How Much Money do you Need to Flip a House?


You want to flip a house. The question is how much money will I need to rehab and flip a home? The answer to how much money depends on how you negotiate the price to buy and where are you getting the money. We want to look at that in more depth with you in this article. Flipping homes can be rewarding financially and provide a sense of accomplishment. You are looking at taking a beat up, rundown home and making it look incredible for a family. The feeling of taking something broken then fixing it is really something to behold.

Flipping a house is not for everyone if you have seen any of the house flipping shows on HGTV. They kind of make it look easy but that is really far from the truth. To get started it requires a bunch of time, energy and money. You need to work at it until you have a system in place and really good people to help you.

Price to buy, cost to repair and the selling price is where you need to focus to make money flipping. If you can buy at a low enough price even surprises will not wreck your profit. There are always surprises when you are flipping houses.

Here are the 4 key areas we will look at to figure out how much it will cost us to flip a house.

  • How much will it cost to buy the home?
  • How much will it cost to do repairs?
  • You have holding cost so how much is that?
  • What will be my selling cost?

These 4 basic costs will factor into what you need to spend. When you first start flipping homes make sure you stick to the numbers. Never ever buy a home on feeling, gut or because you love it because the numbers never lie. You buy because you fall in love with the house you are going to lose money, maybe lots of it.

Buying a property

You have found a wholesale deal. You will need to look at property quickly if you are able to. Sometimes when buying distressed property they do not always let you see the inside of the home. This is when you will have to do some snooping or peeking through the windows.

Rule of thumb when buying for most seasoned investors.

  • 70% of ARV –Rehab Costs
  • (ARV) = After Repair Value

You do not offer more than that number, ever unless you are a really seasoned investor.

You must look at comparable home sales for the area you are buying. This will tell you what homes are selling for in good condition. You should have a low number of homes not as nice that sold and a high number of houses that are much nicer. You need to go back 6 months or more to get enough comparable sales. If you are in a hot market you may not need that many comparable homes but it never hurts to have too many.

Buying a fixer-upper to flip

You really need to understand repairs if you want to make money in this business. If you have no idea of what the cost will be to repair then you need to take a contractor with you on these house inspections. You have to know what you are getting into especially if you are new to real estate investing.

Houses that are in really bad shape you need to ask yourself why anyone else hasn’t bought this home.  There could be a hundred reasons you just have to make sure none of them are too big that you can’t make a profit. The more rehab you need to do the more potential you have of making a ton of money. These properties have a high reward but come with a very high risk.

If you are new to flipping then I would stick with cosmetic homes. Once you get much better at pricing, rehab costs and selling then you can grow by buying the harder to rehab homes.

Buying a cosmetic house to flip

New flippers should look at doing a home that only needs cosmetic work.

What is cosmetic work?

This is just easy things that do not really require a general contractor to manage the rehab for you. I bought this house I live in now for $80,000 below other homes in this area. I bought it right when the real estate market was still depressed but picking up some steam. The hose was bank owned for two years so it just needed some general repairs.

Here is what I did that made this a cosmetic house

I did not renovate and then flip it since I wanted to live here. Let’s check out the list of things we did in the home.

  • The furnace was old but working but I knew it would need to be replaced I had to replace it within 2 months of buying the house. Winter was upon us and we need a better furnace for the home.
  • The air conditioner was also in bad shape but we bought the house in October so I did not need an air conditioner till spring I help off buying that in spring.
  • Paint does wonders to make something dingy nice again. We had to paint the whole home before moving in.
  • The flooring was a floating floor you can buy at any Home Depot or Lowes. They had put this flooring throughout the home which was not really good wood flooring.
  • I left that flooring in kitchen and dining room. I took the rest of the hardwood floors out to put carpet in the upstairs plus family room.
  • I painted the outside trim on the house.
  • I also painted the walls in the basement with Kilz to block mold and stains.

