How much does it cost to flip a house?
House flipping has gained momentum in the past decade and it doesn’t seem to be slowing down anytime soon. Not only is there a shortage of homes but there are also 64 million plus US homes built prior to 1990. Most of these older homes will eventually require updates and repairs. Of course, the homeowner could make these repairs themselves, but many owners find that to be a daunting and expensive task. That’s where house flippers come in.
House flippers come in all shapes and sizes. Some do 1-2 flips per year as a side hustle and others have built a house flipping empire and flip 100+ houses per year. At 30-50k average profit per flip, this can be a very lucrative business. So, where do you find these houses to flip and how much does it cost to flip a house?
Typically, the best deals come from off-market leads. There is less competition for these deals (vs. the MLS) and often times the sellers are motivated. Find a local wholesaler in your market who is selling off-market deals. You can also do your own marketing and generate off-market leads. This requires a marketing budget and/or hard work, but can really pay off and gives you the option to wholesale the deal or flip the house.
If you choose to flip the house, you’ll need to decide if you’ll be making the repairs yourself or hiring contractors. If you are contractor or handyman, you can certainly do some (or all) of the work yourself. Remember, this takes time and time is money. If you are doing this as a hobby and enjoy doing the work, go for it. If you are doing this strictly as a business and have hopes to someday scale the business, I would strongly recommend outsourcing the rehab. How valuable is your time?
The cost to flip a house is determined by adding up all of the repairs, holding costs and closing costs and then subtracting that from the After Repair Value (ARV). A simple formula commonly used to determine what you should pay for a potential flip house is: ARV * .70 – Repairs = Purchase Price. The multiplier .70 factors in your holding costs, closing costs and desired profit. In case you are wondering, holding costs are fees associated borrowing hard money and closing costs are costs associated with selling the flip house when it’s ready. Here is an example.
Let’s say you are looking at a house that could be worth $200,000 after its fixed up. In other words, the nicest and most updated houses in the neighborhood (similar in size) are selling for $200,000. After bringing your contractor through, he determines the house needs new flooring throughout, new countertops and appliances in the kitchen, interior and exterior paint, new bathroom fixtures and flooring, updated electrical, and new windows. You get a quote for $30,000 to make these repairs. Let’s plug that into the formula.
$200,000 (ARV) * .70 = $140,000 – $30,000 (repairs) = $110,000 Purchase Price
If you buy the house for $110,000 and make $30,000 in repairs you can expect to make $40,000-45,000 in profit (assuming you have 15-20k in holding costs and closing costs). If you have your own cash you won’t have any holding costs and can either pay more for the house or make more money on this deal.
Determining repair costs takes practice. At first, you should take detailed notes of each area of the house that needs repair. Itemize each repair and add up the total cost. Once you have more experience, you can estimate repair costs as a whole. Here is a general rule of thumb based (houses less than 2,000 sq ft):
Light rehab (10-15k)
Some flooring, paint, replace some bathroom fixtures, new lighting, some patching, drywall work, minor kitchen improvements
Moderate rehab (25-30k)
Somem fllooring, paint, replace most bathroom fixtures such as tub, toilet, vanity. New lighting, some drywall work, some electric or plumbing work, new kitchen appliances, counter tops, possibly cabinets if smaller kitchen but this can be a big expense. Exterior paint, landscaping
Heavy Rehab (40-60k or more)
All flooring, paint, new everything in bathrooms, kitchen. New lighting, mostly new electrical and/or plumbing. Drywall repair, patch walls, ceilings. Exterior work such as new siding, decking, landscaping.
Eventually, you’ll be able to estimate repair costs in a matter of minutes. Just like anything, it takes lots of practice.
If you find an off-market lead that would make a decent house flip but you would rather pass on it, you can still make money! Put the deal under contract and wholesale it. Partner up and JV the deal with another wholesaler and split the profits. You can still make an easy 5-10k on that lead by doing so.
Related: How To Get Your First Wholesale Deal in 30 Days With No Money
