Two of the most popular questions I get are “How much money can I make flipping houses?” and “How much money do you need to flip a house?” Both are fair questions to ask and deserve thorough answers to help give you the whole picture when it comes to real estate investing. So let’s start with how much it will cost because I feel the answer to that determines how much you can make.
The amount of money you’ll need depends on what your initial costs will be along with rehab, overhead, and carrying costs. In addition, you’ll need to consider where your financing will come from as this can have additional fees and risks. Typically, you should expect to spend around 10% of the purchase price to fix & flip a property.
There is so much more nuance to it, though. So let’s talk about all of the costs you’ll need to consider, plus the hidden costs that can destroy your finances. I’ll also show you a few ways to get the financing you need and another way you can break into real estate investing without getting any loans at all.
There are few standards when it comes to the costs of a fix & flip because every property is different. However, there are a few costs that nearly every investment property will have:
Also known as the “acquisition cost,” this includes how much money you spent on buying the home or getting the mortgage, plus the closing costs. Basically, whatever was due when you signed the final contract is what’s included in this cost.
Your rehab costs will not only be the building materials and labor but also include things that add to the quality of life for the new homeowner. Some investors will consider only things like construction costs or structural repairs in this. Still, it’s best you also add things like appliances, cosmetic repairs, smart home upgrades, and other “niceties.”
Marketing is an essential piece of any business, and real estate investing is no different. While you may have a captive audience in a seller’s market, that doesn’t mean you can skimp on marketing. This includes real estate agent commissions if you use one or whatever is used in place of an agent. Consider things like listing fees, “for sale” signs, open houses, and the cost of your time.
It can get overwhelming for many real estate investors to figure out just what would be a “good” amount of money to invest in a fix & flip because there are just so many potential costs. The best strategy I’ve found works like this:
Sticking to around 10% of the total purchase price seems to be the average amount successful investors shoot for. 10% hits that sweet spot between spending enough to improve the property without losing your shirt to budget creep.
If that number isn’t something feasible for your budget, we recommend padding your projected costs with another $5,000 to handle whatever unexpected things come up during the rehab.
You’re probably already aware of the things that should be in your budget, like rehab costs, agent commissions, etc., so I want to give you a few additional items that many investors forget about.
First thing first: Do not be conservative with your rehab cost estimates. Underestimating the number of repairs and the price you’ll pay to have them done can tank an investment all too quickly. It’s better to overestimate and come out ahead than underestimate and have to hold onto the property longer or lower your asking price.
Okay, here are the rest. These costs will come up while you’re holding the property and are known as “carrying costs.” While they are temporary, they’re also non-negotiable for including in your budget:
This next set isn’t property-specific but should still need to be accounted for in every investment:
If this is all getting too complicated, there’s another method some investors will use as a guideline for how much you should expect to spend on a house flip.
Known as the “70% Rule,” this is a calculation that says an investor should shoot for 70% of the ARV of a home. ARV, or After Repaired Value, estimates how much the house can be sold for once repairs are completed.
So say you’ve found a house that will have an ARV of $150,000. After going through the home with your two general contractors, you feel the property needs $30,000 repairs. Here comes the math:
70% of $150,000 is $105,000. Subtract that $30k, and you’re left with $75,000, so $75k is the number you should shoot for when making an offer on the home. On paper, that looks like a great deal where you’ll double your initial investment ($75,000 x2 = $150k), but this doesn’t account for the rehab costs.
The 70% rule is not a method I recommend because it glosses over a lot of the factors that go into what it costs to flip a house. Nonetheless, it’s better than nothing and can be a good benchmark to use when you’re dealing with homes that just need cosmetic updates and not a lot of actual repair.
Hopefully, you’re still with me and haven’t given up entirely. There are many moving parts when it comes to creating a fix & flip budget, so I understand if you’re starting to feel frustrated. Let’s talk about what to do when the cost projections have you coming up short.
Luckily, there’s an entire industry built for helping real estate investors get the money they need to flip a property successfully. Once you’re more familiar with the industry, you’ll be able to use these resources to your advantage. You might even be able to have your costs entirely covered by one of these sources!
These aren’t the only ways, so check out our article that lists 16 Ways to Get 100% Financing for even more ideas.
The profitability of a fix & flip varies for each property. To estimate your ROI, you’ll need to consider your total costs, how long you’ll have to hold the property before selling, and what data the comps you’ve found have told you.
Overall, you should shoot for an ROI of 10% – 20% when flipping a house. Where you land on that spectrum will depend on the costs mentioned above, plus how hot the market is and how well you do during negotiations.
Whether it’s gap financing or a mortgage, getting financing typically comes with some strict credit and employment history requirements that can leave many investors out in the cold. The exceptions to this are hard money lenders and collateral-based loans like payday or title loans. However, hard money lenders are not remotely in the same category as those predatory lenders.
But that doesn’t mean getting a hard money loan is without risk, and some investors prefer to avoid it altogether. So does that mean you can’t become a real estate investor if you’re not either independently wealthy or willing to use third-party financing? Nope!
Wholesaling is a fantastic way to invest in real estate without the additional financing requirements that come along with a fix & flip. Wholesaling involves you becoming the middleman between the seller and final buyer. When you become a wholesaler, you find properties that are for sale and get them under contract.
Once the property is under contract, you sell that contract off to another buyer at a marked-up price. If you do wholesaling correctly, the only costs you would be responsible for are earnest money and possibly the down payment, though this is rare. Regardless, these upfront costs are paid off with the sale of the contract to the final buyer.
The new buyer may be a person interested in using the house for their personal residence, but more often, you’ll be dealing with other real estate investors. In my experience, “retail” buyers get a little concerned about buying a contract from someone other than the seller if they’re not familiar with how the process works. However, real estate investors are eager to work with wholesalers because the hard work is done for them.
Wholesaling is excellent for new investors who don’t have much money to play around with or investors who could be denied mortgages due to their credit reports, employment history, or previous criminal records.
There are a lot of moving parts when it comes to estimating costs for a fix & flip. Don’t feel bad if it makes your head spin; if it were easy, then everyone would be an investor. Take your investing journey one step at a time and build slowly. Use the tips above to help ensure you’re on the right path when it comes to understanding the hidden costs of real estate investing. The more detailed your projections are, the more likely you are to be successful.
Learn how to make money flipping real estate with us by attending our next webinar.