Home flipping is a jigsaw puzzle of costs, which is why it’s so difficult for first time home flippers to gauge
overall costs and expected profit. The biggest cost outright is cost of the house itself, and for this reason it’s extremely important to know ahead of time how much you should spend on the house.
For a rough calculation to see if a property might be a good fit, start by estimating the after repair value (ARV) of the house by comparing it to similar properties that have sold in the past 90 days in the area. Take 70% of this value and then deduct your estimated repair costs. This will theoretically give you a profit margin of 30%, and provide a substantial buffer in case things don’t go quite as planned and you find yourself spending more on repairs than you had planned. In other words, you should not spend more than 70% of the home’s ARV in cost and repairs.
Other costs associated with house flipping include repair costs, carrying costs, and the cost of actually selling the home. Repair costs should be calculated as accurately as possible prior to purchasing the house, preferably with the help of professionals like home inspectors and contractors. Try to build up a good rapport with tradesmen and contractors as you move into the house flipping business – a good working relationship can make a huge impact on your bottom line. Carrying costs, on the other hand, refer to the costs of owning the house for a certain time period. Carrying costs include insurance, taxes, and utilities, and can vary wildly depending on the location of the house. Finally, there are the costs of listing and selling a home. These costs include realtor fees, escrow fees, closing costs, and other expenses associated with selling a house.
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