The Double-Edged Sword that is HGTV

Flip or Flop, Property Brothers, Rehab Addict, Income Property, Fixer Upper, 5 day Flip, etc. That’s a lot of TV shows dedicated to real estate investing. Although the majority offer good entertainment, I thought I’d outline a few very important expenses all of these shows fail to include consistently. Those pesky holding and financing costs.

Last week I was watching one of those shows and towards the end of the show, where they go over the finances of the transaction, I had to take a step back. Their line of thinking was as follows (I am paraphrasing):

“We purchased the house for $150,000 and we blew out repair budget out of the water, nearly by double, to $50,000, we are in to it for $200,000. We should be able to sell for $275,000. After closing costs, we should walk away with over $50,000.”

This sounds reasonable, especially considering they included closing costs. But it was clear to me that they forgot two very important and considerable costs: holding and financing costs. To help clarify their important, here are a few of the expenses associated with holding costs: HOA, taxes, insurance, utility payments. And here are the major ones with financing: upfront loan fees, interest, draw fees, application and processing fees.

I understand everyone has different financial situations and presumably none of the folks on HGTV are borrowing money (except Tarek and Christina of Flip or Flop). But the reality is that most of us need financing and their costs can really add up quickly.

Comparing HGTV’s numbers (left) with real life (right), here are the results assuming a 2 month turnaround:

Purchase price$150,000$150,000+insurance, escrow and title insurance (+$2,000)Repairs$50,000$50,000Closing Costs$25,000$25,461Resale Price$275,000$275,000Holding Costs$0$8,600Financing Costs$0$12,840Profit$50,000$26,000 (about)

$26,000 vs. $50,000 is quite the difference.

Perhaps these shows should provide a disclaimer at the beginning, like “results not typical,” or “past performance is no guarantee of future returns.” Regardless, I think the benefit they provide us is far greater than the damage inflicted on the poor slob who thinks it’s an easy business, rushes off to buy something, and ends up broke.

In short, if you're thinking of joining the fix and flip business based on the results shown on HGTV, dive in. Just be sure to get a really, really good realtor on your side who can help you avoid making the more serious mistakes.