Thinking of getting into the business of flipping houses? Whether you’re looking for a passive income source or an opportunity to quit your full-time job, real estate investing can create quite the platform to accomplish this. However, in order to get from point a (buying a property and renovating) to point b (selling and collecting your profit), there are a lot of financial aspects you’ll have to cover.
To be successful with property flipping, one must have a clear understanding of the true costs and a means to cover them until they sell the property.
Purchasing the House
The first step is buying the property to fix and flip. This includes the purchase price of the property which is the amount the owner is asking for. Purchasing the property will also require you to cover all associated closing costs which will likely include the insurance and transfer tax. Closing costs can add up to approximately 5% of the purchase price. So, if you purchase a property for $100,000 you’d need another $5,000 or more for the closing.
Before agreeing to purchase a home at a certain rate, check comparable properties in the area to make sure you’re not spending more than you should.
Cost of Renovations
The next financial factor to consider when flipping a property is the cost of renovating it. Whether you’re interested in properties that just need cosmetic adjustments or you’re looking for a real fixer-upper, it’s going to cost. This dollar amount will be a bit more challenging to calculate.
First, you need to identify all the renovations you want or need to be done on the property. Then, you’ll need to reach out to contractors to get estimates on how much it would cost to do these renovations. Once you get these estimates, you’ll want to add an extra cushion of cash for incidentals.
You can maximize your profit on a property by trying to complete some of the renovations on your own, using affordable materials, and searching for contractors that offer the most affordable rates for quality services.
Until you’re able to sell the property, you’re on the hook for all the costs associated with the property. This includes covering the mortgage or finance payments, property insurance, property taxes, and utilities so contractors have access to electricity and water. These types of bills are paid monthly and will need to be covered by you throughout the renovation process until you close the deal with a buyer.
For first-time flippers, working with a real estate agent to get the property sold is likely the best idea. They know the lay of the land, they have an idea of the demographic, and they have the marketing tools and resources to draw attention to your newly flipped property. Keep in mind, however, you will be responsible for covering their commission and fees.
However, if you don’t want to hire a real estate agent, you’ll be responsible for marketing costs on your own. Whether you post your listing to the classifieds, a real estate search engine, or you plan on hosting an open house, it will be your responsibility financially to cover everything.
Funding Options for Your Investment Property
While using cash to purchase properties to invest in is the best option, if you don’t have enough saved up and ready for use, there are other opportunities to get funding. You could try a traditional bank to get a mortgage. There’s also hard money lenders like Lantzman Lending where you can receive a loan based on the value of the property.
The true costs of flipping a property may seem a bit intimidating to a novice investor. The good news, however, is that there are plenty of opportunities to flip properties for very little cash out of your pockets. Using those funding resources effectively and finding ways to save on flipping costs will essentially help you get the best return on your investment.