Properly Analyze & Calculate Monthly Holding Costs for Fix & Flip
Realtor · Miami, FL · Member since 2022 · 22 posts · 8 votes
Properly Analyze & Calculate Monthly Holding Costs for Fix & Flip
Most Popular Reply
Rob BeemanPro Member
Specialist · Philadelphia, PA · Member since 2010 · 298 posts · 118 votes@Isaac Fridmann Isaac - let me first say that the replies to your post have been in my opinion - accurate. However I would throw in a figure for what I call the "oops cost". In almost every rehab you will discover items during the rehab that you might not had budgeted for. This is more common if you are buying the property without all of the utilities on (water, electric, gas, etc.) as when you turn them on - things are discovered. Or perhaps in the demo phase, items are found that were not able to be seen prior to. In some rehab budgets, investors will allow 5-10% of the total rehab, depending on the size of the rehab, to cover this (a contingency). For this transaction we will assume that the contingency is already built into the $50K rehab (as most rehab software products have a line item for it).
Using the calculations and the hypothetical numbers for purchase, rehab, carrying costs and the lender loan figure, let's look at how this transaction might play out.
Purchase price of $100,000
Rehab of $50,000
Carrying costs of $3,025
Lender fees/interest of $12,800
This totals to $165,825. One item that wasn't mentioned, as the post was generally about carrying costs, was the cost for closing costs at the purchase of the property. Transfer fees vary depending on locality. In Philadelphia they can be 5-6% of the purchase cost (plus settlement agent fees, notary fees, title insurance cost, etc.), however in TX, I do not believe there is any transfer fee cost. Best to communicate with the settlement agent that you choose to use to get an estimate of the closing fees. I used to calculate at least 5% of the purchase price in my numbers. In this case 5% would equal $5,000. Side note - always purchase title insurance at closing (plus a lender will typically require it).
Costs on the exit (flipping the property) are normally the realtor commission (if one is used - in your case it would be you), along with what I call "bring-to-dates". Bring-to-dates are water, sewer & taxes for the time you owned the property (often the bill might not have been paid (or produced) while you owned it. Taxes were addressed in the holding cost figure already, so allowing a few dollars for water & sewer should be sufficient. Probably around $300 for the 6 month hold (unless you had a constantly running toilet). Since I am not a realtor, and typically used one to sell the property I would normally allow 7% of the sale's price (sale's price in this case is $200K) to cover the bring-to-dates & realtor commission.
With all of that said - what was earned on this deal? To this point our total costs (listed above) are $165,825. When we add $5,000 for the closing fees at purchase we total $170,825. If the seller is not a realtor and hired one to sell the property, the 7% figure to allow for bring-to-dates & realtor commission would be $14,000 ($200K sale price x 7% = $14K). Add this amount to the cost figure of $170,825 and the grand total is $184,825. The net earned after the dust clears: $200,000 sale figure - $184,825 total costs = $15,175. That figure might not seem large, but let's look at what you had into the transaction.
Total costs of $184,825
Lender loan of $140,000
Balance from you of $44,825
You recover the $44,825 and earn an additional $15,175. If the calculations are correct, that would be a return of 33.8% on the $44,825 invested in a 6 month period. If you recycled that money once more within 12 months, the return would be double that.
Please check my calculations as when I was flipping heavily I used to be able to do these calculations in my head very quickly, but I am a bit rusty now. Since you shared that you are relatively new at flipping, here are a few insights from an old head:
Never pre-pay contractors for labor (paying for supplies are OK, but not for labor).
Always allow more money than what is needed - never short change the rehab figure as this will produce a less than desired end product and ultimately affect the sale and/or the sale price. (in flipping the sale is the payday).
Pay the parties that fuel your business on time (contractors & lenders).
Women buyers focus on the bath(s), kitchen & closets. Men buyers focus on the basement, yard & garage. If you do not have enough budget to improve all of these areas, concentrate the funds on the areas that women buyers focus on (also the kitchen & baths are the areas that increase the value).
Understand that the most important figure in all of the figures involved in a transaction is the purchase price. This is also the figure that you have the most control over. Over paying for the property can seriously impact the entire project. Realistically over paying for the property should lower the profit earned. However more common is that when the investor over pays for the property they under-cut the rehab and the end result is a lower quality rehab which can make the property sit on the market longer before selling, and perhaps require a lower sales amount to get moved - neither of which are good. In other words - learn how to buy right (obviously easier said than done, but can be accomplished with practice). Sorry for rambling, and best of luck on your first deal.
6 Replies
- 4yDavid RobertsonBusiness MemberFlipper/Rehabber · Kansas City, MO · Member since 2010 · 755 posts · 778 votes
Holding Costs are calculated by multiplying your Monthly Holding Costs x Flip Holding Period
Typical Monthly Holding Costs
Here's a list of typical Holding Costs and average amounts that you will likely have on your rehab projects.
- Property Taxes - Property taxes will vary depending on your local property tax rates. To find the property tax amount for a property you can search your local county assessor's website.