This would be considered a cosmetic job if I wanted to flip my own house. There was no wall moving or demolition to the studs. I had no electric issues that would cause me to do any rehab there. We did have a plumbing issue but the lender made the bank fix it before selling to me.

Closing on the home

You may have to pay some closing costs when buying a house. It just depends on what the seller and you agree to each pay for the closing.

The costs that you may end up paying when buying include:

  • Property taxes
  • Transfer taxes
  • Insurance
  • Some title company fees
  • Maybe title insurance

If you have some financing in the deal there may be some costs associated with that. You will get a closing statement before signing showing you what the breakdown is for the cost to close.

Many investors will calculate 5% they will need to pay to buy the property. If you are buying a $100,000 home you would pay around $5,000 for closing costs. You need to remember this number when doing your cost calculations.

How much will it cost to do repairs?

When you buy a property needing cosmetic or extensive repairs there will be a cost associated with the rehab. These costs you need to do a really great job fixing up the place but not so good that you do not make a profit. If you watch the rehab shows they are always trying to figure out what to put in that is what buyers want but not so expensive you go over budget.

The costs will include the materials you buy such as wood, drywall, flooring and so on plus the labor that will install it.

Many flippers have a contractor that manages all the specialized workers. There is a certain order of work that needs to be done before other work can proceed. I need the walls up, electrical ran and or plumbing done if it is in that wall before doing drywall. You need to calculate all costs when working with the contractor to do the work. You may have a main contractor doing all the coordination with all the other workers. This will be the main contractor’s job to come up with the schedule. If you are doing all the coordination yourself then you need to make a schedule and coordinate all the contractors.

You may work with 10 to 20 contractors. Here are some that you may need to help you.

  • Flooring contractor including hardwood floors, carpet, and tile
  • Roofing contractor
  • Electrician
  • Plumber
  • Painter
  • Landscaping professional
  • Drywall contractor
  • General contractor
  • Staging company
  • Bricklayer
  • Basement contractor

The more contractors you need the more extensive the rehab. If you are new to doing a flip then stick to homes that only need moderate to cosmetic repairs.

Cosmetic repairs

I bought my home for $150,000 and it needed $10,000 in repairs. The house at the time we did the cosmetic repairs was worth $210,000.

Let’s plug in the numbers.

  • 70% of ARV –Rehab Costs
  • 70% of $210,000-$10,000= $137,000

You can see that this home did not fit our guidelines for buying to rehab and then flip. I needed to buy at $137,000 if I was really going to flip this house for 30% profit. I could take a lower profit margin and still could have bought this property to flip.

I bought this house to live in and the value for the area is now around $250,000. I have done well on this property by living in it with my family.

You can use these same numbers for any flip no matter how much rehab is needed. Just plug the numbers into the formula.

You have holding cost so how much is that?

This is where the rubber meets the road. Most people will never be able to get the money to flip a home because they do not know how to use OPM (Other people’s money). The easiest way to start is to have your own money to start a home-flipping business. You are probably like most people and do not have $100,000 to $500,000 sitting around to use for buying, rehabbing and selling homes.

There are several types of lenders on the market for people who want to flip homes. You will not be going to a bank to start a home-flipping business. That is unless you are really close to the banker or it’s a local bank that you are close to the banker.

Check out an example of a loan I did with a hard money lender.

Hard Money vs Cash Lending

  Pay Cash Hard Money Lender
Purchase Price $75,000 $75,000
Rehab Costs $10,000 $10,000
Down Payment $85,000 $2,550
Amount Financed $0 $82,450
Interest Rate $0 13%
Mortgage Payment $0 $1,079
Total Costs for 30 Days $85,000 $86,079

 

Every lender is different on the structure, interest rate, and percent down. You may think this is expensive but if you can’t get the money then you can’t buy the home to flip. You just have to take into consideration you’re financing with holding costs. Many new investors will forget about holding costs until it bites them on their first few deals.

There are several ways you can get other people’s money to buy and flip a home. Here are the top ways to get money to start flipping.

