The 3 Costs to Flipping Houses & How to Pay for Them with Little Cash! (Part 3: Renovation Costs)
Updated: Jun 3, 2022
This is a 3-part post. The prequels to this post are Part 1: Purchasing a Home and can be found HERE and Part 2: Carrying Costs which can be found HERE.
All costs associated with flipping a house can be categorized into 3 categories: Purchasing the house, carrying costs, and renovations. Let's dive right into...
#3 Renovation costs
This is a fun one! There are many ways you can fund your renovation, but before I list those off, let me give you a ballpark idea of renovation costs on a flip so you know how much money we're talking about.
If you're flipping anything from a 1,500 sqft home to a 2,500 sqft home (typically a 2 bed 3-4 bath), you can expect the following ballpark breakdown of your major expenses:
20k - new kitchen
10k - new bathroom #1 (ideally a little less)
10k - new bathroom #2 (realistically a little more since it'll be a master bath)
10k - new flooring and paint
10k - extra costs as needed (landscaping, reconfiguring a space, garage door, etc.)
TOTAL - 60k
That last 10k should be your wiggle room money for unexpected costs, underestimated costs, and/or odds and ends.
Keep in mind your goal should be to spend as LITTLE as possible while still creating value in the home. Don't cut corners, but don't go overboard either. This takes a lot of research on your end to find the right materials!
If you have any major costs like needing a new roof, or structural issues you would need to cut down on your kitchen and bathroom budget, maybe select cheaper flooring, and then use some of your last 10k to pay for it. You'll need to pick and choose what is necessary to renovate. I could go on about this, but I'll save it for another blog post.
Do I DIY the renovation or hire out? Easy answer: HIRE OUT ALWAYS! Get a LICENSED general contractor. A general contractor will take care of everything! Don't hodgepodge together your Avengers team of contractors (one electrician, one plumber, one painter, etc.) because you will play the middle man for all of them and you're (likely) not a construction professional. However, a general contractor is and they probably already have a team of electricians, plumbers, painters, etc. that work smoothly together! I've hodgepodge together a team of contractors before to do our home renovations (where time is not necessarily the thief of money, just our sanity haha) and I've lost WEEKS of time because of this. One contractor will say, "Oh that's not my job, that's their job," and the other contractor says the exact same thing. Or, this is a good one, "Your plumber needs to come back and do XYZ before I can do ABC."But now your plumber, who thought his job was done, can't come back for 2 weeks. It's a mess. And remember Rule #1 in flipping a house: time is money!
If you choose to DIY the entire home, it could take at LEAST 6 months if you guys are there every day, all day, and have years of experience in these labor-intensive projects. But a contractor with many labor hands than just you and your spouse and a couple of friends on the weekend if you're lucky, can finish those renovations 3 times as fast and most likely do a much better job. To put this into perspective, imagine it takes you at least 14 days to install kitchen cabinets. If your monthly carrying costs are $4,000 that breaks down to about $133/day. This means you lost $1,862 in carrying costs for you to install the cabinets yourself at $0 labor costs when you have could have paid a contractor $1,200 to have it done in 1 day with $133 lost in carrying costs. Paying a contractor saved you $529. That may not sound like a lot, but imagine that kind of loss on your bathroom tile, bedroom flooring, painting, etc. It adds up and you will lose money with your own free labor because TIME IS MONEY!
There are also 2 extra factors to consider:
The further you get into the project, the slower you WILL move. The more overwhelmed you will get and the more money you will be losing. People will literally get so burnt out and in over their heads on flips, that they will give up, sell the house and chalk it up as a loss. If you want to avoid all of this and save money, GET A GENERAL CONTRACTOR.
If it takes you 6 months to flip an entire house on your own (which is VERY generously fast!!), then you only have the capacity to flip 2 houses/year if you're lucky. Whereas if you hire out, you could do 3-4/year. Eventually, you could have multiple flips going on at one time and flip even more houses each year! If you want to be a well-oiled machine, GET A GENERAL CONTRACTOR.
Also, licensed contractors will make sure you have all the permits necessary if you are making ANY changes to the home. That will be necessary for resell.
I will have another blog post coming soon to address how to find a contractor you can trust, what to do if you've lost trust, and a couple of tips that will save you from ever getting cheated by a contractor! Stay tuned!
How do I fund the renovation costs? Since we are only talking about 60k in renovations, 100k at MOST, it is much easier to get your hands on this kind of money than it is the cost of purchasing a home. Here are some options to fund the renovations:
Your savings and/or a loan from friends/family - this is very common.
You can use your hard money lender for this as well, however, they really like to see you have skin in the game. And remember you are paying a higher interest rate with a hard money lender so if you can find another form of lending or credit at a lower interest rate, that would be better.
You can use a collective effort of credit cards if you have a large enough credit limit and your interest rates are reasonable. You can do a mix of savings and credit cards. Or a small loan and credit cards. As long as you are able to comfortably pay the carrying costs on the line(s) of credit each month during the flip, this is a great option!
If you own a home or have any assets you can use to your advantage, see what you can do to leverage them! A HELOC (home equity line of credit) is a great option. A HELOC is where you receive a line of credit for 80% of the equity minus what you owe with a very low interest rate (usually 2-4%). For example, if your home is now worth 500k you take 80% of that, which is 400k, and subtract what you still owe on the home (say 330k), which equals 70k in a line of credit. Your carrying costs each month for 70k would only be $116! ((70k x 2%))/12months = $116. It is technically a lien on your home, and you cannot sell your home until the HELOC is paid off, so keep that in mind.
Another option is a cashout refinance on your home. This is where you refinance your home and receive cash for 80% of the current value of your home minus what you still owe on your home. This is the same as a HELOC except you receive cash with no strings attached and you will have to pay closings costs. I can elaborate on both of these in a future blog! Lots more to talk about but that's the gist haha!
And there you have it, my friends!
I hope these 3 collective blog posts have made flipping houses seem less mysterious and feel more achievable! I hope I was able to tackle a lot of your questions and show you how you can get all your ducks in line to flip a house. If you have any lingering questions, reach out over Facebook, Instagram, or comment on these blog posts. We love interacting with you all and talking about anything and everything real estate - it's our passion! Happy Flipping!