More often than not, inexperienced investors find themselves getting into trouble with inaccurate cost estimates. It is a common misconception that your net profits are the product of numbers directly associated with the house. Your profits are impacted by more than just acquisition costs, rehab costs and the sales price. There are several costs that go into flipping a home that many may be unaware of. Unfortunately, these costs may make more deals look unattractive. Before you get started with any deal, you need to know exactly what you are getting into and you need to know all of the real numbers you are working with.
Financing costs, while important, are often overlooked by impatient investors. However, those who pay cash for their deal or secure lender financing may not be as aware of additional costs. They are still paying monthly interest rates on a mortgage and have simultaneously tied up their funds for the foreseeable future. If you secured private money financing, costs will burden your bottom line until you sell the property. Chances are you are paying an interest rate anywhere between 10-15 percent. If it takes you six months from acquisition to sale, you are looking between $6000-$8000 in interest payments alone. These rates will ultimately cut away at your bottom line, leaving you with less money in your pocket.
Aside from financing, rehab costs constitute a large portion of the money you spend on flipping a home. Rehabbers must account for every dime spent between labor and materials. Due to the nature and scope of an average project, it is best to leave these estimates to a professional. Out of date costs and time-frames can account for an estimate that is 10 to 20 percent off. Unfortunately, inaccuracy can lead to cutting corners, essentially lowering the value of your home.
Despite the relationship you share with your realtor, they will still require a commission. Even investors that are best friends with an agent should dedicate 2% of the sale price to their realtor. Their commission is deducted from your profits at the closing as well. You may consider selling the property yourself, but doing that will not only eat away at your time, but prevent you from receiving top-dollar for your efforts.
Carrying costs are perhaps the most forgotten costs associated with a rehab. They are a necessary and sometimes expensive factor in your bottom line. Carrying costs include: property taxes, insurance and utilities. You need to keep the lights and heat on while people are working on your property. The same applies to the insurance and taxes. While necessary, many forget about these costs.
Between finance costs, commissions, taxes, insurance and underestimates in rehab work, you are looking at thousands of dollars in potential lost profits. If properly accounted for before you make an offer, it will affect the price and ultimately your bottom line. Before you make any offers, make sure you understand these costs. Discuss everything with anyone involved to gain a better understanding.