  • Hard Money Lender
  • Find a Partner with money
  • Bank local or national
  • Money from private individual

Hard money lender

You will have to pitch in some of your own money when using a hard money lender. They will not let you do it without some skin in the game. The hard money lender we used on our properties was a really good friend of my brothers. He was wealthy and started a hard money lending business. They only did the loans with people they know.

You will probably need 15% to 20% of purchase price with a hard money lender. This was a friend of ours and they still charged 3% with 13% interest which was a little bit of a discount. If you have been using the hard money lender for a ton of deals they will usually lower your cost a bunch to keep your business. They also know you are golden because you are seasoned and not as big of a risk like a new real estate flipper.

Find a partner with money

This is a really good way to start. You can do all the work while the partner funds the deal. This way you do not have to put any of your own money into the deal. The only downside is you have to usually split the cost 50/50 with your partner. Many flippers will start this way and make enough money to branch off on their own.

The Bank

I would stay away from the bank. The only way I would work with a bank if it is a small local bank where you know the bank manager. It is almost impossible to get what you want in a deal with the bank. They will make your pitch in at least 25%of the cost. The bank may also make you pay all the rehab cost which is a bunch of money once you add in the down payment. The good thing about a bank is the cost of the home rehab loan is very cheap compared to hard money.

Money from a private individual

This may work out the best for your bottom line. Who wouldn’t want to make 8 to 10% on their money every year? This is very attractive for private money because they can lend the money and make 10% without doing much of anything. They have to trust you will not buy a house that you cannot flip. The good thing is if the rehab goes badly the house can be sold to get all or most of the private lender’s money back.

Taxes on property

You may have to pay taxes for the remaining year. This is pre-paying taxes so you just have to see if that will be a cost. You also need to figure in the monthly taxes for the property. If you do not have a bank loan then you are responsible for taxes. Make sure you set it up to pay them every month until you sell.

Insurance on property

The 1 to 6 months you hold the property while you renovate it will need insurance. Insurance can be costly for a vacant home that you are rehabbing. You need to make sure you pay it every month and calculate it into your holding costs.

Utility water and electric – gas if in winter

You need to put all these into your name when you buy the home. You also need to make sure everything is turned on before contractors start work. You need water and electric to renovate a home. The gas is not such a big deal if it is not winter. Your utility bill will vary depending what is used like watering the lawn to make the yard look nice could get costly.

What will be my selling cost?

How much will it cost you to get this house on the market and sold?

The cost all depends on how you sell the property. We are going to look at 3 ways to see a house you just rehabbed.

  • For sale by owner – You can sell it yourself as for sale by owner.
  • Realtor – You could hire a realtor to sell it for you.
  • Real estate license – The third option is to get your real estate license and sell the house yourself as a realtor.

For sale by owner

You can sell it yourself but you will need to do all the marketing for the home. That will be a cost to you to get it on the MLS plus any other marketing you do. You need to market the home well to get it sold fast to lower holding costs.

You should only do for sale by owner if you know what you are doing and can do it quickly. The time you are spending on this home takes away you looking and buying another home to flip.

Realtor

Many people use a realtor to take care of marketing, help with negotiations and also assist with all the paperwork to buy or sell a home. Realtor fees are 6% that is 3% to buyer’s agent and 3% to seller’s agent.

You sell a $100,000 home you would have to pay $6,000 dollars in realtor fees. This is some money we do not really want to lose. When you first start out you can use a realtor but later when you get bigger get your license and sell your own homes.

Real Estate License

You at some point may need to just go get your real estate license. You can then buy and sell your own homes saving at least 3% for almost every deal. If you do not have any other agents involved that will be 6% back to profit.

The question was how much money do you need to flip a house? The answer varies widely because of all the different factors we mentioned above. You have so many things that go into the cost of flipping a home. If you run through the list we just gave you then your cost to flip should be spelled out in good detail for you. The key is to buy a home as low as you can to give you extra room in case you mess up the rehab costs or holding costs.

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