It’s a popular question and there are a lot of bad answers online. The reality shows lead us to believe there’s easy money to be made in flipping houses. While many people have become millionaires flipping houses, it’s not easy and the margins are not what the reality stars and mentors would suggest. We’ve analyzed our last 150 full house flips and calculated the expense percentages we have found to be typical. Keep in mind that we are professionals with established lead generation, innovative systems, and proven construction strategies. Don’t expect to match our margins and be leery of anyone who claims to beat our margins. It’s likely they aren’t counting all their costs. For example, if you are using your own capital or investing your own time in the construction, you need to count the opportunity cost of that capital and time. This model assumes you are using other people’s capital and time to flip houses.
How Much Can You Make Flipping A House?
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Let’s start at the bottom of the graphic we have created with the cost of the property. Obviously, this will vary according to the quality of your lead generation. If you are buying bank owned foreclosures off the MLS with your realtor, expect to pay far more than this percentage. This percentage cost assumes you are generating quality leads directly from motivated sellers in average locations in your market. If that’s not the case, adjust accordingly. If you are purchasing in war zones, your cost of property percentage should be less to make up for the pain, suffering, and risk. In a strong location, you’ll pay a higher percentage because sellers in good locations don’t give their houses away. Actually, no one gives houses away.
The construction costs can vary widely based on a number of variables. Our costs assume we are hiring a licensed contractor to do an extensive rehab, including roof, hvac, windows, updated kitchen/baths, flooring, paint, fixtures, some plumbing/electrical, and landscaping. If you have technical knowledge and contacts in the construction industry, you can beat these percentages. If not, aspire to match these percentages unless you are investing your own sweat equity. In that case, be sure and assign a value to your time and count your hours in your costs. Be honest with your time. If you can make $50/hour working overtime at your job, it’s actually costing you $50/hour to swing a hammer and lay tile in the evenings.
The cost of property and construction costs are the obvious costs and we refer to the sum of those two as the “All In” amount. The combination of those two costs should equal between 70-80% of your estimated after repair value of the house (ARV), or the amount you expect to sell the house for. The actual target percentage will depend on several risk variables we measure. Many people only count these “All In” costs. The reality, however, is there are other “quiet” costs that must be factored in. Quiet costs include:
- Transactional Costs of Buying and Selling
- Cost of Money
- Holding Costs
The most significant quiet costs are the transactional costs of buying and selling the property. When you purchase a property, you will need to pay a title attorney for the transaction fees and title insurance. These buying costs are consistent in our area, but can differ widely depending on your county’s recording fees. The remaining costs are on the sales end of the flip. They include real estate agent commissions and seller concessions. Concessions are typically closing costs the seller pays for the buyer. This will vary by market and demand, with the seller typically paying between 2-4% in closing costs. The real estate agent commissions also vary widely. If you flip many houses and advertise, it’s possible to sell some during construction as for sale by owner and avoid some agent commissions. In our experience, we expect to pay 8% in various combinations of buying and selling costs.
Another quiet cost is the cost of money. The cost of money can vary greatly depending on the amount you have down, your credit, your experience, and your financial health. At best, you’ll pay a low interest rate for an equity line. At worst, you’ll have to secure financing from a hard money lender who will charge “points” on the front end and a high interest rate along the way. A “point” is one percent of the loan amount. If you get a $100,000 loan and pay 5 points to a hard money lender, that’s $5,000 before paying any interest. We estimate paying 10% APR with no points for a combination of private investor capital and bank funding. We estimate the cycle time of the project to be 6 months. Four to seven months is reasonable unless you are juggling multiple projects at once. If anyone claims to do a full remodel and sell it in less than 4 months, be skeptical. Most flip houses are sold to buyers with FHA loans. FHA rules require the seller to have owned the property for 91 days before executing a sales contract. Even if you fly through the rehab, you might have to wait until day 91 to put it under contract.
The last quiet cost is the holding cost of the property. Holding costs are those costs associated with owning a property. The most significant are:
- Property Taxes
Obviously, these will vary greatly from market to market, depending largely upon property taxes.
After subtracting out all these costs from our ARV, we are left with a typical property gross margin as seen on the graphic. As you can easily understand, overpaying for a house, miscalculating construction, or overestimating the sales price can reduce the gross profit considerably.
Even if you get everything right, there are also overhead costs. Typically, the most significant overhead expense is marketing for deals. Finding inventory requires a budget, excellent strategy, and time. Remember, people don’t just give houses away. In addition to marketing, there is accounting, liability insurance, online subscriptions, and any other costs that come with operating a business.
It is certainly possible to make a good income and create wealth from flipping houses. It is, however, like any other business. You have to find inventory, add value to that inventory, and pay the costs of selling it. Unless you have established lead sources and extraordinary systems, expect to pay at least half your gross profits in overhead costs.
While flipping houses is like any other business in many regards, there are some unique advantages. Your inventory is real property so it’s possible to finance as much as 100% of your inventory. This wouldn’t be possible in most industries because inventory of shoes, food, and most other types of inventory are considered risky collateral and, therefore, difficult to finance. Investing in real estate allows you to use other people’s money to scale your inventory and business. While the gross profit percentage in different industries can vary widely , the average sale in real estate is significant. Selling one house takes less work and time than selling 150,000 hot dogs or 1,500 pairs of shoes. As a real estate entrepreneur, you also don’t have to keep a storefront open, which allows you a great deal of flexibility. Being a real estate entrepreneur can be a great life, generate income, and wealth. Just don’t expect to take home as much as the reality shows would have you believe.