TV stars make the flipping process look easy. Sure, they may have to replace an entire HVAC system last-minute, but they always walk away with happy buyers and tens of thousands of dollars in their pockets.
Is that really how flipping goes?
Not all investors agree that flipping is the best process for investing in a house. Others prefer the buy and hold model or the BRRRR strategy. The “right” choice will depend on the home’s value, how much you can afford in holding costs, and what repairs are necessary to flip the property.
No investor should flip a house without looking closely at the associated costs. The estimated total will always seem lower if you forget to factor in the little expenses that slowly eat away at your profit. Don’t leave any costs up to chance.
The six most important calculations you will need when assessing a flip include:
How Much Does It Cost to Flip a House?
Dive deep into the aforementioned six areas to calculate as accurate an estimate as possible. That way, you can invest confidently in properties where the numbers make sense.
Surprise repairs or sitting on the market could mean the difference between a good investment and a bad one. Prepare yourself appropriately to walk away from your flip with a stuffed wallet.
1. Current Cost of the Home
This is obvious. How much are you going to have to pay up front in order to get this flip started? Know that this cost will also have an impact on other calculations, like closing costs and financing costs.
2. ARV (After Repair Value)
The ARV will determine whether or not all of your repairs are worth the time and money. Investors calculate a home’s after repair value to estimate what they will walk away with when they finally sell the flip to the new homeowner.
Estimating a home’s ARV may require some research and planning. What repairs will add value to the home? Where is the home located? How will it compete with similar homes in the market?
Take a look around the neighborhood and consider similar properties when assessing your home’s ARV. This analysis can also be a good predictor of how long a house might stay on the market. It suggests the direction that home prices are moving, too.
3. Projected Repair Costs
You won’t reach your target ARV until you make the right repairs on your flip. But how much are these repairs going to cost?
There is no one answer. Every house has different needs based on its square footage, when it was built, and how it was maintained by previous owners. Flippers could have to replace an entire HVAC system just to get the building up to code, or the house may just need some fresh flooring and paint.
The more thoroughly you assess these costs, the fewer surprises you will face when it’s time to flip. (It’s not an episode of an HGTV show unless it has one big surprise repair to keep viewers hooked.)
BiggerPockets has a Rehab Estimator Calculator to help fix and flippers assess necessary repairs. Before you buy, consider which repairs must be done:
These are just some of the repairs you may face when flipping a home. Bring a comprehensive checklist when walking through a home to thoroughly assess the work that needs to be done and how much these repairs could cost.
4. Closing Costs
Flippers will need to buy and sell their property, going through the closing process twice. Buyers typically don't have to factor in a high number for closing costs, but negotiations could always change the game. Sellers often foot the bill for agent fees, concessions, or title fees. These costs could reach up to 10 percent of the sales prices, so don't forget to factor them in when assessing the flip.
5. Financing Costs
Unless you have cash to play with, you're going to need to get a loan for your flip. The more you sit on the flip, the more interest your loan will accrue. Consider the costs of getting the loan—and paying it back.
6. Other Monthly Expenses
Even if you don’t anticipate owning the home for more than a few months, you’ll still have expenses to pay as a homeowner.
Here are a few:
Keep these costs in mind as motivation to sell quickly. The longer you sit on a flip, the more you will have to pay in electric bills and property taxes.
Don’t Just Rely on One Calculator
There are plenty of online tools to estimate a flip’s potential profitability. In fact, BiggerPockets has seven different calculators for assessing a flip, including a Fix and Flip Calculator and Rehab Estimator Calculator.
A single calculator is unlikely to provide a definite answer on whether your flip is a good investment or not. Consider multiple scenarios and look to different resources before making a decision.
The difference between a good or bad flip could be one simple oversight. Consult with real estate investment experts about anything you'd like clarified or double-checked.
Source:
BiggerPockets
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