The cost to flip a house will be the sum of the acquisition cost, rehab costs, carrying costs, and marketing and sales costs. The total cost to flip a house will generally be equal to around 10% of the property’s purchase price. The costs will vary based on where the home is located, property type, and the extent of the renovations needed.
Those planning on financing some of the costs to flip a house see if they pre qualify for a fix and flip loan with LendingHome. Their rates start at 7.5% and they’ll fund up to 90% LTV and 75% ARV. Prequalifying online is easy.
How much it costs to flip a house will be different from project to project. That’s part of what makes flipping real estate so appealing: it’s feasible on almost any budget. While the exact dollar cost for a flip will vary widely, each fix and flip project will typically have the same four expenses.
The 4 costs of flipping a house are:
1. Cost of Property Acquisition
Property acquisition is how much it actually costs to acquire the property. These costs will include the purchase price of the property and the associated closing costs. The closing costs are the fees paid at the settlement of a real estate transaction and they generally include title insurance and fees, transfer taxes, and financing fees.
Purchase Price of Fix and Flip Property
The purchase price is how much you pay for a property. The purchase price will include the property itself and the land it sits on if it’s a single family or multi-family home. A condo or co-op does not include the land. The purchase price doesn’t include taxes or insurance, but depending on how the deal is structured, it may include appliances, custom window treatments, and light fixtures.
Before purchasing a property, there are two main things to consider. Use comparable properties to see how they measure up to the property you are interested in purchasing. Then consider the rule of thumb where you pay 70% of the after repair value (ARV) of a property minus the rehab costs. If you are new to house flipping, purchase a property that only needs cosmetic repairs since this will make the costs easier to figure out.
We spoke with Lucas Machado, Real Estate Investor and President of House Heroes LLC. To ensure profitable deals and avoid money-pits, he uses this formula: Maximum Allowable Offer = (After Repair Value x .70) – Repair Cost.
“This creates around a 30% margin by accounting for the most significant costs: purchasing the property and making repairs. It’s a quick measure indicating if it’s a good deal for the home flipper. We use a 6-month metric as the key time frame, but go further back if necessary to evaluate enough comps to reach a higher level of certainty.”
When purchasing a property to flip, you’ll be responsible for some of the closing costs pertaining to the deal. These costs will include the transfer taxes, your share of property taxes, property insurance, title company fees, and title insurance. If you’re financing the purchase, the financing will have its own costs at closing, too. Your realtor and lender will both provide you with a breakdown of your closing costs.
A conservative rule of thumb is that a buyer’s closing costs will be 5% of the property’s purchase price. If you purchased a property for $200,000 then expect to pay 5% of $200,000 which is $10,000. So the $200,000 property has now cost you $210,000. These costs will affect the budget and your ROI, so it is imperative to remember to include them when calculating how much it costs to acquire a house to flip.
2. Cost of Rehab & Repairs
Rehab costs are the costs associated with rehabbing or renovating the property you intend to flip. These costs vary depending on the extent of the rehab, the property condition, how large the property is and how expensive labor is in the area you purchased a property in. Rehab costs include both materials and labor.
Cost of Materials & Labor for a Flip
When calculating the cost of materials for your fix and flip property, including delivery fees and if an appliance requires a certain professional to install it. Some items will need to be special ordered which adds days to your timeline and increases your carrying costs. The cost of materials will vary depending on the scope of the rehab project but generally fall into two categories:
- Common building materials (lumber, paint, hardware, etc.)
- Common appliances (HVAC, stove, refrigerator, etc.)
Labor is how much contractors charge for their time and effort in rehabbing your fix and flip project. They will charge you to install all of the purchased materials. Some contractors charge per hour, but the majority of them charge per project.This will be negotiated and put into a signed contract before any work begins.
Depending on the extent of the rehab, different laborers will be used. Some common laborers include:
- General Contractor (GC)
- Day laborers or Handymen
The extent of the property rehab is a major factor in determining how much it costs to flip a house. As a beginner, it is ideal to choose a property that needs cosmetic repairs in order to keep your rehab costs down and project manageable. Once you have experience, it is fine to choose a property that needs moderate or extensive repairs.
Cost of Cosmetic Home Repairs for a Fix & Flip
Cosmetic home repairs are minor improvements and repairs needed to enhance the property. When completed correctly, they add value to the property. These repairs are done on a shorter timeline which reduces carrying costs. Your material and labor costs are also lower but your acquisition costs are higher since the property is already in better condition than one that needs a full rehab.
