The Costs of Starting a Fix and Flip Business

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If everything you know about the fix and flip business comes from Joana Gaines’ “Fixer Upper,” then you may operate under the false assumption that the business is easy. You simply buy a home, fix it up, and then sell it for massive profits, right? Wrong! While this business model can generate income, it’s hard work that necessitates spending a good chunk of change in order to make money off of it. This is said not in an attempt to dissuade or discourage you but to ensure that you enter this exciting opportunity with eyes wide open.

There are several upfront costs to starting a fix and flip business. It’s essential that you know what those are.

Market Analysis and Goal Summary

Do you know the market you’re entering well? Do you have experience in real estate? Contracting? If you’re entering as a greenhorn, then there are steps you must take to prepare yourself. Hannibal and Alexander the Great didn’t just enter a battle campaign and “wing it.” They meticulously planned, staged, and sketched up a battle plan for every engagement. You’ve got to do the same. And that can cost you both time and money.

You will need to do two prep steps:

• A house flipping goal summary – A detailed outline of your business plan should include:

• Specific house flipping goals – What are they? How will you realize them?
  • Location – What area do you want to purchase and flip?
  • Property types – Do you want apartments, condos, single-family homes, etc.?
  • ROI – Your goal should be to hit 20% to 25% ROI
  • Labor – Will you do most of the work? Hire a contractor? Specialists?
  • Number of projects – Are you sticking to focusing on just one or many projects at a time?

• Market analysis – A comprehensive overview of the specific housing market you’re targeting. This marketing plan will help you determine the After Repair Value (ARV). This should include:

• Finding comparable properties
  • Real estate price trends
  • Average number of days a property is on the market prior to sale
  • Demographic data
  • Upcoming or underway developments nearby

Financing Costs

Have you thought about how you plan on paying for the various costs? Purchasing, fixing and flipping such an expensive asset isn’t cheap. How much you spend depends on the duration of the project, time to sell, and agreed upon interest rate.

Really, there are only three options at your disposal:

• Self-finance – You can draw on your savings and pay for it yourself.

• Financing – Banks and financial institutions rarely give out loans for such risky ventures. However, on primary residences or second home purchases, you can take out a bank statement mortgage for the self-employed. To qualify you must satisfy these conditions:

• Self-employed for 2 years
  • Operate in California, Hawaii, Arizona, Washington, Colorado, or Texas
  • Have a minimum credit score of 620
  • Minimum of $100,000, maximum of $5,000,000

• Private lenders – If you have nothing to invest, you can look to others to finance on your behalf. They will typically demand a decent interest rate and their cut of the profits.

Property Costs

You ready to start fixing? First, you need to actually purchase the property. As you might imagine, this will account for a solid portion of your costs. However, if you’ve preformed a thorough market analysis, you should know whether or not you’re getting a good deal on the property and have a general idea of how much you’ll be able to sell it for once the job is finished.

Renovation Costs

Another large portion of your financing expenses will be spent on the renovation. Is your property a dive? It’ll cost more to fix up. Is the property 85% of the way there? Then it may just need a face lift. If this is your first time, it’d be wise to enlist a contractor to act as your Sherpa throughout the process. This will give you a more accurate picture of estimated costs before you begin. 

Cost of Hiring the Right Team

Depending on the size and scope of the project and your previous experience, you may need to pay one or several professionals to help with the process. Hiring the right team could save you money in the long run by avoiding mistakes and making smart decisions. People you may want to consider hiring include:

• Attorney
• Accountant
• Real Estate Agent
• General contractor
• Landscaper
• Landscape Architect
• Architect
• Interior Designer
• Handyman

Getting Started

Are you prepared for the battle ahead? What we’ve discussed thus far are the main costs associated. In addition to these, there are dozens of smaller costs that you’ll encounter along the way. It’s critical that you are prepared for this eventuality, so you aren’t caught off guard with your hands in empty pockets. This is not a good way to make money for the lazy. It’s hard work. But if it’s done right, there are plenty of profits to be had.