Just getting into house flipping and feeling a tad lost? That’s a normal reaction since this industry is more complex than TV shows make it seem.
From afar, this venture appears to be picture-perfect: buy a property at a bargain price, make repairs, and then sell it for a whopping profit. And that can be true, but only if you’re fully aware of the costs involved and the variables influencing them.
How much does it cost to flip a house then? That’s what we’re about to discuss while also sharing industry secrets on how you can save money along the way.
How Does House Flipping Work?
Flipping houses is a type of real estate investment where people purchase a property with the intention of reselling it for a profit.
The flipping motto is “buy low, sell high,” so you’ll find that most houses investors target are those in poor condition or undervalued. Then, with the help of experts, they make the necessary repairs and improvements so they can sell it fast and earn revenue from it.
How Much Does It Cost to Flip a House
It’s impossible to give you a specific cost for flipping houses because it depends on multiple factors. However, you should generally expect to pay around 10% of the property’s purchase price for renovations.
To give you a sense of scale, the flip can cost you as little as $18,000 or as much as $79,000, possibly even more in certain cases.
Factors Influencing the Cost of House Flipping
Here are the three key aspects that can determine how much a house-flipping project will cost:
1. House Age and Condition
A house that’s run-down, old, or worn out will usually fetch a tempting price for flippers. If you accept such an offer without considering the age and condition of the property, the odds won’t be in your favor.
Renovating old houses will require more professional labor, and if they were constructed with toxins like lead and asbestos, the labor cost would rise dramatically. The same goes for a house in poor condition that needs extensive repairs to the foundation, roofing, or other vital structures.
2. Geographical Area
Where you choose to flip a house will play a major role in predicting the potential costs and return on investment (ROI).
For instance, selecting a property in densely populated areas such as New York and Houston will automatically raise your flipping expense by nearly half.
One of the best house-flipping tips you’ll ever hear is constantly reviewing lists created by credible sources rating the profitability of this business in each state. Currently, most states with the highest ROI in house flipping are in the South, with Louisiana leading the way, followed by Michigan and Alabama.
3. Property Type
A homeowner association is a group that governs certain communities, usually in planned developments. If you’re looking at property types like condos or townhouses, then they’re most probably governed by this entity.
If the property type you want to flip is subject to HOA (Homeowners Association) regulations, then your renovations need to follow all their strict rules, which may put you over budget.
You’ll also have to pay HOA fees, which vary by state, with the highest being $600 in New York and the lowest being $100 in Wyoming.
What Are the Costs Associated With Flipping a House?
As you start creating your house-flipping business plan, you’ll find that most of its groundwork lies in determining the costs. While the list of expenses may seem endless, here are the major ones that’ll directly impact your profit.
1. Acquisition Expenses
The largest sum you’d have to pay is the property’s purchase price. But it doesn’t stop there; the costs of acquiring a house go far beyond that.
For example, there are pre-purchase expenses, such as appraisals and property survey fees that can range between $300 and $500. Both services are crucial as they’ll help you identify all the flaws and defects in the property before buying it.
When it’s time to finalize the deal, you’ll be faced with closing costs, which can range from 2% to 6% of the house’s sale price.
Closing costs include all the nitty-gritty expenses of transferring property, such as legal fees, property taxes, real estate agent commissions, title-related fees, and property insurance.
2. Hiring Professionals
Remember, you want to fix and sell the house as soon as possible so you don’t end up paying a fortune in ongoing or carrying costs, like monthly property taxes and utility bills. That’s why you’ll need to hire professionals to ensure the job gets done effectively and on time.
Labor costs for renovating a house in the U.S. range between $20 and $150/hr. Of course, the kind of experts you’ll need to hire will vary depending on the house’s condition. Yet, almost all renovations call for certain professions:
- General Contractor: 10-20% of the project’s total construction costs
- Interior Designer: $100-$500/hr
- Carpenter: $30-$200/hr
- Electrician: $50-$150/hr
- Painter: $20-$50/hr
3. Building and Cosmetic Materials
As you put together your house-flipping budget, don’t overlook the cost of building materials and cosmetic finishes. One of the common mistakes house flippers make is not factoring in these expenses, thinking they’ll be light on the pocket. That’s far from the case.
