There are more reality TV shows about by flipping houses than ever before and I am sure everybody has seen at least one and thought “I could do that”. I know I am always tempted, but the shows don’t tell the whole story. The biggest problem is they over-simplify the math. While I am no expert and welcome your views I think the following is close enough to deter me from the game.
The TV viewer sees the following return on investment:
Purchase Price – $ 250,000
Renovation Budget – $ 50,000
Projected Sale Price – $ 370,000
Projected profit – $ 70,000
While the projected profit might be attainable they really should stress that it is a gross profit before expenses. Why? Let’s look at the hidden costs of flipping a home:
There is the commission you pay on the purchase of the property which in my area is $ 11,500 (will vary by Realtor and location). There is the commission on sale of home at $ 15,100. Assuming the renovation takes 60 days, the home is on the market for another 30 days and closing is another 30 days out there are the carrying costs for 120 days.
Assuming you put $ 50,000 down on the purchase of the home the payments on a $ 200,000 mortgage at 5% are $ 1163.21 per month. Over 4 months this is $ 4652.84. The interest on the $ 50,000 in money borrowed for renovations over 4 months is $ 966.80 at 6% for a total of $ 3867.20.
There will also be property taxes, insurance, utilities and legal costs which could easily add another $ 2,500 to your costs.
Where does this leave you?
Gross profit $ 70,000
Real estate commissions $ 26,600
Mortgage payments $ 4,652
Interest expense $ 3,867
Miscellaneous $ 2,500
Total expenses $ 37,619
Net profit $ 32,381
And the one last expense is the government’s portion of the capital gain (again depending on where you live). Now I am not passing judgement either way on the merits of “flipping”, but the numbers are not what they appear to be and a careful analysis should be carried out each time.