How much money needed to start flipping houses?

Flipping a house could require several hundred thousand dollars or almost no upfront money of your own at all. Everything from location, to condition, to your credit score can impact how much money is needed to flip a house. And no two flips are exactly alike, which means the cost changes from project to project.

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How much money do you need to flip a house? Boy, is that a loaded question. There are so many variables your budgeting spreadsheet could get convoluted real quick. Flipping a house could require several hundred thousand dollars or almost no upfront money of your own at all. Everything from location, to condition, to your credit score can impact how much money is needed to flip a house. And no two flips are exactly alike, which means the cost changes from project to project. You’ll never know exactly how much money is needed until the process is complete, but estimating as accurately as possible is critical.

Budget for the Common Costs Associated With Flipping a House

Any experienced flipper will tell you there’s a lot of money to be gained and spent flipping homes. Unfortunately, the spending part comes first. It’s certainly a case of you’ve got to spend money to make money. No matter what type of home you buy or the financing that’s used, there are always going to be two expenses.

Purchase Price

Whatever the house costs up front is the initial starting cost, also known as the acquisition cost. This is typically the largest cost of a flip and can set the tone in terms of how much profit you earn. One formula for coming up with a purchase price for a fixer to flip is to reduce the estimated after repair value (ARV) by 30%. Next, subtract the estimated cost of the renovations from that number. For example, if comparable renovated homes in the area sell for $200,000 and the renovations will cost $40,000 then a good purchase price is $100,000 ($140,000 ARV -$40,000 repairs).

Taxes

You’ll have to pay for property taxes during ownership as well as short-term capital gains taxes on the profits. Federal short-term capital gains are taxed at the same rate as income. Some states also take a cut through capital gains taxes. The federal tax is a given no matter where you buy. There is also a third expense that almost always comes into play. This expense is actually many expenses rolled into one and takes a lot of effort to budget.

Renovations

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It’s the biggest wild card in the flipping game. Renovations are tricky because they aren’t straightforward expenses. Current condition, material quality, and the contractor you use can all affect the price. It’s always best to have a general contractor come out and write up an estimate before you purchase the property to get a rough idea for budgeting. But even then, surprises almost always happen once things get underway. That’s what a contingency is for! Here are some other common costs you’ll need to account for in your budget when you’re running the numbers. Agent Commissions - If you sell the house through a licensed agent (which is highly recommended) a commission of up to 6% of the purchase price will need to be factored into the budget. Marketing Costs - If you decide to sell the house yourself you’ll have to cover the marketing costs. Loan Payments - Getting a loan to purchase the house? That means you’re like 39% of flippers today according to Attom Data Solutions latest house flipping report . You’ll have to factor in monthly loan payments with an interest that could be as high as 12%. Closing Costs - If you’re getting a loan, the closing costs will be around 5% of the purchase price. You may also have to pay closing costs when you sell the home. Utilities - Utility service has to be established in order to do work at the property and show it once it’s up for sale. Insurance - Whether or not you get a loan, you’ll want insurance to protect your investment. Interest on Credit Cards - Using credit cards to pay for renovations? Include the interest payments in your budget. Photography - This one may be built into the real estate agent’s fees. If not, then you’ll need to budget at least a few hundred bucks for professional photography. Inspections - If you plan to (and are able to) do an inspection before purchasing a property that will be an added expense. Staging - Vacant homes don’t sell as quickly as lived-in/staged homes. It’s pricey, but staging could be worth the additional cost because it can also net you a higher offer price. The average price for staging is $500-600 per room, per month. Permits - Depending on where you live and what you’re doing, permits can set you back thousands.

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Cash is Really King in House Flipping

There are a number of advantages to purchasing with cash. Probably the most important one in terms of budgeting is it’s cheaper and quicker than using a loan. Other all-cash benefits include:

Some property purchases, like an auction buy, require cash.

Other times you can negotiate a better purchase price by enticing the owner with a quick cash close.

You won’t have loan interest eating into your profit.

There are no stipulations like a certain amount of insurance coverage with a cash purchase. (Although you want to have insurance when you take ownership.) If you have cash in hand it doesn’t matter what your credit score is. Many people think flipping homes is an investment strategy that’s limited to people with hundreds of thousands of dollars in the bank. That kind of cash certainly helps, but it’s not always a necessity. Let’s say you’re able to get a loan to purchase a house to flip. And let’s say you also have a partner that’s funding the renovations. In that scenario, you would only need enough cash to cover the down payment and closing costs, some of which could be rolled into the loan. The caveat here is that you would most likely need really good credit and a steady income to get the loan. The lender may also require proof that you have access to a certain amount of capital through cash, credit lines, retirement accounts, etc. But if you were able to swing it, then flipping has a very low entry cost. It’s basically $0 if a partner can front the cost of the home purchase and renovations.

Photo credits: Pxhere , Unsplash

aceableagent.com - How Much Money Do You Need to Flip A House? - AceableAgent

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