This is a 3-part blog post. If you're looking for the pre-qual it's right HERE!
You can categorize all the costs to flipping houses into 3 categories: 1) Purchasing the home, 2) Carrying Costs, 3) Renovation costs. I've broken down the many ways you can find a house to flip and finance the purchase of the home with $0 of your own in the previous post HERE.
Let's move on to...
#2 Carrying Costs
Carrying costs are all of the sunken costs that you will need to pay throughout the flip. All of the costs that will "carry" with you throughout the process, if you will.
The carrying costs that you should be prepared for are:
The house's bills; electric, gas, water, sewage, trash, HOA, etc. If you live in the same area as your flip you could gauge what those bills would look like based on your own home's bills. They might not be as expensive, but you will need electricity to run the power tools, water for drinking and bathroom breaks, if you live where there's extreme weather you'll need to run the AC/Heater, etc. These costs can vary SO much based on the HOA, house size, etc. But a ballpark could be around $250 - $600.
Any interest on your loans to fund the project. This will be the monthly interest you pay on your hard money loan and, to jump ahead a little, you may also use a line of credit to fund the renovation, so you will also have interest payments there too.
Since the largest carrying cost will be the interest you pay on your hard money loan let's break that down so you have an idea of how much cash you're for sure going to need to pay for these carrying costs.
How much am I going to pay in interest? Let's say we receive $400,000 cash from our hard money lender to purchase a home, and we agree to a 12-month loan term (meaning, I have to have everything paid pack plus interest within the 12 month period), and our interest rate is 10%.
10% of $400,000 = $40,000. You would pay $40,000 in interest over the span of 12 months.
$40,000/12 months = monthly interest-only payments of $3,333.
This means you'll be paying $3,333 each month until your flip has concluded. You then sell the house and pay the principal of the loan (the $400,000) back using the profits you make on the sale.
What if your flip only takes 4 months? 4 months x $3,333 monthly interest-only payment = $13,332 total in interest. (You will also be paying for 4 months of house bills so keep that in mind too.) Remember, time is money! And this is where it matters MOST!
You can definitely play with these numbers to figure out what is affordable for you. If you purchase a house for less, the interest goes down. For example, if your max budget on a house is $200,000, your interest rate is 10% on a 12-month loan, your monthly interest payments will only be only $1,666. There are a lot of variables that can affect those carrying costs.
How do I pay for carrying costs? It's never a good idea to pay debt with more debt especially in such a risky business as flipping houses. The smartest way to pay these carrying costs is with your own personal savings. This is one reason it might take you some time to get all your finances in order before flipping a house; you need to save money. If that is not possible or quick enough, you could partner with friends, family, or another flipper/investor to split the carrying costs and then in turn split the profit.
Hopefully, that answers all your questions about carrying costs! If you have any lingering questions (this can be a confusing topic), reach out to me! Leave a comment, message us on Instagram or Facebook. We'd love to hear from you!