House flipping is a property investment strategy that involves purchasing distressed real estate, refurbishing it, and selling it at a higher price than the acquisition and improvement costs for a profit. Flipping houses can be risky, owing to fluctuating home prices, increased competition for a slice of the pie, and unforeseen costs eating away at your profits.
Yet, the benefits cannot be overlooked. For starters, the demand for rehabbed properties is evergreen, with people willing to roll out hefty amounts for top-quality remodeling and locations. Moreover, short-term investments can often generate high profits at lightning speed, if done correctly. You can have complete control over the time, effort and capital one wants to invest in a flip. Based on 2023 data, flip transactions accounted for nearly 8% of single-income houses in the USA, with an average gross profit of 27.5%. According to experts, house flipping will remain a lucrative business in 2024 as home prices are predicted to rise approximately 5% nationally.
On the surface level, house flipping may seem like a simple game of buying low and selling high; however, the process is riddled with several complexities, especially for costs associated with this business. Some of the main factors that affect the cost of house flipping include initial acquisition costs (purchase price, insurance, agent fees, etc.), renovation charges, and holding costs, i.e., expenses such as property tax and utility payments incurred till the final sale.
Purchase, Insurance, and Ownership Costs
While purchase price accounts for a lion’s share of the acquisition cost, it is only one part of it. Add to this the additional expenses, and you’ll find yourself in a pickle; Property taxes and insurance are the first expenses to consider, as you will be liable for them until the property is sold off.
Title fees are another variable in the cost equation, which is associated with reviewing and modifying the title, and often getting it insured to prevent false property claims for an investor’s protection. You will also need to keep in mind the financing fee since some personal liquid cash will be needed for applying and qualifying for a loan, not to mention the high interest rates and origination fee that come with hard money lending.
Finally, closing costs to the likes of legal fees, transfer taxes, and loan pay-off fees must be kept in mind when calculating overall expenses. The type of property and location play a vital role in determining the average costs of flipping a house. For instance, areas with strong demand and price appreciation potential will perform much better. For instance, in 2023, the median national price for a home saw a year-on-year increase of 2.2%. Average prices also differ by location, for example, in highly urbanized metropolitan cities of California, such as San Jose, Santa Clara, and Irvine, the average costs range between $1.3 - $1.85 million, whereas for cities with smaller towns and more suburban population, such as Cumberland and Decatur, the average costs fall between $128,000 to $157,000.
So, what are some tips for finding and financing good deals for flipping? We recommend taking baby steps and starting small, such as with a single-family house that doesn’t require copious investment in repair and reconstruction. Another crucial detail to remember is the power of networking since flipping houses requires an expert team of contractors, real estate agents, and certified accountants on your backing. Lastly, always keep in mind the 70% rule – your maximum offer price should be 70% of your after-repair value minus repair costs. This will allow you to account for any unexpected costs or fluctuations in the market.
Renovation and Repair Costs
Your scope and budget for renovations and repair are greatly dependent on the condition and style of the property you purchase. For instance, a higher number of bedrooms and extra amenities such as heating systems can increase the scope of the renovation. If you’re new to the game and apprehensive about your budget, then it's best to consider properties that don’t need extensive repairs, especially concerning major renovation categories such as cost of demolition, contractual worker payments (electricians, plumbers, floor technicians, etc.), repairing existing defects such as wall plasters and paints, and landscaping gardens, ponds or fountains.
Some projects incur lesser material costs because of the ease of supply availability, such as farmhouses which require simpler and low-cost upgrade materials and fixtures to give a rustic look, that can average $10 – 150 per square foot. Historical homes on the other hand can range between $100 - $200 per square foot in terms of cosmetic and structural upgrades.
Managing your repairs and repair costs can be quite a pain in the neck, but not to worry, because we have just the right tips to prevent you from pulling at your hair in frustration. First, create a detailed budget and determine your after-repair value or ARV based on the level and style of upgrades required. Next, create a spreadsheet of the most common repairs with the help of your contractors and suppliers. As a final measure, make sure to keep a contingency estimate of 5 -20% (depending on the condition of the property), which will most likely enable you to identify any additional work needed.
Holding and Selling Costs
Holding and selling costs are expenses that you are liable for while you still have the house in your possession. These costs are highly impacted by the duration of holding, as well as current market conditions. Longer holding periods mean increased costs in terms of recurring utility bills and tax payments as opposed to shorter holdings. However, they also help flippers in inflation hedging, since properties almost always rise in value over time, meaning that they can demand a higher asking price.
Furthermore, prevailing market trends such as decreasing interest rates can often lower your holding and transfer expenses. Some other components of holding and selling costs include maintenance expenses, monthly mortgage payments, and agent fees, which are the commissions for real estate agents who usually help to speed up the selling time. Marketing and staging is another overlooked selling expense since advertising and marketing strategies can eat up a large portion of your budget.
Our expert tip on reducing and optimizing holding costs is to negotiate prices. For instance, by setting a target level of properties sold for your real estate agent, you can negotiate a lower commission per house. We also recommend being mindful of realistic pricing when selling property. For example, you can use educational websites that offer market insights to determine the right value for a condo. An unrealistic selling price might leave your property on the market too long, increasing the holding costs and giving it a bad reputation.
Our parting note for anyone interested in flipping houses is simple – take baby steps and start with low-risk investments, always keeping track of all your cash and down payments. Happy shopping!
Do you have a real estate project you would like to obtain financing for? RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. If you are looking to finance a house flip in 2024, RCN Capital has competitive loan options available.