The Hidden Costs of Fix and Flips
Entrepreneurs are increasingly realizing the power of purchasing investment properties, and learning just how lucrative real estate can be. From commercial real estate ventures to residential real estate business opportunities, the industry is rife with potential profit. One area in the real estate sector that continues to pick up steam are fix and flips. If you’re considering purchasing a home below market value, fixing it up, and selling it for a profit, consider these hidden costs before putting money down on that investment.
Interest on Loans
Traditional lenders won’t generally loan to borrowers looking to fix and flip a home. Many hopeful flippers approach private lenders for their necessary funds, securing fix and flip loans. These loans are convenient, often with approval processes occurring within weeks of applying. Hard money can be a fantastic route for home flippers just starting out, as generally the property is used as collateral, meaning your credit score and past business ventures don’t play as heavily into the loan approval process. However, you’ll pay for this convenience. Private loans are generally short-term and come with higher interest rates than other loan options. In any financing option, the longer you own the property, the more you’ll pay in financing costs, but this is especially true for hard money loans. The smoother your flip goes, the faster it’s finished. The sooner it’s finished, the quicker you can get it sold and pay back what you borrowed from your investor.
You’ll often need to employ the help of an experienced real estate agent to help you source the right place, and you’ll definitely need their guidance when it comes to putting your flip on the market. You’ll generally have to pay a realtor’s commission, which usually falls around 5 to 6 percent of the income made from the purchase of the property, but keep in mind that this number can be negotiable. Forgoing the assistance of a real estate agent can save you this fee, but you’ll lose out on the advantages professionals can provide. Generally, a good real estate agent will help sell a property faster, which means less interest paid on loans, and fewer carrying costs.
You’ll pay attorney’s fees when it comes time to purchase the property, and when selling it after your renovations. Attorney fees may run up to the thousands during purchase proceedings. Selling the property generally rings up in the hundreds, as you’ll need deed preparation.
If you are doing flips in your personal name, you’ll generally only receive a basic home owner’s policy, which usually covers fire, and not much else. Renovating a home provides a great deal of risk, and it’s important to have as much coverage as possible if you’ll have contractors working in the home. Consider commercial policies designed for homes undergoing renovations. If you have an LLC, take out the insurance through that instead of your personal name for ultimate protection. Insurance companies can be hesitant to insure flipping investments, so give yourself plenty of time to purchase your business structure insurance policy should you choose to file under an LLC.
Once you own your investment property, you’ll be charged with day-to-day upkeep, repairs, and maintenance costs, plus the general financial obligations including mortgage payments, taxes, and insurance costs. You’ll be paying for utilities, property taxes, yard maintenance, and any other necessary tasks specific to the home in question, just like you would with your personal residence.
Renovation creates heaps of trash and rubbish. If you plan on flipping a home, take some time to consider your dumpster needs. Unless you want to drive back and forth to the city dump, you’ll want to rent at least a small dumpster to rid the property of all that’s left in it after purchase and take out any scraps due to demolition. Dumpster rentals can range in the thousands, so it’s important to know exactly how much you’ll need to dispose of and base your choice on the right size for your flip project.
Flipping homes isn’t always the simple get rich quick scheme many people assume it is. Keep these hidden costs in mind if you’re considering a foray into this sector of the real estate industry.