Costs to consider when deciding on the right fix and flip loan size.
If you’re thinking about starting a home flipping project, few things are more important than seeking the right loan from the right lender. Unlike a normal mortgaged house purchase, a fix and flip project requires you to cover the cost of the house as well as the cost of the renovations needed to ensure a profitable sell. Running out of money in the middle of a flip is disastrous, and taking out a loan that is far too large can put you in an uncomfortable financial position.
Purchase Cost of the House
In most flipping projects, the largest cost contributor is the price of the house itself. Even if you’re buying a run down property at bargain basement prices, homes are tens to hundreds of thousands of dollars each and the land itself has its own value. There are also costs inherent to the home buying process. No matter how you conduct the sale, there will still be closing costs and lawyer fees. If you use a real estate agent, they’ll need their cut as well.
Remember, you will also need to have at least 20% of the home’s sale price ready as a down payment out of pocket. Your loan cannot cover this portion of the cost of the house. But it should be calculated to cover everything else.
Make sure to calculate for:
- Final Price of the House
- Closing Costs
- Lawyer Fees
- Realtor Fees
- Property Tax
Cost of Renovation Materials
The next major cost to consider in your loan amount is the cost of materials you will use. At its core, flipping involves installing new materials and features onto an old house, renewing it’s modernity, comfort level, and functional life span. Flippers often rebuild cabinetry, replace whole rooms of flooring, repaint the walls, rebuild decks and porches, and sometimes completely remodel the interior of homes they flip.
The loan you get absolutely must cover the cost of your supplies. Running out of money can stop a renovation project in its tracks, delaying and even diminishing your future profits. Make sure you have a very clear idea of the entire cost of supplies before you decide how big a loan you need. Planning ahead for what you want the finished property to look like will save you time and reduce uncertainty when making those material purchases.
Cost of Contractor Services
Home flippers come from all backgrounds and skill levels, but very few people have 100% of the skills it takes to rebuild a wrecked house. Flipping often involves hiring a contractor, inspector, or repair service to handle what you are not skilled at or certified in. You may need a professional plumber to update old pipes or do a deep in-wall repair. And any electrical work should be inspected by a licensed electrician before selling.
The help of contractors, repair technicians, and inspectors comes with service costs. If there is any part of the flip that will require professional help, calculate the cost of those services into your total loan amount along with the renovation material costs.
Cost of Owning the Flip
There are cost associated with owning the new property such as the mortgage, taxes and insurance but you should also take into account paying the power, water, and garbage utilities into your overall budget whether or not you live in the home during the renovation. This will also generally cover much of the cost of living for flippers who choose to live in their flips and dedicate a full-time effort to renovation work.
Finally, don’t forget to leave a few thousand dollars available for emergency situations. Burst pipes, hidden problems, and storm damage are just a few of the ways that the cost of a flip project can suddenly increase. You may also have underestimated the cost of time, materials, or even yet-unnamed shipping fees that will become a necessary additional expense. Always give yourself an emergency cushion in your flip budget when calculating for the loan amount.
Knowing how big of a loan to ask for from your lender is an important part of planning your flip. Ideally, you want to be able to control the purchase price, renovation budget and selling cost but also give yourself a reasonable emergency cushion. But even if you do have last-minute expenses that go over budget, the right lender can help you with loan extensions or short-term additional loans to finish the project and sell your flip.
For more information about planning your fix and flip project or to discuss financing options for your residential investment, contact us today. Center Street Lending offers free, no obligation quotes to help you make the best decisions for your investments.