How Much Does It Cost to Flip a House? A Guide
Flipped homes accounted for 5.7% of all home sales in the last quarter of 2021. House flipping can be an excellent small-business opportunity with a solid ROI. This is also a business venture anyone can explore without much experience. Many teams started flipping homes with little to no qualifications or expertise tied to the real estate market. This makes it an attractive option for amateur investors.
While house flipping can be an exciting and lucrative enterprise, it does need to be approached the right way to keep the risk level under control. It always starts with considering the costs and setting a proper budget for flipping homes. But how much does it cost to flip a house? Before we answer this question, let’s explore the home flipping process in more detail.
What Is House Flipping?
If you are interested in learning how to flip houses, you need to understand the basics of this venture. Flipping houses is a real estate investment strategy where investors purchase a home to sell on rather than to use. The aim is to buy the property at a low price, fix it up into something habitable, and sell it with a high profit margin.
One of the key aims is to put the home back on the market as quickly as possible. The longer you hold onto the property, the greater the risk and the costs become. The costs building each day own a home include:
- Mortgage payments
Profiting from flipping a home is possible through pure price appreciation due to a heated real estate market - and it is now the hottest it’s ever been - combined with capital investments used to improve the home and increase its value even further.
How To Start Investing in Real Estate
If you are keen to start flipping homes, you must limit the risk while maximizing your potential return. To do this, you need to follow the 70% rule.
The 70% rule is simple: As an investor, you should only pay up to 70% of the after-repair value (ARV) for the home, not taking into account the cost of repairs required. The ARV refers to the house's value after the property is ready for the market. The best way to explain this is by using a working example.
For example, if a home’s ARV is $300,000. Even if you’re not flipping big houses, this is a realistic example in today’s market. The house might then need $50,000-worth of repairs. If that’s the case, a property flipper should pay no more than $160,000 for the home. This is 70% of the ARV, minus the repair costs.
Professional house flippers use several ways to find houses to flip, including sales ads, real estate lead generation services, and word-of-mouth.
The Costs Involved In House Flipping
To create your house flipping budget, you must consider all the costs involved in this process. These include:
- Closing costs
Remember, the total cost of all these factors should not add to more than 70% of the ARV, with the exception of the cost for repairs.
While it’s possible to flip houses with no money, you’ll have to borrow to purchase a property first. When looking into the cost to flip a house, the initial financing will likely be the most significant chunk of the expenses.
Different financing methods for flipping property change the risk levels. For instance, a mortgage might have a high interest rate, while a home renovation loan will likely charge much less interest. There are different types of mortgage loans, too, so choose carefully if you don’t want to bury yourself in payments before even starting your business.
Of course, the most favorable option would be to purchase the property using your own capital. If you can use financing to your advantage, it can also provide opportunities to flip several homes simultaneously.
Do note that there are also likely to be other expenses included with the loan. For instance, most loans provided by private lenders come with origination fees. Add closing costs to this, and your initial expenses might surpass the average cost of flipping a house. In other words, be careful who you borrow from.
If you’re lucky, you can get a Fannie Mae HomeStyle loan to cover the property's purchase price and refurbishing cost. Since this is a government-backed loan product, it will have favorable conditions. However, the lender will need to approve any contractor doing work on the home you bought with the HomeStyle loan.
Whenever purchasing a property, you will be accountable for some of the closing costs. The costs here will usually amount to 5% of the price that the property was purchased for and include:
- Title company fees
- Title insurance
You should receive a full breakdown of these costs from your lender or real estate agent. For example, if you buy a home for $300,000, you may have $15,000 in closing costs. As such, the total cost for the home would stand at $315,000.
Renovation and Repairs
Once you have done your due diligence and purchased the home, you now need to consider the costs of preparing the property for the market.
First, consider how much you will need to pay for materials and labor to complete the work required. You might need to pay for building materials, as well as furniture and appliances if the home was stripped bare. In terms of labor, you will likely need the following services:
- General Contractor
Don’t forget, to add value to the home, the work must reach a certain quality standard. If you are not experienced or qualified, you will need to rely on the support of professionals. There are three different types of repairs that a home may require:
Of course, cosmetic repairs are the cheapest, and the cost to flip a house can increase dramatically as we go down the list.
Cosmetic repairs include replacing things like carpets, repainting the walls, and basic landscaping to keep any outdoor space tidy and enhance the curb appeal. The latter is particularly important if you’re doing an open house, because it contributes greatly to any potential buyers’ first impressions.
Cosmetic repairs should not cost more than 5% of the property you have purchased. In our example of a home worth $300,000, a maximum of $15,000 would go toward cosmetics.