Larry Friedman, Real Estate Investor and Co-Founder of SDF Capital says that:
“In terms of estimating repairs, generally to refresh a property, we budget approximately $30/ft.A refresh would entail purely cosmetic fixes such as new paint, carpet, minor repairs, new lights, refinish floors, new toilet bowls, new vanities, new faucets (no extensive plumbing, electrical or foundation work).I would advise first time rehabbers to stick to cosmetic rehabs initially as they are easier and less risky.”
Cosmetic repairs include:
- Interior Painting and Patching walls
- Replacing Carpet and/or refinishing hardwood floors
- Replacing cabinet hardware and painting cabinets to update the look of the cabinets without replacing them
- Basic landscaping including cutting the grass, planting flowers and tidying up the entranceway
Here is an example of how cosmetic home repairs affect your ROI:
You purchase a home for $100,000 and spend $5,000 on cosmetic repairs. The home is now worth $115,000. (This doesn’t account for closing costs or carrying costs.) This means your ROI for this project is: $10,000/ $105,000 x 100 = 9.5%
Cost of Moderate Home Repairs
Moderate home repairs are substantial repairs to upgrade a property and increase its value. Since they are larger projects, a licensed contractor will be needed to complete them which will add to your labor and material costs. Your acquisition cost will be lower, but your timeline will increase, which increases your carrying costs.
Moderate home repairs include:
- Renovating the kitchen to include stone countertops, new light fixtures, appliances and new flooring
- Updating bathrooms with modern, matching plumbing fixtures, new toilets, and new, neutral-colored tiles
- Adding exterior landscaping such as pavers and shrubs to increase curb appeal
- Painting the exterior of the property to give off a great first impression
Here is an example of how moderate home repairs affect your ROI:
You purchase a home for $100,000 and spend $15,000 on cosmetic repairs. The home is now worth $135,000. (This doesn’t account for closing costs or carrying costs.) This means your ROI for this project is: $20,000/ $115,000 x 100 = 17.4%
Cost of Extensive Home Repairs
Extensive home repairs are needed when a house is either structurally unsound or in need of a full renovation to bring it up to date. These repairs lower acquisition costs but increase your material and labor budget. Since they will need contractors and permits they will increase your timeline which also increases your carrying costs.
Extensive home repairs include:
- Fixing a structural issue such as a crack in the foundation
- Adding on a room to increase square footage
- Adding another bathroom to increase the property value
- Adding a garage if it is an expected feature in the neighborhood
Here is an example of how extensive home repairs affect your ROI:
You purchase a home for $100,000 and spend $25,000 on cosmetic repairs. The home is now worth $155,000. (This doesn’t account for closing costs or carrying costs.) This means your ROI for this project is: $30,000/ $125,000 x 100 = 24%
3. Carrying Costs to Flip a House
Carrying costs are the recurring costs you spend from the time you purchase a property until the time you flip it. These costs are generally paid monthly during the time that you own the property. The most significant carrying cost is generally financing, but also included are property taxes, insurance, and utilities.
Financing Costs for Flipping a House
Financing costs are the costs that are associated with borrowing money to purchase and renovate a property. For example, a flipper may use a private money loan to purchase the property and float the renovation costs on a credit card. These costs will include any points, interest, and prepayment penalty charged by the lender.
Typical fix and flip lenders offer high interest rates and short-term loan products. A mortgage calculator is a handy tool to do some preliminary calculations yourself. There are a number of good fix and flip lenders and it’s great to be able to compare the lenders and determine the best terms for your fix and flip project.
Here is an example where we isolate the cost of financing a fix and flip project and compare three financing methods. These numbers do not represent the total cost of the project (such as other carrying costs, etc).
Example of Financing Costs for a Fix & Flip Project
|Financing Related Closing Costs|
|Out of Pocket Rehab Costs|
|Total Costs for First 30 Days|
As you can see from the example, a lender may charge points and a higher-than-market interest rate to finance a flip. But, financing allows you to buy a property that you may not have had enough cash to purchase. Additionally, financing can enable you to have multiple flip projects going on at once after you get the hang of fixing and flipping properties. For a more in-depth look, check out our guide to starting a house flipping business.
