A surefire way to ruin your deal is to run into unexpected costs you can’t afford. Here’s what to expect and how much a flip will likely cost you.
If there’s one rule with house flipping, it’s that the more money you have, the better chance you’ll be successful. I’ve seen new real estate investors come into this industry thanks to large infusions of money like inheritances, retirement savings loans, or just pinching pennies to get that first deposit. But even those who are well off for whatever reason will want to know if what they have is “enough.” How much money should you have saved to flip a house, anyhow?
To figure out how much savings you’ll need to become a house flipper depends on your costs. You’ll need to account for things like the purchase price, carrying fees, overhead costs, and your salary. There are a few ways to estimate this, like the 10% rule or the $5k pad, which I’ll explain below.
That might not be the answer you’re looking for, so I get it if you’re feeling frustrated. The truth is, many nuances go into determining how much money you need every time a new fix & flip is on the table. So let’s talk about all the costs you’ll need to consider and the ways you can come up with the money to make it happen. Plus, I’ll also show you how you can get into real estate investing without any money at all. Let’s dive in.
The Major Costs You Can Expect for a Fix & Flip
Fix & flip budgets have a lot of moving parts that you’ll need to factor in to determine both how much you’ll need to save to buy the home and your potential profit when you’re ready to sell. The major costs listed here won’t come as any surprise to you, but I’d recommend reading more about them so that you can get into the habit of correctly calculating all of the factors that will need to be paid for with your investment.
Your purchase price is the straight-up cost of the property, land included. While that sounds pretty self-explanatory, many new investors will fold in additional expenses that should be in their own category. We’ll get into those in a second, but the point is that when you’re factoring in your ROI and budget, the purchase price should simply be how much you offered the seller to buy the property.
Unless you’ve negotiated a way for the seller to pay these, closing costs are going to fall on you to pay before the title is transferred. These include applicable taxes like transfer/sales taxes, property taxes, and whatever local taxes are specific to your new property. You’ll also be responsible for property insurance, title company fees, and title insurance. Expect your closing costs to run anywhere from 5% – 10% of your purchase price.
Materials and Labor
Your materials and labor costs should be calculated before closing so that you know exactly what you’re getting into. I’ll cover how to figure out these costs further down, but every nail and minute of labor needs to be taken into account here. If you come up with multiple estimates or get overwhelmed quickly, stick with the largest number that shows up in your projections. That way, you won’t get stuck in a situation where you’re scrambling for more money.
Cosmetic repairs are different than materials and labor because they’re not required but still contribute towards lowering carrying costs and increasing your selling price. Things like paint, carpeting, hardware, light fixtures, and refinishing of hardwood floors would all be put into your cosmetic repairs category.
Hidden Costs Everyone Forgets When Creating a Flipping Budget
Now that you’ve got the four main pillars of fix & flip costs, let’s discuss the other expenses that can wreck your budget. Too many new real estate investors will overlook these costs and get stuck in a situation where they’ll have tough financial decisions.
Carrying costs are the things you pay for while the property is under your ownership. Your carrying costs will typically be ongoing expenses rather than one-off, and getting stuck with a large DOM can drastically reduce your profitability solely because of these fees. Carrying costs include landscaping, utilities, ongoing taxes, insurance, HOA fees, and mortgage payments.
You might’ve noticed I’ve listed insurance and taxes both as carrying costs and closing costs. The reason they’re listed in both is that you’ll be hit with them more than once. You should expect to hold onto the property for an average of six months, and depending on how your tax and insurance payment plans work, you could be on the hook now and in the future. Don’t lump these two items into one category; ensure you account for them as both a one-time and recurring cost.
Real estate investing is unique in that, unlike other industries, you have a captive and hungry audience looking for the exact thing you’re selling. That said, you’ll still need to spend money marketing your house to get it sold quickly. Marketing costs include real estate agent commissions or the costs you incur listing it yourself. Suppose you’re going at real estate investing without an agent. In that case, you’ll probably have costs like listing fees, “for sale” signs, the real estate agent working with the buyer (if you’re paying their commission), and the costs associated with running open houses like cleaning fees, etc.
New entrepreneurs will leave their salaries for whatever is leftover from a sale, and that’s just not how you should think about running a business. Real estate investing is your job, and you deserve to be paid for the time spent doing it. You can either have a set salary that’s paid with every flip or instead incorporate the asking price to account for a fixed percentage that goes to you. So if your salary is 10% of every flip, you’ll need to pad the price to account for that 10%. The actual amount is unique to your costs, standard of living, and marketplace, so don’t take anyone’s advice for what the “right” amount of salary should be. Figure out how much you and your family need to make from this business and go from there.
The Cost of Your Business
Also known as overhead costs, these are the things you need to pay for to keep the business running. Costs in this category include your business liability insurance, office space rent, and its associated utilities, office supplies, gas and mileage, business cards, etc.
Tips for Calculating How Much Money You’ll Need to Flip a House
Now that you have an overview of all the things you’ll need to budget for let’s dive into determining the cost of the “fix” with a fix & flip. There are a few ways you can go about this:
Getting an estimate from a general contractor will be the most precise way to determine costs. Set up an appointment and walk through the property with the contractor. Have them point out things that they notice and ask questions. If they don’t give you a number here, that’s fine. They’ll prefer to return to their office and crunch the numbers based on material costs, labor, etc.