Moderate work means significant repairs and contract work necessary to increase the home's value. Moderate repairs can include kitchen renovations and bathroom upgrades, like adding new fixtures and modern appliances to make the home more practical and valuable to a potential buyer.
The cost of moderate work can be double or triple the amount for cosmetic changes. You might spend $30,000 on moderate repairs for a home worth $300,000. However, moderate repairs also increase the property's value much more than cosmetic ones.
In some cases, you might invest in a home that requires significant work. This could include fixing structural issues or adding additional rooms to ensure that the home is more practical for a modern buyer. You could spend as much as $50,000 on extensive repairs.
Extensive repairs can be worth it if you can purchase the home for a low enough price, and the work you do make it skyrocket in value. However, this will increase the level of risk, as you may be unable to get a high enough ROI to offset the repair costs.
Tax and Insurance
There are two different types of tax costs to consider as part of your house-flip budget. This includes monthly property taxes that need to be paid while you maintain ownership of the home and the taxes you may need to pay at settlement.
Do note that property tax can vary substantially depending on where you invest - even properties in the same state can be taxed differently. Property taxes can also impact how attractive the home is to potential buyers. You must keep this in mind if you want to sell the property fast by attracting a large number of buyers immediately.
The insurance required for flipping a home is different from the coverage for living in a property. Typically, you will need vacant and unoccupied coverage. The average cost of this insurance is over $1,800, even for a smaller home. It’s so expensive because of the increased risk of property damage due to no one being there to protect it.
When choosing your insurance package, make sure it provides full coverage, including coverage for flood and fire damage, depending on where the property is located.
Once you’ve completed work on the property, you will need to choose the right marketing solution; this will be a significant portion of the house-flipping cost. In recent years, internet marketing has been a vital element of this, too.
First, choose whether to handle the marketing yourself or use a realtor. If you are marketing the home yourself, you need to consider everything from the best listing for your property, to advertising it on the right websites. You will also need to create promotional materials, such as photos for the home’s exterior and interior. If you hire a realtor, they will handle all this for you; in a way, you can pay someone to flip your house for you.
Those using a real estate agent should expect to pay them approximately 6% of the home sale price. If we resold our example $300,000 home for $400,000, that would mean paying the realtor $24,000. As such, you might assume it would be more cost-effective to market the property yourself. However, this is actually rarely the case: You will need to handle multiple costs for a range of services and products, making the process far more complicated and ultimately more expensive than the one-off realtor price.
Mistakes to Avoid
When exploring a fix & flip investment, it’s important to avoid some common mistakes that new investors tend to stumble upon.
First, set a budget before you begin. This should include everything from the initial labor costs, to the closing costs for the home sale. It is the only way to generate a realistic number for ROI that you are likely to gain with the sale of the home.
Also, research the market carefully: You need to know precisely how much a home in a specific condition should sell for. You should also know how much the necessary repairs will cost before buying a property; this will guarantee that you aren’t caught off-guard later. As mentioned, a strong starting formula for flipping houses is the 70% rule. If you can’t predict making enough from the house to follow it from the beginning, you might want to choose a different property.
We hope you now have a comprehensive understanding of all the costs tied to a property-flipping investment. By accounting for these costs, you can plan a thorough budget from day one. This will increase the chances of gaining a solid ROI from this investment.
The amount earned from house flipping will depend on how many houses you flip each year. However, on average, it is estimated that a typical property flipper will flip between two and seven homes annually and earn approximately $67,000 per flip before taxes.
The rule for property flipping is that you should never spend more than 70% of the ARV (after repair value, without the cost of the repairs themselves) of a home on buying and fixing it up.
Flipping a home is worth it as long as you understand all the costs involved and manage the risks effectively. You also need to remain realistic about how much you are likely to earn.
The average house flip ROI for 2021 was $67,000. However, this will only be the case if the costs remain controlled. If the expenses build, the ROI will deplete.
If you’re wondering how much it costs to flip a house, $100,000 is more than enough to fund a property flip investment successfully. However, you will need to take out a loan for the initial purchase. Otherwise, you will be limited in terms of the property types you can buy and the repairs you can make.
Julia A. is a writer at SmallBizGenius.net. With experience in both finance and marketing industries, she enjoys staying up to date with the current economic affairs and writing opinion pieces on the state of small businesses in America. As an avid reader, she spends most of her time poring over history books, fantasy novels, and old classics. Tech, finance, and marketing are her passions, and she’s a frequent contributor at various small business blogs.
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