs are only a few of the expenses necessary to plan for; Fix and flip investors should keep in mind that the total cost of the flip will be dependent on a variety of factors including the location of the property, and how many renovations are needed among other things. By establishing some of the above costs, fix and flip investors can generate a better idea of the true cost to fix and flip a property.