Every once in a while I catch an episode of Flip this House; I have to admit, it is entertaining and it does show the drama involved in fixing up a home. However, I am very amused when they show the final numbers. I have watched episodes where a first time rehabber has bumbled and stumbled through the process and yet still manages to make a profit in the end, according to the show. This and other shows might make one believe that a flip is a sure bet. When they do the numbers they normally list the Purchase price, the fix up costs, and the sales price. Wow, are they missing a bunch of stuff.
Please take my advice: Do NOT start that flip if those are the only categories of expenses that you are anticipating.
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
The REAL Costs of Flipping a House
Here are the actual costs of one of my recent flips.
*This deal was brought to me by a wholesaler. So my purchase price consisted of both the amount that I paid the owner (in this case a bank) and the finder’s fee that I paid the wholesaler.
Costs of Money:
3 Points: $7,312.50
Broker Fee: $2,437.50
Holding Costs: $9,500.00
Lender’s Lawyer: $1,220.00
Total Costs: $20,470.00
The cost of money or the cost of capital to me is everything that the lender charges for the use of his money. Note that in this case (which is pretty standard) I paid the lender 3 points and I paid the broker 1 point. Note that there is also a lawyer; this lawyer is not the title company. This is the lenders lawyer who writes up the contracts and the deed. He’s the one who does his very best to shackle me to ensure his client gets his money back. The lawyer represents me in no way at all, but I get the privilege of paying for his services. Most hard money lenders will either have this fee or some sort of administrative fee of about the same price.
Holding Costs: The holding costs in this case are just the interest I pay on the loan. In this case it was a hard money loan at 15% per year and I had the loan out for 4 months. I normally budget for 6 months of interest in a flip. This one worked out a little better but it still cost me nearly 10k just in holding costs.
Note that that in this case I also only borrowed $190,000. I put down 15% and I paid all of the points and closing costs in cash at closing. I then paid for all of the repairs out of pocket. If you are planning on borrowing all of the money for your deals then expect much higher costs of capital. In this case if I would have borrowed every dime of this project it would have cost me about $4,000 more in points and almost another $5,000 in holding costs. Not properly accounting for that additional $9,000 in capitol costs can be a career ending mistake.
Closing Costs When I bought:
City, County, State Tax: $3,973.23
Title Work: $1,523.00
Total Costs: $7,853.67
Note* these are the closing costs that I paid when I bought the property.
Insurance: Many people will snicker when they see what I pay for insurance. However, many people do flips in their personal name and get only a simple home owner’s policy for their flips. I highly recommend getting a commercial policy that is intended for a home that is undergoing major renovations. A homeowner’s policy is normally just a basic fire policy. A home that is undergoing major renovations has additional risks of personal injury to the workers and neighbors and you have a risk of builder defects. Yes, your builder’s insurance should cover that and I do check my contractor’s certificates of insurance, but I also take extra steps to make sure I’m as well covered as possible for the unexpected. I also do my flips in the name of my LLC, so that forces me to get a commercial type insurance. I highly recommend a simple LLC or corporation if you’re going to start flipping homes.
Title Work: I just lump everything in this category that has to do with conveying the title. An example of title cost to me are the title search, the title company fee, the abstract, recording, courier fees, etc. These costs vary greatly from state to state. You can call some local title companies and get a feel for these expenses before you commit to a deal.
General Contractor: $47,948.28
Mold Remediation: $6,950.00
Kitchen Cabinets and Countertops (Materials only): $5,415.50
Misc Materials: $5,409.59
Total Repair Costs: $69,821.44
I could write an entire post on the costs of repairs! Most people know to account for repairs, although, most people I know greatly underestimate repairs. In this case we did a pretty extensive rehab. There was a mold issue so we gutted the basement installed a sump pump system and a vapor barrier; we treated spot mold upstairs (all by a certified mold company). We did a complete remodel of the kitchen, and 2 bathrooms. I work with a good licensed and certified general contractor so he handles or oversees most every aspect of the job. The material items listed were things I paid for outside the contract with the general.
Construction costs vary depending on location. Get to know your construction costs. You can’t hardly paint and carpet a simple rambler for less than $10,000 in my area, but I know many people who have budgeted far less for it. If you are not real sure of the costs of repairs then don’t guess, get a bid from a reputable contractor.
Realtor Fee: $25,200.00
Many people think they’re going to sell the home themselves. Well if you’re determined to do that then make sure you account for marketing. There will be a few hundred dollars in signs and flyers if you do it right. I highly recommend paying a fee to get your home listed in the MLS and then budget to pay a Realtor 3% of the home’s sells price if a Realtor should bring you a buyer. You are cutting out a massive portion of potential homebuyers if you are not able and willing to work with Realtors. In full disclosure, I am a licensed Realtor; even as a licensed and active Realtor I almost never find the buyer myself. 99% of the time another Realtor has my buyer.
Closing Costs at the Sale:
County Tax: $291.66
Home Warranty: $405.00
Total Cost: $1,767.66
Closing costs at Sale are similar to the closing costs when you buy. I usually budget to pay at least some of the buyer closing costs. In this case I was lucky. The buyers paid all of their own closing costs.
Total cost of this project was $351,049.77. That is $125,112.77 above and beyond the purchase price. I can’t count how many times someone has come to me with a deal and bragged that there is $100,000 of equity in the deal. Well, if there would have only been $100,000 of equity in this deal then I would have been working for the privilege of loosing $25,112.77. I don’t like paying to work. I like getting paid for my work. In this case the final sales price was $420,000. I did very well on the project because I was confident in what the market would bare, what the market demanded and what it would cost me to meet those demands.