- Property Insurance ($100 to $150/month) - You will need to get a Vacant Property Insurance which will cover loss of the property and provide liability insurance for a few hundred $ per month.
- Utilities ($200 to $350/month) - For utilities, think about how much you pay for your own personal residence in utilities. Generally, in the Kansas City area you will have around $200 to $350/month in utilities depending on the season.
- Maintenance ($50 to $100/month) - Maintenance costs include any kind of on-going property maintenance such as lawn mowing or snow removal.
- HOA Dues - If your property has a Home Owner's Association, you will likely have Annual HOA dues for the property. Generally, you can find HOA information on the property listing or the neighborhood's website.
Typical Flip Holding Period
A typical rehab project timeline is as follows:
- Purchase Closing (take possession)
- Planning, Permits, Bidding (1 week to 1 month+) - If possible, you will try to start the planning before the closing to gain a head start. The planning process can take as little as 1 week or as long as 2 months if you have large project that requires plans, plan review, & permitting.
- Rehab/Construction (2 weeks to 4 months) - For a cosmetic rehab, the project may only take a few weeks, but for a larger 'gut job' it could take up to 4 months.
- Listing for Sale (1 week to 2 months) - In a hot seller's market in a desirable area, you may have an offer the 1st day you put the property on the market. In a buyer's market, your property could sit for 1 to 2 months before you get an offer.
- Closing (1 to 2 months) - Once you get an offer under contract, it generally takes around 30 to 60 days to process the closing.
In a best case scenario, with a cosmetic rehab that sells quickly, you are looking at a holding period of 2 to 3 months. Overall, the average rehab will likely take around 4 to 6 months.
Holding Costs Example
Let's run through a quick example of how to calculate your Holding Costs for an average rehab that takes about 5 months to complete from taking possession to final sales closing.
In the table below, the monthly holding cost amount is being multiplied by the holding period to calculate the Total Holding Costs.
Holding Costs (5 Months) $/Month Amount Property Taxes $125 $625 Property Insurance $125 $625 Utilities $275 $1,375 Maintenance $80 $400 Total Holding Costs $605 $3,025
In this example, we are spending $605 a month on holding costs during the 5 months of ownership which amounts to $3,025 in Total Holding Costs.
Note, if you are financing the purchase you will also be paying monthly interest to your lender which I usually calculate separately from holding costs. - Property Taxes - Property taxes will vary depending on your local property tax rates. To find the property tax amount for a property you can search your local county assessor's website.
- Realtor · Miami, FL · Member since 2022 · 22 posts · 8 votes4y
Hi David,
Thank you for your detailed reply!
- Flipper/Rehabber · Pickerington, OH · Member since 2012 · 230 posts · 139 votes4y
@Isaac Fridmann If you're planning to use hard money you need to figure in interest payments on the loan. That may be your biggest expense when it comes to holding costs.
- Realtor · Miami, FL · Member since 2022 · 22 posts · 8 votes4y
@Matt Stewart Yes, 100% true. I already am speaking to some lenders to get an idea of what it would cost. Thank you!
- 4yDavid RobertsonBusiness MemberFlipper/Rehabber · Kansas City, MO · Member since 2010 · 755 posts · 778 votes
As Matt mentioned your biggest carrying costs will be your interest expense if you are using a lender:
Here's a list of typical Financing Costs and average amounts that you will likely have on your rehab projects.
- Interest Payments (8 to 12% Interest during Holding Period) - Your interest rate will vary widely depending on the type of financing, (hard money, private, conventional), and your individual financial situation.
- Points (2 to 3% of the Loan Amount) - Again, depends on the lender, but you should expect to pay a few % points upfront.
- Other Closing Costs ($750 to $2,000) - The Lender will also likely charge other fees for miscellaneous items.
- Loan Origination Fee
- Appraisal Fees
- Underwriting Fees
- Credit Report Fees
- Processing Fees
- Rehab Draw Inspections ($175 to $250 per inspection) - Your rehab loan will be divvied up into a 'loan draws'. When you request a loan draw payment, the Lender sends a 3rd-Party Inspector to inspect the property to ensure the project is ready to receive the next loan draw payment.
Financing Costs Example
In this example, a rehabber purchased a property for $100,000, that needs $50,000 in repairs and is planning on reselling the property for $200,000. The rehab is scheduled to take 5 months to complete, but the lender requires a minimum of 6 months of payments.
The Hard Money Lender will lend up to 70% of the ARV with a 12% interest rate, 2% points upfront, with $1000 in origination fees, plus 4 rehab draw inspections of $150 each.
