Many people are enticed into house flipping by television images of people ripping materials out of a dilapidated house, refurbishing it, and selling it for a substantial profit. The profit realized from each flip can be modest or substantial – or the investor could lose everything depending on decisions made before or during the process.
My house flipping budget checklist
Before you go shopping for the perfect rehab-to-flip property, you need to create a budget for the entire project, not just the purchase and rehab expenses.
The first item on your check list does not have direct monetary value and cannot be added into the expenses column. However, it is an important “ingredient” to your budget: an excellent credit score. Unless you are funding a flip entirely with cash or through private means, an excellent credit score works in your favor with the banks – especially when the loan is for a high-risk project like a house flip.
Now, let’s look at the specifics of your budget:
• The After Repair Value (ARV): determining the ARV of your potential flip is the starting point on which you can base your expected return on investment (ROI) when the house is put on the market. A trusted realtor can help you estimate the ARV of the property.
• Rehab costs: these will vary widely depending on how much rehab work needs to be done. A budget repair form can be handy for tracking all the repairs needed.
• Financing/carrying costs: these include not only the loan but also the costs of carrying the house until it is sold:
o Financing loan(s)
o Property taxes
o Utilities (gas, water, electric)
o Property insurance
o HOA/Condo fees
An important point to note here is that the longer the rehab work takes and/or the longer the post-rehab house stays on the market, the greater your carrying costs and the lesser profit you may realize.
• Realtor’s fees: you can sell your flipped house yourself (FSOB – For Sale by Owner) but if you are looking for the fastest turnaround on your investment – and profit – relying on a good real estate agent is worth the commission fee (and actually helps you save money on your flip project in the long run).
• Forgotten costs: these are additional expenses of house flipping that are often overlooked, including:
o Inspection fees
o Interest on loans
o Contingencies
o Closing costs
One experienced house flipper’s average budget was broken into these cost percentages:
• 53.25% = Purchase Price
• 20% = Labor
• 6.5% = Materials
• 8% = Carrying costs, utilities, commissions, etc.
• 12.25% = Profit
Realistic budgeting = reduced risk
There is nothing that can completely eliminate the risks inherent in house flipping but creating a realistic budget is one of the key ways to mitigate some of that risk. Another way to “manage” some of the risk is to become as thoroughly knowledgeable about house flipping before you make your first investment. And a final way to manage risk is to follow the old adage and never invest more than you can afford to lose.
Best wishes for your house flipping success!