Are you considering flipping your first property? It’s a safe bet that you are aware you’ll spend money on materials and labor, but the costs associated with flipping a property don’t end there. New investors often find themselves going above their budget due to soft costs.
To ensure this doesn’t happen to you, we’ve complied some information for house flipping investors detailing soft vs hard costs and how to budget accordingly.
First, what are hard costs?
In terms of real estate investing projects, hard costs are often referred to as “brick and mortar” costs or direct construction/renovation costs. Hard costs are more clearly defined than soft costs, as they include the materials and physical labor in a renovation or construction project. Hard costs are often clear-cut and relatively easy to predict. These are the first expenses addressed when you’re determining how much it will cost to flip a property.
What are soft costs?
These types of costs include every expense involved in owning and renovating a piece of real state. Here are a few common examples of soft costs:
- Accounting and taxes: These types of soft costs include accounting and bookkeeping fees, property taxes, utilities, HOA fees, and renovation project management costs
- Construction: If you’re planning on building a new property from scratch, construction project soft costs include architecture plans, permits, surveys, and engineering plans.
- Legal Fees: Purchase-related costs like title company fees and legal fees are also soft costs
- Lender Fees: If you’re borrowing money to finance house flipping then you’ll have to contend with interest payments, lender closing fees, and lender draw inspection fees as soft costs. Beyond that you may also have to deal with appraisal costs, insurance costs, and other expenses required by your lender.
- Marketing: If you’re looking to flip a property, you’ll likely need to spend some money for advertising and marketing. This could include a real estate agent’s commission, flyers, ads, or any other related costs used to sell the finished property.
- Renovation: Renovation-related soft costs include permits, inspection, and other fees imposed by the local housing authority
Can I finance soft costs?
Unfortunately, no. Investors are responsible for covering most soft costs, although they do still have a few options. Many real estate investors choose to keep their investment properties as rentals rather than selling them. In these situations, many long-term landlord loans will allow borrowers to pull their cash back out, based on the post-renovation appraised value. Despite the fact that investors pay out of pocket for their costs while renovating, they can pull some of that money back out in a refinance. Beyond that, partnering with another investor is always a viable option if you’re light on cash and worried about all the costs not covered by a bridge loan.
Soft costs can quickly eat into your returns as a real estate investor, and since they’re less obvious, many amateur real estate investors overlook them. It’s best to get advice from seasoned real estate investors and flippers to get a better sense of how they budget extra for soft cost. There’s nothing worse than surprises that cost you money. Plan, budget, and forecast— that way you’re prepared for every expense that comes your way and you’ll have a better chance of obtaining the profits you anticipated.
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. RCN Capital also has flexible and competitive loan options available. Connect with us today to discuss your next fix & flip investment.