Hidden House Flipping Costs Not to Overlook
The idea of flipping a house can be intriguing. You can imagine yourself making huge profits within a short period. In your thoughts, you just do a simple calculation.
- Purchase a house below its market value
- Revamp it
- Sell at a higher price than the combined cost of buying and renovating it
- You pocket your profits and you are rich. Sounds easy.
Now back to reality. This is usually not the case. Apart from the purchase and general repairs costs, there are many other hidden costs that you will incur before you finish the house flipping deal successfully.
As a beginner in real estate investing, knowing these costs will give you a clear picture of the returns, you are likely to make. The exact costs will guide you in your budgeting to determine whether a flip is profitable or not before even starting.
Let us explore the hidden costs that you are likely to incur in flipping a house.
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#1: Buying costs
Apart from the purchase price, there are other costs you are likely to incur. They usually range from 1% to 3% of the purchase price. They include:
This is the cost you will incur when conducting a title search to ascertain that the property you are buying has no outstanding claims.
In any real estate transaction, it is essential to have a real estate attorney on board to help you with the paperwork and guide you in all legal requirements concerning the purchase.
It is recommended to hire a professional inspector to give you information if there are any concerns about the property you might not be aware of. This might include the presence of hazardous material such as asbestos and lead.
This fee is charged by the local authorities to document all information regarding the property in their public records.
#2: Repair costs
As an investor, you might have budgeted for the general contractor’s fees, interior designer’s cost, and relevant materials for the revamping. The following are other costs you should be aware of.
This can come as an inconvenience, but chances are you will need multiple permits to do the renovation. Building, electrical, plumbing, roofing and fencing permits are some of the permits you should remember to budget for. Without these permits, you will not pass inspections.
Removing hazardous materials
Since you will be mostly dealing with distressed or abandoned houses, you might not be aware of the presence of harmful materials like lead and asbestos. This is common in old houses that were built in the 1970s.
During that time they were not aware that lead and asbestos were health hazards. You will need to get a professional to get the lead of the lead paint. For asbestos, you can do it yourself or get a professional too.
Landscaping and yard costs
The newly refurbished home should be appealing to boost its demand. This calls for a clean yard. Depending on the yard’s condition it might need landscaping to make it beautiful and attractive.
Rehabilitation involves construction work. And such sites accidents are common. Insurance will protect you in case someone gets injured. You might be tempted to overlook this cost but it’s very important.
#3: Holding costs
These are costs after you have bought a house, renovated it but you have not sold it.
This includes electricity water and heating system bills. To reduce this you should ensure you resell your finished home within a short span.
They depend on your locality tax rates.
If the property is in a neighborhood where there is a homeowners association in charge you will have to pay their monthly or annual dues.
#4: Selling costs
These are closing costs when selling the property. They can take approximately 7% -9% of the selling price. They include:
This is the cost you pay to a licensed real estate agent for your house to be listed. A realtor will help you in marketing and selling your property quickly.
These are taxes imposed by the local government on real estate transactions.
This is the tax paid on profits made after a sale. The amount you will pay depends on your government rates.
#5: Financing costs
It is unlikely to find a house flipper who uses their cash to go through the whole house flipping process. Most investors acquire funds from lenders. Some of the costs involved include:
Interest paid to private lenders
This is the fee you pay for holding a private lender’s money before paying them back. The longer it takes the higher the interest rates.
Interest paid to hard money lenders
It is one of the most costly financing options. As much as you will get the money very fast, their interest rates are very high. You must be careful to ensure these interests don’t eat up on your profits.
In the house flipping business, time management is a mandatory skill. Therefore you should strive to sell your revamped property fast to avoid additional expenses and increase your profits in return.
For your house flipping business to be a success you must keep track of all the expenses. Record keeping is very essential otherwise; you might end up getting small or no returns.
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Nick Foy, founder | Under30wealth.com
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