When it comes to flipping houses, many new investors make the mistake of underestimating the total cost of repairs and end up losing money because they didn’t count on certain expenses. In order to realize a profit from fix-and-flips, you have to have a good understanding of the fix-and-flip process, which includes the acquisition of property, budgeting the cost of repairs, the fix and flip process, and finally, the sale and marketing of the property on the back end. To make the process go more smoothly, you should create a budget for every fix and flip project you undertake. Here are some tips on how to create a fix-and-flip budget.
Start With the Acquisition of Property
There’s more to acquiring a fix-and-flip property than the asking price. You also have to account for closing costs, earnest money, and other expenses related to the acquisition process. Here’s a short rundown of what those might be.
- Cost of property – The asking price is simply the asking price. Consider negotiating this price to land on a more favorable loan-to-value (LTV) if you are borrowing the money for the project.
- Closing costs – Every real estate transaction involves closing costs, which are handled through the title company.
- Inspections and Assessments – Unless you are using hard money, you will likely need to have the property inspected to satisfy borrowing requirements.
- Title issues – If the property you’re acquiring has title issue, you may need to spend money to resolve those.
- Taxes – You may have to pay back taxes on some properties.
- Fees and other expenses – Some jurisdiction may require you to pay a zoning fee, or there may be other expenses you have to account for. Be sure to account for all expenses when you budget your project.
The Cost of Fix and Flip Projects
Before you purchase any real estate, make sure you understand as much as the property as possible and know what repairs need to be made before you acquire the property. If you need expert assistance in any area—for instance, foundation repair—be sure to have them look at the property before you close so you understand the costs going into it. Consider all potential costs of repairs for the roof, the basement and foundation, raw land, improvements you plan to make, updating interior and exterior features, and historical considerations if your plan is to restore a home to its period look.
When you plan the cost of your fix-and-flip project, be sure to add some padding for contingencies. Expect that something will go wrong and you’ll have to repair something you didn’t plan for. Usually, a 10% to 20% padding is enough for most fix-and-flip projects.
Marketing and Selling the Property
After repairs are done, you’ll have to sell the property. Don’t forget to account for costs associated with selling the property. These might include ads you run in local newspapers or online, signs, and even real estate agent commissions or online listing fees at FSBO websites. Every expense you incur should be accounted for, preferaby before you acquire the property.
To ensure that fix-and-flip projects do not go over budget, savvy real estate investors perform comparable after-repair research of similar properties in the same neighborhood. You want to make sure that your total costs do not exceed what you can expect to receive for the sale on the home on the back-end. In fact, you should aim for an after-repair LTV of 70% or less. The idea is to leave enough room for profit on the back end.
One other expense you’ll need to account for is the cost of any loan you undertake. If you are using hard money, you’ll need to consider the cost of that money on the short term. Interest rate payments are a part of your total cost and should not be forgotten.
