Properly Analyze & Calculate Monthly Holding Costs for Fix & Flip

[Isaac Fridmann]

Hi Everyone,

I've been a licensed Realtor in FL for the last 2 years. I'm looking to expand my business by getting into fix and flips. Most of the clients I've worked with as a Realtor are investors and I've already spoken to them about partnering up and helping out with the financial aspect (Hard money loans), I can handle finding the deals and working with the GC's.

I am really excited to get started on my real estate investment project, but I am struggling with calculating the costs associated with holding the property. I have watched countless videos and read everything I can find online about this topic, but I still feel like I am missing something. Perhaps someone out there has some helpful advice or guidance that can point me in the right direction. My back is against the wall on this one, and I am feeling overwhelmed and a little bit stressed.  So please, if anyone has any tips or suggestions for making this process simpler and more effective, I would greatly appreciate it. Thanks!

[Rob Beeman]

@Isaac Fridmann  Isaac - let me first say that the replies to your post have been in my opinion - accurate. However I would throw in a figure for what I call the "oops cost". In almost every rehab you will discover items during the rehab that you might not had budgeted for. This is more common if you are buying the property without all of the utilities on (water, electric, gas, etc.) as when you turn them on - things are discovered. Or perhaps in the demo phase, items are found that were not able to be seen prior to. In some rehab budgets, investors will allow 5-10% of the total rehab, depending on the size of the rehab, to cover this (a contingency). For this transaction we will assume that the contingency is already built into the $50K rehab (as most rehab software products have a line item for it).

Using the calculations and the hypothetical numbers for purchase, rehab, carrying costs and the lender loan figure, let's look at how this transaction might play out.

Purchase price of $100,000

Rehab of $50,000

Carrying costs of $3,025

Lender fees/interest of $12,800

This totals to $165,825.  One item that wasn't mentioned, as the post was generally about carrying costs, was the cost for closing costs at the purchase of the property. Transfer fees vary depending on locality. In Philadelphia they can be 5-6% of the purchase cost (plus settlement agent fees, notary fees, title insurance cost, etc.), however in TX, I do not believe there is any transfer fee cost. Best to communicate with the settlement agent that you choose to use to get an estimate of the closing fees. I used to calculate at least 5% of the purchase price in my numbers. In this case 5% would equal $5,000. Side note - always purchase title insurance at closing (plus a lender will typically require it).

Costs on the exit (flipping the property) are normally the realtor commission (if one is used - in your case it would be you), along with what I call "bring-to-dates". Bring-to-dates are water, sewer & taxes for the time you owned the property (often the bill might not have been paid (or produced) while you owned it. Taxes were addressed in the holding cost figure already, so allowing a few dollars for water & sewer should be sufficient. Probably around $300 for the 6 month hold (unless you had a constantly running toilet). Since I am not a realtor, and typically used one to sell the property I would normally allow 7% of the sale's price (sale's price in this case is $200K) to cover the bring-to-dates & realtor commission.

With all of that said - what was earned on this deal? To this point our total costs (listed above) are $165,825. When we add $5,000 for the closing fees at purchase we total $170,825. If the seller is not a realtor and hired one to sell the property, the 7% figure to allow for bring-to-dates & realtor commission would be $14,000 ($200K sale price x 7% = $14K). Add this amount to the cost figure of $170,825 and the grand total is $184,825. The net earned after the dust clears: $200,000 sale figure - $184,825 total costs = $15,175. That figure might not seem large, but let's look at what you had into the transaction.

Total costs of $184,825

Lender loan of $140,000

Balance from you of $44,825

You recover the $44,825 and earn an additional $15,175. If the calculations are correct, that would be a return of 33.8% on the $44,825 invested in a 6 month period. If you recycled that money once more within 12 months, the return would be double that.

Please check my calculations as when I was flipping heavily I used to be able to do these calculations in my head very quickly, but I am a bit rusty now. Since you shared that you are relatively new at flipping, here are a few insights from an old head:

Never pre-pay contractors for labor (paying for supplies are OK, but not for labor).

Always allow more money than what is needed - never short change the rehab figure as this will produce a less than desired end product and ultimately affect the sale and/or the sale price. (in flipping the sale is the payday).

Pay the parties that fuel your business on time (contractors & lenders).

Women buyers focus on the bath(s), kitchen & closets. Men buyers focus on the basement, yard & garage. If you do not have enough budget to improve all of these areas, concentrate the funds on the areas that women buyers focus on (also the kitchen & baths are the areas that increase the value).

Understand that the most important figure in all of the figures involved in a transaction is the purchase price. This is also the figure that you have the most control over. Over paying for the property can seriously impact the entire project. Realistically over paying for the property should lower the profit earned. However more common is that when the investor over pays for the property they under-cut the rehab and the end result is a lower quality rehab which can make the property sit on the market longer before selling, and perhaps require a lower sales amount to get moved - neither of which are good. In other words - learn how to buy right (obviously easier said than done, but can be accomplished with practice).  Sorry for rambling, and best of luck on your first deal.