Loan Amount = ARV x % of ARV
Loan Amount = $200,000 x 70%
Loan Amount = $140,000
Monthly Interest Payment = (Loan Amount x Annual Interest Rate) / 12 Months per Year
Monthly Interest Payment = ($140,000 x .12) / 12
Monthly Interest Payment = $1,400
Total Interest Payments = Monthly Interest Payment x Loan Term
Total Interest Payments = $1,400 x 6 months
Total Interest Payments = $8,400
Loan Points = Loan Amount x Points %
Loan Points = $140,000 x .02
Loan Points = $2,800
Rehab Draw Inspections = Draw Inspection Amount x # of Inspections
Rehab Draw Inspections = $150 x 4
Rehab Draw Inspections = $600Financing Costs $/Unit Amount Interest Payments (6 Payments) $1,400/mo 8,400 Points (2% of Loan) $2,800 Other Closing Costs $1,000 Rehab Draw Inspections ($ Draws) $150/ea $600 Total Financing Costs $12,800 - Interest Payments (8 to 12% Interest during Holding Period) - Your interest rate will vary widely depending on the type of financing, (hard money, private, conventional), and your individual financial situation.
- 4yRob BeemanPro MemberSpecialist · Philadelphia, PA · Member since 2010 · 298 posts · 118 votes
@Isaac Fridmann Isaac - let me first say that the replies to your post have been in my opinion - accurate. However I would throw in a figure for what I call the "oops cost". In almost every rehab you will discover items during the rehab that you might not had budgeted for. This is more common if you are buying the property without all of the utilities on (water, electric, gas, etc.) as when you turn them on - things are discovered. Or perhaps in the demo phase, items are found that were not able to be seen prior to. In some rehab budgets, investors will allow 5-10% of the total rehab, depending on the size of the rehab, to cover this (a contingency). For this transaction we will assume that the contingency is already built into the $50K rehab (as most rehab software products have a line item for it).
Using the calculations and the hypothetical numbers for purchase, rehab, carrying costs and the lender loan figure, let's look at how this transaction might play out.
Purchase price of $100,000
Rehab of $50,000
Carrying costs of $3,025
Lender fees/interest of $12,800
This totals to $165,825. One item that wasn't mentioned, as the post was generally about carrying costs, was the cost for closing costs at the purchase of the property. Transfer fees vary depending on locality. In Philadelphia they can be 5-6% of the purchase cost (plus settlement agent fees, notary fees, title insurance cost, etc.), however in TX, I do not believe there is any transfer fee cost. Best to communicate with the settlement agent that you choose to use to get an estimate of the closing fees. I used to calculate at least 5% of the purchase price in my numbers. In this case 5% would equal $5,000. Side note - always purchase title insurance at closing (plus a lender will typically require it).
Costs on the exit (flipping the property) are normally the realtor commission (if one is used - in your case it would be you), along with what I call "bring-to-dates". Bring-to-dates are water, sewer & taxes for the time you owned the property (often the bill might not have been paid (or produced) while you owned it. Taxes were addressed in the holding cost figure already, so allowing a few dollars for water & sewer should be sufficient. Probably around $300 for the 6 month hold (unless you had a constantly running toilet). Since I am not a realtor, and typically used one to sell the property I would normally allow 7% of the sale's price (sale's price in this case is $200K) to cover the bring-to-dates & realtor commission.
With all of that said - what was earned on this deal? To this point our total costs (listed above) are $165,825. When we add $5,000 for the closing fees at purchase we total $170,825. If the seller is not a realtor and hired one to sell the property, the 7% figure to allow for bring-to-dates & realtor commission would be $14,000 ($200K sale price x 7% = $14K). Add this amount to the cost figure of $170,825 and the grand total is $184,825. The net earned after the dust clears: $200,000 sale figure - $184,825 total costs = $15,175. That figure might not seem large, but let's look at what you had into the transaction.
Total costs of $184,825
Lender loan of $140,000
Balance from you of $44,825
You recover the $44,825 and earn an additional $15,175. If the calculations are correct, that would be a return of 33.8% on the $44,825 invested in a 6 month period. If you recycled that money once more within 12 months, the return would be double that.
Please check my calculations as when I was flipping heavily I used to be able to do these calculations in my head very quickly, but I am a bit rusty now. Since you shared that you are relatively new at flipping, here are a few insights from an old head:
Never pre-pay contractors for labor (paying for supplies are OK, but not for labor).
Always allow more money than what is needed - never short change the rehab figure as this will produce a less than desired end product and ultimately affect the sale and/or the sale price. (in flipping the sale is the payday).
Pay the parties that fuel your business on time (contractors & lenders).
Women buyers focus on the bath(s), kitchen & closets. Men buyers focus on the basement, yard & garage. If you do not have enough budget to improve all of these areas, concentrate the funds on the areas that women buyers focus on (also the kitchen & baths are the areas that increase the value).
Understand that the most important figure in all of the figures involved in a transaction is the purchase price. This is also the figure that you have the most control over. Over paying for the property can seriously impact the entire project. Realistically over paying for the property should lower the profit earned. However more common is that when the investor over pays for the property they under-cut the rehab and the end result is a lower quality rehab which can make the property sit on the market longer before selling, and perhaps require a lower sales amount to get moved - neither of which are good. In other words - learn how to buy right (obviously easier said than done, but can be accomplished with practice). Sorry for rambling, and best of luck on your first deal.
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