When it comes to house flipping, most people can figure out the basic costs when it comes to purchase price and rehab. But, is that really all there is to determine your budget for a fix and flip project? The short answer is no – but the longer answer might include some relevant information for you if you’re a new or upcoming real estate investor. Whether you’re funding the deal with a hard money loan or using your own cash, there are other costs you might want to take into consideration when determining your ROI on your next project.
The Basics: Purchase & Construction Budget
Naturally, in order to begin work on a property, you’re going to need to buy it first. This is pretty simple to figure out – just take a look at listings and figure out what’s in your price range. If you’re buying in cash up front, you may be able to negotiate a lower purchase price with the seller. If you’re purchasing via property auction or a tax lien sale, you’re likely to get a good deal, but your purchase price may be variable and more difficult to predict. Make sure you have a maximum number in mind that you’re not willing to go above in any of these cases.
After that, you need to take a very careful look at the property’s structural integrity and overall cosmetic appearance. Structural improvements can be costly (a new roof, or repairing a foundation), so it’s important to know before even purchasing a property what kind of work will be required to get it in great shape. After that, you’ll want to figure out what all of your cosmetic upgrades (kitchens and bathrooms especially) are going to cost. These details form the basic outline for your project, and will be the bulk of the associated costs.
Don’t Forget Taxes, Utilities & Insurance!
Insurance is an absolute must when you’re flipping a home – and if you’re financing the project, you’ll definitely be required to keep valid insurance throughout the length of the project. After all, the collateral for your loan will be the property itself, so if something were to happen to the property, both you and your lender will be very unhappy if you weren’t carrying insurance.
Whether you’re conducting the rehab yourself or hiring an outside general contractor, you’re probably going to need access to running water and electricity during construction. Make sure you’re taking into account how much it’s going to cost to pay these bills for the duration of the project.
Lastly – don’t forget about taxes! Once you sell the property, you’ll have to give a cut of the proceeds to the government. You won’t want to forget this calculation when figuring your ROI.
Calculate Interest if You’re Financing
If all of your funds are coming straight from your own pocket, you can ignore this section. But if you’re financing the project through a hard money lender, or even a traditional bank, you will have to pay interest on your loans. Private lenders typically offer interest-only payments throughout the course of a project, and recover the principle when the property is sold. Make sure you fully understand the terms of any loans before signing a term sheet – trustworthy financiers will be sure to take the time to answer any questions you may have prior to closing a deal, so don’t be shy if you’re confused. You’ll want concrete answers when you put your ROI calculation together.
Other Variable Costs to Consider
After your project is complete, you’re going to have to sell the house. At the very least, you’ll need to list the house on real estate websites like Zillow and Redfin. But, oftentimes, that’s not enough – you may need to hire a staging company, real estate agent, or even invest in digital marketing channels in order to complete a sale. If you’re putting a “For Sale” sign out front, you want to be sure to include that cost in your budget as well.
Beyond that, there should always be a contingency plan in case anything goes wrong with your project. Your best bet as an investor will be to always lean on the conservative side with your ARV estimates and overall project ROIs. It’s definitely better to pleasantly surprise yourself with a larger-than-expected profit than it is to think you’re hitting the jackpot, only to come up breaking even.
Have a Project in Mind Right Now?
If you’re trying to figure out your costs and projected ROI for a project you’re considering, the expert loan origination team here at Pimlico Capital can help! Simply fill out our online rate calculator (which will also give you financing terms that you pre-qualify for) and a member of our team will get in touch with you. Alternatively, you can give us a call at 410-855-4600 and we’ll be happy to have a conversation with you about your project.