The total rehab costs will primarily depend on the extent of repairs a house needs. Some require extensive repairs to critical structural components, setting you back a pretty penny. Let’s say you need to replace the roof; on average, that’ll run you $9,117.
Whereas, for a house that only needs cosmetic repairs, you’d pay much less for materials. These repairs include any task performed to enhance the aesthetics of a house, like refinishing the floors, replacing light fixtures, repainting the walls, etc.
4. Appliances and HVAC Repair or Replacement
When it comes to appliances and HVAC in renovation, you’ll pay a hefty price, but you can choose to be economical or extravagant. It’s one of those decisions that entirely depends on your house flip goal; was it just to make it fit for living, or were you aiming for a high-end makeover?
In all cases, if you want to draw in more potential buyers, old appliances, particularly the basics, need to go. These include refrigerators, microwaves, and dishwashers.
For mid-quality appliance replacements, you should budget around $2,000 to $3,000, but if you want top-notch quality, expect to pay between $10,000 and $15,000 or more.
Now, shift your attention to the HVAC systems and see if they only require minor fixes or need to be replaced. That’ll make all the difference, as you can pay an average of $350 to repair these systems but a minimum of $6,000 to replace them.
5. Marketing and Selling Costs
Once you’ve rounded out your project and the house is ready for its new owner, you’ll need to spend some cash to put it on the market. You can pursue various marketing strategies, each with its own set of costs.
Assume you hired a real estate agent; in that case, expect to pay 5-6% of the house sale price. Although outsourcing may sound costly, in the end, it relieves you of the burden of market research, buyer acquisition, negotiating, and other tiresome duties.
If you decide to become an independent real estate agent, there are a few routes you could take to sell the house. You can start by listing it on real estate selling websites or take the for sale by owner (FSBO) approach.
Following the DIY direction, you’ll mainly spend your money on marketing costs, such as hiring a photographer to take high-resolution photos, printing signs and fliers, open house expenses, etc.
Without prior marketing experience or professional assistance, the selling process might be much slower.
What Is the 70% Rule in House Flipping?
The 70% rule is a guideline that seasoned investors use to distinguish between fruitful opportunities and lost causes. According to this rule, house flippers shouldn’t pay more than
70% of the property’s after-repair value (ARV) minus estimated repair costs.
This rule is quite helpful as it can save you a ton of time, money, and effort that would’ve been wasted on a futile project, but only when used correctly. The 70% rule works best with thorough research, not assumptions.
To guarantee accurate results, identify the expenses that your potential fixer-upper necessitates. For precise figures, we recommend delegating this task to a general contractor. Simultaneously, conduct market research or consult with a realtor to get an idea of the property’s ARV.
Tips for Reducing House Flipping Costs
House flipping has become slightly less profitable over the years. For reference, it had an average ROI of 51.4%, which dropped to half by 2022.
Because of this, it’s critical you arm yourself with effective money-saving tips and tricks for this business. Here are a few to get you started:
- Don’t change the windows or floor plan unless absolutely necessary; both processes are costly.
- Opt for discounted appliances or high-end ones that have been slightly used, as that’ll drastically reduce their price.
- When replacing flooring, choose synthetic materials like vinyl and laminate that mimic expensive natural materials such as wood and stone at a fraction of the cost.
- Reglaze bathroom tubs and tiles rather than replacing them; it’ll cost you approximately 75% less.
- Refinish kitchen cabinets instead of swapping them, or at least change only the front panels.
Wrapping Up
Well-planned flips can generate a significant amount of money in a relatively short period. Just be extra cautious when reviewing the project’s costs, or else it can quickly turn into your finances’ worst nightmare.
Stick to the 70% rule when selecting a property, and don’t hesitate to reach out to industry professionals when needed.
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