W
hen flipping
properties, you also
need to consider
repair costs, holding costs, real
estate commissions, closing
costs, estimated profit, and lost
opportunity costs. Let’s analyze
each of these costs separately.
Repair costs. The repair costs
will likely be your largest cost,
so you need to calculate them
carefully. If you’re able to
inspect the interior, you’ll be
able to estimate the repairs and
renovations needed to make the
house salable. However, if you
aren't able to inspect the interior,
use 10% of the purchase price as
your estimate of repair costs. In
the alternative, multiply the
square footage of the house by
$7.00. For example, if the
property has 1,500 square feet,
the estimated repair cost would
be $10,500.
Holding costs. It’s going to take
you approximately 24 months
to repair, market, and sell the
property. During those months,
you’ll incur holding costs (i.e.
mortgage payments, taxes,
insurance, and utilities).
Neophyte flippers frequently
forget to include these costs in
their budgets. If you’re worried
about these costs, you can
significantly reduce them by
living in the house during this
period, which is exactly what
many flippers do when they are
just starting out. Instead of
chalking up your monthly
expenses as holding costs,
simply consider it rent. Another
way to trim your holding costs is
to price the house correctly the
first time. By offering the best
home in its class at the best
price, you’ll sell the home faster
and lower your holding costs to
more than cover the cost of
selling the home for a little less.
Real estate commissions. You
can assume you'll pay a 6%
commission to your real estate
agent for selling the house when
you flip it. For that money, the
agent will market your property
for sale, list it in the Multiple
Listing Service and related
websites, advertise in local
newspapers, receive and submit
offers, negotiate with the buyer,
and assist you with the timely
close of escrow.
Closing costs. You will incur
closing costs when it comes time
to sell the property. These costs
include escrow fees, title
insurance, transfer tax, recording
fees, and other miscellaneous
charges. For a rough estimate of
closing costs, figure 2% of the
anticipated selling price.
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“Every
investment you
make has an
opportunity cost.
With respect to
flipping, lost
opportunity cost
boils down to
making choices
between various
deals.”