Fixing and flipping a property is a great way to earn extra income or make a living if you want to take the time to learn the business. With any business, this business has it's fair share of risks and if you are unaware of the costs associated with a fix and flip, there is a good chance you can lose money. For each individual or business, there will be more or less out of pocket costs but we will all have the same categories we will draw costs from. These costs will be anything from:
Financing Costs
Repair Costs
Holding Costs
Closing Costs
With each one of these cost categories, we have individual costs that will make up that specific category. These are the costs that we have to be aware of and plan for, prior to the project starting until the project is completed. The better you understand these costs, the better you will be able to plan and forecast future profits. This will allow you to create systems around tracking costs, calculating and projecting profits for all of your fix and flips.
What Are The Financing Costs Associated With A Fix And Flip?
As you scour the web you will hear several different opinions on the upfront costs associated with financing a fix and flip project. Some investors have built a network where they have private lenders who will finance 100% of the purchase and repairs on a project, while others are using hard money loans that may cover 85% of the purchase and 90% of the repairs. Financing for these types of projects vary. When fixing and flipping it is going to very difficult to obtain bank financing due to the short term interest that they would be receiving over the life of the loan.
So for this article, I want to go over a typical scenario and what you can expect to have to pay out of pocket to complete a fix and flip. For this portion of the article, we are only going to talk about the financing of the purchase of the property (not the repairs), we will talk about these later. Let's go over the typical options you have and the costs associated with these options when looking to flip a house.
1) Hard Money Lenders - In our opinion these loans are best for investors with some experience because they tend to charge higher interest rates and higher origination fees. If you use a hard money loan, you can expect to pay anywhere from 12%-16% depending on your experience and credit as well as 4-6 points for an origination fee. Hard Money lenders will typically finance 75% - 100% of the purchase of the property depending on how good the deal is. Typically this is the most expensive money to fix and flip a property, but it can be a good resource for funding if you have experience and can turn the property over quickly.
Here is a typical example for a property that you hold for 6 months. (15% interest, 4 Point at Closing, 85% of Purchase)
$100,000 Purchase Price
Origination Fees: $4,000
Interest Over 6 Months: $7,500
Down Payment: $15,000
Total: $26,500
2) Private Money Lenders - The best available financing and the hardest to consistently obtain. This is financing that you would receive from any individual with extra cash laying around that is looking for a beneficial return. Typically you will be able to obtain interest rates from 8%-12% and no origination fees. Depending on the deal and experience you may be able to obtain 100% financing for purchase and repairs. A real estate investor will give a private money lender security on their investment, like:
First Lien Position
Hazard Insurance
Title Insurance
Deed or Mortgage
Promissory Note
Here is a typical example for a property that you hold for 6 months. (12% interest, 0 Points at Closing, 100% of Purchase)
$100,000 Purchase Price
Origination Fees: $0
Interest Over 6 Months: $6,000
Down Payment: $0
Total: $6,000
What Are The Buying (Closing Costs) Associated With A Fix and Flip?
Outside of the financing costs, there are additional costs that you will need to pay prior to closing on the property. Depending on who you are buying the property from, you will be expected to pay for certain items prior to coming to the closing table. Some of the costs associated with purchasing a fix and flip are:
Taxes
Abstract (updating or new)
Survey (updating or new)
Attorney Fees
Inspections
Title Insurance
Deed Filing
Mortgage Filing
Sellers Closing Costs
Depending on your business model and if you are paying for the sellers closing costs.
The estimated buying (closing costs) on a fix and flip: $1,000 - $5,000
What Are The Holding Costs Associated With A Fix and Flip?
These are the most common costs that potential investors forget. These are the costs that are not discussed on any of the television shows that you guys may be watching. When you purchase a fix and flip, you will be holding this property anywhere from 3 - 12 months depending on your market, experience and model. Some of the holding costs associated with a fix and flip are:
Utilities (Electrical & Water)
Insurance
Taxes
HOA Fees (depending on area)
Estimated holding costs on a $100,000 fix and flip:
Utilities: $1,000
Taxes: $2,100
Insurance: $700
Total: $3,800
What Are The Selling Costs Associated With A Fix and Flip?
Some investors think that once you get the property under contract, you're finished. With a fix and flip, this couldn't be further from the truth. Selling a house is not cheap. Although some of these costs may not require upfront payments, meaning cash out of hand. These are costs that you need to account for because they are going to affect your net profit when the project is completed. Each state has different costs associated with selling a property so be sure to take a deeper look into these details prior to starting your flip. Some of the selling costs associated with a fix and flip are:
Real Estate Commissions
Recording Fees
Attorney Fees
Estimated selling costs on a $200,000 sale:
Real Estate Commission (6%) : $12,000
Recording Fees: $150
Attorney Fees: $450
Total: $12,600
What Are The Repair Costs Associated With A Fix n Flip?
The repair costs will be one of the most expensive aspects to any project. The repairs costs will differ depending on the investor's strategy, material discounts, labor costs and market. The repair costs can also range anywhere from the investor funding 100% of the repairs out of pocket or an investor covering 100% of the repairs depending on the project. In our market, our average repair budget for projects in our market are $25,000 - $35,000. Sometimes we can get our investors to cover some of these costs and other times we will use on our own cash to fund the repairs.
Estimated repair costs associated with a fix and flip: $20,000 - $50,000
In Conclusion
We hope that this post gave you a good breakdown as to the costs associated with a fix and flip. As you can see, this business is very capital intensive but it does have the ability to be very lucrative if you understand your market, market conditions, plan extremely well and buy right. Since the out of pocket costs can vary so much depending on the investor, let's go over what the total costs (besides) repairs may look like. The total costs to flip a property may be a bit surprising. Not accounting for the sales costs (not out of pocket cash) or repair costs, you are looking at $18,000 - $30,000 depending on the purchase price of the investment.
One of the main points that we wanted to get across from this post is that you do need a decent amount liquid cash available in order to expect to flip a house. As stated some investors do have connections that allow them to fund a purchase and rehab with no money down but this is not typical.
In the comment section below, let us know the out pocket costs you tend to experience in your market.
HS Property Funds
Funds to Help, Problems to Solve
(315) 516-8023
www.hspropertyfunds.com
Comentários