If you’ve ever watched a house-flipping show on TV and thought to yourself, “I can do that,” you aren’t alone. In fact, in 2017 house flipping reached an 11 year high in the US. With the rise in popularity of these “fixer-upper” shows, more and more people are becoming intrigued by this phenomenon. But, there’s one important thing most of these shows don’t reveal: the real costs that can be involved.
As a seasoned house flipper with eight flips under my belt, I can attest that renovating a house involves more than buying a house and selling it for a profit. If you’re considering tackling your first house flip, it’s important to understand all the costs associated– from holding to selling expenses, and the many fees in between, make sure you arm yourself with all of the information necessary before embarking on your house-flipping adventure!
Repair costs are an obvious expense with house flipping. Kiersten Vogt, a seasoned Northeast Pennsylvania house flipper explains, “I think most rookies underestimate the final price. Everything costs more than someone expects!” From materials to labor, one of the most expensive line items on a flip budget is repairs. Without proper experience and knowledge, estimating the price of repairs can be difficult. Vogt suggests “People should have contractors walk the property and give estimates before they put an offer in or at least make an offer contingent on estimates.”
One of the hidden costs with house flipping is the holding costs. As Vogt explains, “Holding costs are things like taxes, utilities, lawn care, HOA fees, etc. Holding costs are basically anything you’d have to pay even if the house isn’t sitting there not being worked on or in escrow.” Holding costs can vary based on the timeline of the flip- the longer it takes the flip a home, the more expensive the holding costs will be.
Depending on how a flip is financed, there are upfront buying costs. From loan fees, appraisal costs, title fees, and more, investors will have costs before they even start work on Day 1. In fact, those initial purchase costs can be as much as 2%-3% of the purchase price.
In addition to closing costs when a home is purchased, investors will also pay closing costs when they sell the property. From termite policies, title work, revenue stamps, and more, the expenses associated with selling a house flip can be thousands of dollars. However, as Vogt explains, “Closing costs for sellers are typically lower than that for buyers.” It’s wise to consult a bank and title company to estimate closing expenses before you begin house flipping!
While it’s not necessary to have a real estate license to flip houses, it’s incredibly beneficial to use the services of a Realtor to market a flip. In fact, 87% of buyers are using a Realtor to find a home. Using the services of a Realtor does come with a price tag though. Both Kiersten Vogt and I are licensed Realtors in addition to being house flippers, so as Vogt explains “Our realtor fees are quite low because we sell the flips ourselves. So our fees are normally just 2.5% of the sales price. If I didn’t have my real estate license, I’d be paying anywhere from 5%-7% of the sales price!”
With the appreciated value of a flip property, the goal of house flipping is to make a profit. Unless you’re doing a live-in flip, you will be required to pay taxes on the profits. Exactly how much the government gets varies; however, Vogt suggests “I set aside 30% for capital gains in an account I don’t touch or think about until tax season… if I have some left over at tax time then good!”
Knowing all the costs with house flipping is critical to being a successful house flipper. While there is potential for wealth building and big paydays, without knowing the math before you start, there is also potential for failure!