Hard Money Loan for a Fix and Flip
A hard money lender is a lending source that primarily lends money to real estate investors. This is an asset-based loan where the property serves as collateral for the loan. Hard money loans are typically issued by private companies for short-term financing solutions.
Some costs associated with a hard money loan include loan origination fees and points paid at closing. The borrower will also be charged an appraisal fee. This fee is for a licensed expert to complete a written estimate of the property’s market value. Each lender has their own requirements. For more information on hard money lenders check out our in-depth article, or to find hard money lenders in your area, look at our hard money lender directory.
Homestyle Renovation Loan for a Fix and Flip
A homestyle renovation loan incorporates the costs of the rehab and the purchase price of the property into a single loan. This loan enables borrowers to purchase a property that needs repairs. It is a Fannie Mae, government-backed loan product.
A property is eligible for the Homestyle Renovation Loan if the repairs being done are permanently fixed to the property and add value to the property. 15 year and 30 year fixed rate and adjustable rate mortgages are offered. The lender must approve the contractors who are doing the work. Renovation costs are limited to 50% of the ARV value of the property.
All Cash Financing for a Fix and Flip
An alternative to financing a property is using all cash. This saves you money in the short term because you don’t have any lending fees, interest or points. However, purchasing a property will use up cash that you could have used for something else and you won’t have the leverage of being to purchase multiple properties.
When using all cash, you will need the cash required to purchase the property and the cash to rehab the property. In addition to this, you will need to have cash available for unexpected expenses. The other out of pocket expense will be the carrying costs including utility, insurance, and property tax payments.
If you want to see what rates your fix and flip property qualifies for, take 5 minutes and get pre-qualified with LendingHome. They offer interest rates starting as low as 7.5% and can have you funded fast.
Property taxes affect the cost of fixing and flipping investment properties in two ways. Firstly, at settlement, you may be required to prepay the remaining taxes for the rest of the year. Secondly, there may be monthly property taxes due which will become part of your carrying costs.
Property tax rates are wide-ranging throughout the US. That because states and municipalities are the ones that set property taxes. Even properties within the same state, sometimes even within a few blocks from one another, can have drastically different property taxes. To check property taxes in your area, go here.
Property taxes that are too high can be a deterrent for home buyers. This should be considered during a fix and flip since you want your renovated property to attract as many qualified buyers as possible. The faster your property sells, the less your carrying costs are and the higher your ROI is.
Property insurance is a policy that provides financial reimbursement to the homeowner for the property structure and its contents if damage or a loss occurs. Insurance is also important to protect you, the property owner, from potential litigation. Some types of property insurance include fire, hazard, and flood.
Property insurance is necessary when purchasing a fix and flip investment. It can be paid upfront during closing or it can be paid monthly. Insurance costs vary based on the type of property, the property location and the size of the property. The average annual premium for property insurance in the U.S. is $964.
Utility costs relevant to a property flipper include water, electric, gas, and oil. These expenses need to be factored into your monthly carrying costs. Some utility companies also require upfront deposits, especially if you own a multi-family property or the previous owner had high monthly bills.
Utility bills vary based on usage and size and condition of the property. You can contact the previous owner for an estimate of monthly costs. When you purchase a property, it may take a week or more for utility providers to turn on the services, so schedule them right away. Contractors can’t work without water and electricity. If they get stalled, it will cost you more money and increase your timeline.
4. Cost of Marketing & Selling
When using a realtor, most of the costs of marketing and selling a property are not out of pocket expenses but come from the settlement proceeds. However, if you sell the property yourself and choose not to use a realtor, you’ll have to pay for all your marketing expenses up front.
These marketing and sale costs include realtor fees (unless acting as your own realtor), marketing costs and closing costs.
Realtor fees are usually paid by the seller. These fees will cover the commission of both realtors if two realtors are used. Generally, one realtor represents the seller and one represents the buyer. The standard realtor fees are 6% but they can be any amount agreed upon by the seller and the realtor.
Realtor fees are included in the marketing and sale costs. They represent the highest percentage of the closing costs that the seller is responsible for. If the subject property sells for $200,000 then the realtor fees will be $12,000. They are not an out of pocket expense but are deducted from the sales price of the house at settlement.
Marketing costs are minimal if you use a realtor to sell your fix and flip property. If you sell the property yourself, these costs will increase and will need to be paid out of pocket. Marketing costs include for sale signs, flyers, online postings and open house expenses.
