When you’re thinking about a fix and flip, it’s important to know ahead of time the expected costs, revenue, and profit margin on the investment. This might seem easy to the casual observer - just the sale price minus the cost of renovations and cost to purchase the property, right? Not so fast - there are a number of other costs that a prudent investor should consider before jumping into a real estate project.
Construction Costs Aren’t As Simple as They Seem
When looking at the cost, construction cost is important, and shouldn’t be overlooked. The secret here is that this cost can be controlled and lowered significantly.
First, find contractors who know their stuff. Look for people with track records of successful projects in the area, and get competing bids to drive down costs. Cost and quality doesn’t need to be a tradeoff - you just need to know how to play your cards and negotiate for the best price for a high quality of work.
Next, look at the cost of materials. Are you getting the best possible deal on lumber for that flooring? Is that granite countertop really worth it, or can you go for quartz, which is increasingly popular but sells at a much lower price point?
Finally, make sure everything is up to code and can pass inspection, even if it’s put under the microscope. Getting the right permitting is an easy way to save you time, hassle, and (most importantly) money.
There Are Fees Along the Way
To get an accurate representation of expected profit on your fix and flip, you need to know ahead of time what fees you’re going to encounter along the way.
First, you’ll need to decide whether or not you list the property yourself. If you do, you can save the 2-3% listing fee that comes with a listing agent. Of course, you’ll still have to pay the fee for the buying agent, which is covered by the seller either way.
Listing the property yourself will also mean it’s “for sale by owner”, which restricts the number of people who might see the property. If you have a realtor license, though (or work with someone who does), you can access tools like MLS and MRIS, which will help you increase the number of people who see your listing. Ultimately, whether or not you work with a listing agent is your choice - it’s just important to acknowledge the trade-offs when calculating your expected profit.
Also, as mentioned above, permits are an important part of the fix and flip process - unfortunately, they also cost money. Your contractor or city planner should be able to help you estimate those costs in advance - and remember, the benefits of getting the right permits will almost always outweigh the costs.
Finally, before you can close, you’ll need to recognize the costs associated with real estate transactions: title transfer and insurance, taxes, and any fees charged by an attorney.
Don’t Forget About Maintenance and Operating Expenses
The most oft-overlooked cost is the general maintenance and running costs of owning property. While these tend to be pretty straightforward, they can also hugely impact your profitability.
While the construction is going on, you’ll want to make sure you have an accurate estimation of the following:
- Property taxes: These vary drastically from area to area, so best to check online before breaking ground.
- Utilities: Water, gas, and electric should be taken into consideration, and may vary based on the size of your property and how modern the systems are. Keep in mind that updating existing systems may increase the value of your flip.
- Insurance: This varies based on the property, location, and type. This can be estimated by dividing the value of the home by 1,000 and multiplying the result by $3.50.
Time is money - the longer you have the property, the bigger these expenses get. However, having a well-thought-out and realistic timeline will help you minimize these costs and get the most out of your investment.
The final cost one should consider before investing is the cost of financing itself. While interest rates on fix and flip loans vary from lender to lender, they are generally in the 10% range, and usually require 30% money down.
Luckily, the costs of financing can be controlled by working with a hard money lender who shares your goals and who has a strong track record of investing in the area. For instance, Walnut Street Finance offers hard money loans for 20% down, and has the same rates across all loan products. Careful selection of financial partners is the easiest way to minimize what can often be the deal breaker on an investment.
When it comes to investing in a fix and flip, it’s easy to overlook some of the associated costs. But working together with a smart and qualified financial partner will set you up for success, help you build a smart budget, and give you an accurate idea of your final profit margin.
If you want to dive even deeper into fix and flip costs and more, check out our can't-miss reading list.