It actually costs you nothing…
But that’s only if you know how to flip houses with no money using “OPM”…but that’s the subject of another post entirely.
Having said that though, there is money and costs involved when flipping houses – it’s just not your money.
This was a question from a new real estate investor I met at our most recent MeetUp – which we just started doing in our local market. It’s great fun to talk with new real estate investors and really see exactly what’s on their mind, what’s holding them back, the issues they’re having with their first investments – and I always walk away seeing things from a completely different perspective.
Real Estate Investment Association meetings and meetups in general are great ways to not only network and grow your house flipping team. But for me, it gives me some fresh ideas as to what to discuss here on BiggerPockets as well!
So let’s get back to the question…
How to Estimate Rehab Costs!
Estimating rehab costs accurately can make or break your real estate business, and it takes years of experience for even the best rehabbers to master the art. However, you can expose yourself to less risk and get more accurate with your projections by learning how the pros think when estimating construction costs.
How Much Does It Really Cost to Flip a House?
The answer here varies widely based upon the project as well as the price range of properties in your area.
For me, we typically buy houses in the six-figure and under range and sell them for $200,000 – 300,000. Your market may be completely different than this, either up or down.
Also, depending on rehabilitation cost, the cost can vary from thousands of dollars to hundreds of thousands of dollars!
Regardless of what the upfront cost is, the most important number in house flipping is After Repair Value, otherwise known as ARV.
How Much It Costs to Flip a House: Nail the ARV
To get to how much it’s going to cost to flip a house, you first need to know what you can sell the property for when it’s all done. Once you know this all important number, the other costs associated with the house flip will really start to come into focus much better.
The best way to determine ARV is through comparing other houses similar to yours that have sold nearby within the past six months. These types of properties are known as “comps”.
A real estate agent who knows that market can help you with this unless you have access to the MLS system.
You can certainly try to get comps through online services, but since this number is so vitally important, it’s best to enlist the help of a professional. They know the ins and outs of the market far better than you do.
Heck, I’ve been doing this for almost 5 years and I still use real estate agents even in markets I’ve bought and sold dozens of properties!
A couple of important things to keep in mind when determining ARV:
- Look at houses that have sold not ones that are for sale
- Whenever possible, find houses that have sold within the last 6 months or even less
- If your real estate agent runs costs that have no recent sales, this potentially could be a warning sign as it may indicate lack of demand for the type of house you’re about to purchase.
- Your broker should do this but make sure he or she looks at other properties that have similar lot sizes, kitchens, heating systems, number of bedrooms, number of bathrooms, kitchen updates, etc.
How Much It Costs to Flip a House: Finance Costs
Since you’re flipping this house with very little if not no money of your own, there are financing costs that go along with it every flip.
As a rough estimate as to what your possible finance carrying costs may be, find out from your realtor the average days houses in your area are staying on the market before their souls. This will give you an idea as to how long properties are taking to sell. Your realtor will have many opinions as to why some are telling in a shorter period of time and others in a longer period of time – so listen to their advice.
Taking this a step further, let’s say you got a loan from a private lender of $120,000 at 10% interest. And let’s say from the date of purchase to the date of the actual closing – factoring in time for renovation at four months, time on market is one month an additional one month to close, you can figure out your financing costs fairly easily:
- 4 months +1 month +1 month = 6 months
- Annual interest: $120,000 x 10% = $12,000
- 6 month interest cost = $6000
How Much It Costs to Flip a House: Renovation Costs
The biggest expense in flipping houses is usually the renovation. In our business, we don’t do quick “fix and flips” that got the house flipping industry a big black eye years ago – we do ethical house flipping using the highest quality of work possible, while still maintaining healthy margins.
If you’re just getting into house flipping, I would suggest you do the exact same.
And the best part of this is that you don’t have to do any of the work yourself. Just because you know how to use a circular saw it does not make you a competent renovation expert…
I haven’t picked up a hammer in any of my house flips in the last 2+ years (with one small exception).
So if you are just getting started flipping houses, oftentimes its best to get some professional help by hiring a contractor.
Having a contractor on your team will give you a very good idea before the project starts as to what the renovation will cost. When you start flipping houses on a regular basis, you’ll be able to eyeball very quickly how much everything costs – but to start out, get a contractor.
Many house flippers use a price per square foot to estimate renovation costs. We used to advocate doing this, but since every project is so different, it’s best to get the opinion of a contractor – or even multiple contractors to bid on the work.
How Much It Costs to Flip a House: Realtor’s Fees
Although many house flippers and real estate investors feel they are most qualified to sell their property, I discourage you from doing this.
Although the cost for a real estate agent’s commission is significant (5 – 6% typically) which can cost you $15,000 or more on a $300,000 property, if you have a good real estate agent, this is totally worth it. They will be an integral part to your house flipping team.
They know the market, they are the experts and will be taking all the time selling to show the property while you’re off finding your next deal…or working your day job.
Although you may think you can sell that property faster and save yourself the $15,000, think twice. Suck it up and hire a real estate agent to do the work for you. Just make sure you factor in their commission to your overall profit margins.
How Much It Costs to Flip a House: Carrying Costs
There will be some overhead as you hold onto the property. You still have to pay the electric bill, the gas bill, the lawn mowed, the list goes on. Just some of these carrying costs include:
- Property taxes
- Utilities (including electric, gas, water)
Of course, when you determining your house with costs, the longer you hold onto the property, the hired these costs will be as well.
If you’ve made it this far, leave a comment below. Did I leave any house flipping costs? What do you think? Please leave a comment below and let me know!