After the walkthrough, they’ll send you a total estimate. Make sure the estimate is itemized with the work that needs to be done; having an overall estimate won’t be helpful for your budget.
Once you have the itemized estimate, do the same thing with a second general contractor. Not only will this help you get competitive pricing, but you’ll have a fallback if your first choice ends up ghosting you.
The 10% Rule
Another popular method is estimating your costs to be 10% of your current purchase price, not the eventual selling price. While 10% will give you a solid number, I find that it’s not precise enough, especially for new investors. You’ll need to get experienced with rehab, overhead, and other costs that 10% might not be enough to pay for. When you get more properties under your belt, you might notice a pattern of what your total costs run and use that as a ballpark estimate that could be 10% or any other number.
The $5k Pad
No matter which method you prefer, I recommend padding that number with another $5,000. $5k can cover a lot of emergency expenses, and potential budget creep issues.
Where Can I Find More Money for a Fix & Flip?
If there’s a gap between your cost estimate and the amount of savings you have, there are ways you can get extra funds. I’d recommend some of these methods over others, but when your back is up against a wall, you want to know all of the available options.
- Open a new credit card. If your credit is good, you should be able to find 0% APR introductory offers that can go a long way towards bridging that money gap. Just be sure you’re using it responsibly and not taking family vacations to Disney.
- Get a hard money loan. Hard money loans are designed for this specific situation. Hard money lenders like Do Hard Money work with real estate investors who need help covering costs. Most lenders won’t require credit checks and can often fund you within a few days. Once you establish a relationship with a hard money lender, you’ll be able to have more leeway with how much you can borrow. Many of our clients end up needing to bring $0 cash to close!
- Get a loan from your bank. I’m referring to short-term, smaller loans that may or may not use the property as collateral. If you have a longstanding relationship with a particular bank, you should be able to get financed quickly. I’d recommend starting with local, community-based credit unions first since they’ll have a shared interest in raising the property values around the area.
- Use a HELOC. Home Equity Lines of Credit leverage the equity you have in a home and turn it into cold, hard cash. HELOCs are great because they don’t accrue interest until you draw money out, and you can withdraw anywhere from $1 or the full amount. Unlike one-time loans, a HELOC is revolving so you can keep it open even after paying back what you’ve borrowed.
- Sell your assets. If you’ve got assets that have some value attached, you can leverage that for quick cash. Things like jewelry, cars, boats, artwork, and antiques can all be flipped quickly for a cash infusion. I wouldn’t recommend doing this if you can help it since the selling price might be lower than you need (pawn shops and auction houses are notorious for smelling desperation), but it’s still an avenue when you’re tapped out and need to make things happen.
- Get a 2nd mortgage. You’ll most likely not be able to get a 2nd mortgage on your fix & flip, but if you already own a property, you may be able to get another mortgage on that. Second mortgages take time and require lots of paperwork, so this might not be an option if you need quick cash tomorrow.
- Borrow from friends and family. Depending on your personal relationships, you might be able to get a cash infusion without needing a bank. For some, this is a no-brainer, and for others, it could cause more trouble than its worth, so consider what your opportunity cost is and what might happen if you can’t pay it back.
- Use your car as collateral. If you’ve exhausted other avenues, consider going for a title loan. Title loan lenders are like payday lenders in that they’ll all too happily lend you money but at a ridiculously high cost. Both title and payday lenders aren’t regulated by any government body, so they’ll charge anywhere from 20% – 500% interest. You’ll use the title to your vehicle, not the home, and if you can’t pay back the amount plus interest you’ve agreed to, they can repossess your car to cover your debt.
- Get a business partner. Bringing on a business partner who has the money you need can be a great way to finish the fix & flip successfully. You’ll most likely trade their cash infusion for a piece of the profits, but this doesn’t have to be forever. You can have a partner for a single house or an ongoing business relationship, whatever works best.
What Should I Do if I Can’t Save Enough Money for a Fix & Flip?
If you’ve exhausted all of your avenues and just can’t make enough to invest in a fix & flip successfully, there’s still a way to become a real estate investor.
Wholesaling is a fantastic way to break into the industry. It requires no credit history or large sum of money, and anyone can do it, even those with felony convictions. Wholesaling means you’ll find properties for other real estate investors.
You’ll source potential properties, make an offer, and get the house under contract. You then take that contract over to another investor and sell the contract for a profit. If you do it right, the only costs you’ll need to cover upfront are earnest money and potentially the down payment, though that’s rare. Regardless, the profits you earn from selling the contract pay for these costs and more.
Wholesaling works well because it drastically cuts down the effort fix & flippers need to put into sourcing new properties. To get started, you’ll need to begin networking and establishing contacts with other investors who look for services like this. Don’t start getting properties under contract until you have a list of potential buyers you can sell it to so that you don’t end up on the hook for following through on the entire contract.
Creating an estimate for what you’ll need to save for house flipping has lots of moving parts. If you’re feeling overwhelmed, you’re not alone. We’ve all had to get the hang of this at one point. Take it slowly and be prudent with your budgeting, and you’ll be on your way towards a successful investing career.