How Much Should You Be Spending on Real Estate Flips?

Flipping a house can be a great way to make money in the real estate market. But first, you’ll need to consider the upfront costs. Experts will tell you to set a budget for real estate house flipping. Before you can do this, though, you need to understand the different costs involved and their implications on a successful flip.

So, how do you set a budget to fund your real estate flip? Here’s a general breakdown to guide your investment.

Follow the 70% Rule

In real estate, the 70% rule is a guideline that states that an investor should pay no more than 70% of a property’s After Repair Value (ARV) minus the cost of repairs. Experienced real estate investors use this rule of thumb to determine whether or not a fix-and-flip investment is worth pursuing.

For example, let’s say you find a property that you believe will be worth $100,000 after you complete all the necessary repairs. Using the 70% rule, you would calculate the maximum amount you should pay for the property as follows:

70% of $100,000 = $70,000

$70,000 - $20,000 (estimated repair costs) = $50,000

This means that you would not pay more than $50,000 for this particular property. (Of course, less than $50,000 would be ideal.)

Calculating the Cost of Repairs

Aside from the purchase price of the home, successful real estate flippers will need to estimate how much it will cost to repair or upgrade the home and turn a profit. This can be a tricky process since it involves so many factors, but it does get easier with practice.

The first step is to assess the condition of the property. Make a list of all the necessary repairs, both big and small. Once you have an idea of what needs to be done, start researching the cost of materials and labor. Also, factor in any potential unforeseen costs that could pop up during the repair process, such as a repair being more extensive than meets the eye.

In some cases, you may not be able to upgrade or repair everything. For example, if the countertops aren’t your preferred aesthetic but are still in good shape, you might want to skip that upgrade to free up some space in the budget.

You’ll want to budget for the most pressing upgrades first. A leaking roof, running toilet, or faulty appliances can’t be neglected.

Once you have a good estimate of the total cost of repairs, you can start factoring in your own budget and profit margins. This will help you determine whether or not flipping the property is a viable option.

Beyond the Flip: Real Estate Closing Costs

Both buyers and sellers pay closing costs in a real estate transaction. Typically, these costs range from 2%-5% of the home’s final selling price. So, on a $100,000 home, you could be looking at $2,000 to $5,000 in fees.

These fees can add up, especially if you're taking out a loan. Some of the most common closing costs include the loan origination fee, appraisal fee, and title insurance.

You can negotiate with the seller to have them pay some or all of your closing costs. If you're flipping a house, you might also be able to negotiate with the lender to have them cover some of the closing costs. Or, if you’re paying cash, you may be able to avoid some of these costs altogether.

Don’t Forget Carrying Costs

Holding onto a property while flipping it can also rack up some expenses. For example, you’ll need to pay property taxes, homeowners insurance, mortgage payments, and utilities.

To avoid carrying costs eating into your profits, make sure to factor them into your initial budget. Estimate high and put some money aside each month to cover those costs.

Final Cost Summary

Flipping a home can get expensive if you’re not prepared for all the costs involved. One way to move forward with confidence on your first flip is to get the guidance of a house flipping coach. At Hamptons Flips, we help you vet properties, estimate costs, and turn your flips into passive revenue to avoid some of the classic mistakes most home flippers make. Contact us today to learn more!