These costs are often overlooked when calculating carrying costs. However, they are an important factor in getting positive exposure for the house. The property will be advertised to more potential buyers and the likelihood of one of those buyers purchasing the house is high. This will decrease your carrying costs.
Closing costs are the fees paid at the closing, or settlement, of a real estate transaction. This occurs when the title of the property is conveyed to the buyer. They are not paid up front but subtracted from the sales price of the property. The majority of closing costs come from the realtor fees.
The other closing costs that the seller is responsible for include any outstanding property taxes and utilities, any credits the seller gives the buyer and transfer taxes in most states.Typically, closing costs equate to about 3% of the sales price of the house, this, of course, is in addition to the realtor fees, if a realtor is used.
How to Determine Your Fix and Flip Costs
Start with potential ARV and work backward to keep all 4 of your major costs in line. If you know how much the property will be worth, before you purchase it, you will know how much to acquire it for, the budget for rehab costs, your budget for carrying costs and the marketing and sales budget.
ARV (After Repair Value)
After repair value (ARV) is an estimate of what a property will be worth after all the proposed renovations are completed. You can estimate the ARV for your property by using comparable properties that have recently sold, within the last 90 days, in the same neighborhood as the subject property. The comparables should be properties in similar condition to how the finished (rehabbed) property will be in.
ARV is such an important tool because it will guide you in the right direction when making an offer on a house. It accounts for carrying costs and rehab costs and if you carefully calculate the numbers during each transaction you won’t overpay for a property. ARV affects your ROI and the less you pay for a property, the more potential profit you will make.
A budget is an itemized summary of estimated expenses recorded over a given time period. When flipping a house, it will include your property acquisition costs, your rehab costs, and your carrying costs.
The budget is so important when figuring out the cost to flip a house. It will keep you on track with your contractors and material costs. It will also be a helpful tool to keep track of what money is being spent where and if too much is being spent in one place. By staying on budget, your expected ROI will be met and your fix and flip should be a profitable project.
A timeline is how much time you expect the fix and flip process to take. It will be set at the beginning of the project, along with the budget. The timeline starts when you purchase the property and ends when you sell the property.
For example, your timeline might be 60 days from the time you purchase the property to when you expect to sell it. The timeline needs to take into consideration:
- The scope of the rehab work
- The size of the property
- Your schedule and availability
- Contractors’ availability
- Marketing and selling the property
The timeline is just as important as the budget. The shorter the timeline, the less expensive your carrying costs are. This means that your expected ROI will be on target and your profit will be greater. The opposite is also true. If the timeline goes over the goal, then your carrying costs will increase and your ROI will decrease.
We spoke with Michael Perna, real estate investor and owner of The Perna Team. He says that:
“The number one common mistake when calculating costs is not realizing the time-value of money. This one hits close to home but if you are flipping and you let it drag on, you could still “turn a profit” but you could wreck your entire year’s goals by losing focus.”
Expected Return on Investment
The expected return on investment (ROI) is how much you expect to gain when flipping a house. The higher your ROI, the higher your profit, which is the goal after spending time and money on a project. The lower your ROI the lower your profit. The ARV, budget, and timeline all affect your ROI. The formula for calculating ROI is:
ROI = Net Profit / Total Investment x 100
For example, if your net profit is $40,000 and your total investment is $200,000 then your ROI = 20%
We spoke with Dr. Alex Roher, a real estate investor who has flipped 16 homes in the past 4 years. He prefers to think about ROI on an annualized basis rather than project by project.
“My formula takes into account time to renovate so I can pay more for easier flips (paint and carpet) since turnaround time is quicker. I target a 50% annual return on total capital invested. I take into account all costs – holding costs, rehab costs, closing costs, selling costs, etc. If I can make 17% on capital invested on Flip A, and buy, renovate and sell it in 4 months, I’m good. That would allow for a 51% annual return since I can do three similar project per year.”
The cost to flip a house varies depending on a variety of factors. These factors include the property acquisition costs, rehab costs, carrying costs and financing costs. By accounting for each of these factors, you should be well on your way to knowing how much money you need to flip a property.
If you think you may need financing to flip a house, contact LendingHome. It only takes a few minutes to prequalify online. They lend up to 90% LTV and 75% ARV. They offer funding with interest rates starting at 7.5%.