The True Cost of Financing a Fix and Flip Venture

If you’ve ever spent too much time watching HGTV or the DIY Network, you might start thinking about flipping a house. But before you get in too deep and sign on the dotted line to buy property, you should know the true cost of financing your fix-and-flip project. The real estate market isn’t as simple as it seems.

Costs of Flipping Property

The home improvement reality tv stars make flipping houses look like an easy job. Just buy something with good bones, create an open-concept kitchen, and stick to a neutral color palette. Once you have your redesign in place and sell it for thousands of dollars of profit, you walk away way richer. Unfortunately, fix-and-flips are not as easy as these shows suggest.

Here are some notes on costs that you should be aware of:

1- It takes more money to buy property and flip it than to buy a home you’re planning to live in.

Why? Because you need money not only to own the home, but you also need money for the renovation, property taxes, utilities, and homeowners’ insurance.

2- Capital gains taxes will cut into any profits you make on your flip.

Capital gains tax rates, which range from 10% to 37%, and depend on what federal income tax bracket you fall into, will affect how much money you walk away with.

3- Lenders are going to charge more for a flip.

Lenders view flips as risky enterprises and will charge you more if they decide to lend to you. In addition, lots of financial institutions won’t approve a loan to beginner flippers. However, you’re in good shape if you’re more experienced.

Using Hard Money Loans for Flips

A hard money loan is a type of financing where the borrower’s collateral is the property he or she is financing. You’ll want to find a local lender for the best terms. For example, if you’re in So-Cal, choose Los Angeles hard money lenders to get the most ideal terms.

In most cases, hard money loans are typically for less than a year with interest rates between 12% and 18%, plus points. In a hard money loan, a point is equal to 1% of the loan amount. So, when you get a hard money loan, you’ll borrow the principal amount plus whatever amount of points the lender charges. Typically, you’ll be responsible for between two and five points, but you won’t have to pay those points until the home sells.

Upsides of Hard Money Loans

With hard money loans, you can get approved for financing for property despite the property being in disrepair and deteriorating. In fact, lenders expect the home or property to be in rough shape. There’s less bureaucratic regulations to deal with.

Hard money lenders make the decision whether or not to lend based on the reliability of the flipper and the difference between the repair costs and the resale value.

In most cases, hard money lenders aren’t as concerned about traditional indicators of creditworthiness like credit scores and debt-to-income ratios.

Tips for Your First Flip

1- Have a Strict Budget:

Keep your renovation realistic, especially if it’s your first rodeo. Make sure you understand how to create accurate estimates for what it’s going to cost you to repair a property and weigh that against the potential resale value.

2- Stick to a Plan:

Don’t make upgrades on the fly when you’re in the middle of a renovation – that’s the fastest way to destroy your timeline and lose out on profits.

3- Consult with Professionals:

If it’s your first flip, consider splitting your profits with a more experienced home renovator so you can learn valuable tricks of the trade.

4- Be Ready for Anything:

As the saying goes, “Even the best laid plans…” Expect the unexpected and make sure that you have some flexibility in your budget for things going wrong like a burst pipe or plumbing that isn’t to code.

Takeaways

Before you pick up the hammer and begin a renovation project, it’s important to have some knowledge and a good plan about the kinds of costs you’re going to be dealing with. At the very least, it’s crucial to establish a financing plan, stick to a strict renovation strategy, and sell the property as soon as possible to maintain a good profit margin.