Many people watch popular house flipping shows on television, and they believe that doing their own flip will be easy money. Yes, you can make good money doing property flipping; although, you will only profit if you take all of the risks into consideration. Most new investors know that the basics of calculating your profits is to subtract the repair costs from you purchase price. Unfortunately, many flippers miss the hidden fees that can sneak into the final cost of your flip.
Here is a list of some of the hidden fees that you need to include in your profit and loss analysis:
Interests On Loans
Most flippers don’t pay for their entire rehab with cash. Also, they fail to keep track of the interest that they need to pay back for the loans that they borrowed. If you are working on your first property, then you need to take an educated guess about how much time will be needed to finish your rehab. Assuming that you can save money by doing all the work on your own can be a big mistake. Many times this will make the holding time for your property go up significantly; therefore, it will cost you more in additional interest on loans than it will save you in labor costs. Also, make certain that you don’t forget the amount of extra time it is going to take to sell the property once all of the repairs are completed.
Forced Repairs Due To Permits
Depending on what city you live in, your local code office may have different permitting requirements for different type of repairs. In many municipalities, if you do a major rehab, then the city may be require you to do more repairs than you initially planned for. For example, if you tear out plaster to replace it with new drywall, then the code office may say that you exposed so much of the wall surface that you need to repair the inside of the walls also. This could include replacing rotten wood, upgrading electrical systems, and even replacing or repairing structural beams. If there is a lot of unexpected work that needs to be done to bring the property up to code, then this can be a major hidden expense that destroys the profit of your rehab.
Mold and Asbestos
Finding either mold or asbestos on your property can be devastating to your project. It can cost thousand of dollars to have these repairs done. Be certain to have the property inspected by a qualified contractor before you buy the property. If you do discover that the property is contaminated, then it is important that you do not panic. The most important thing that you can do to deal with this situation is get bids from many different contractors. The amount they charge for removal varies greatly; therefore, shopping around for the most affordable contractor can save you thousands of dollars. (Related: Five Words Used in Real Estate Listings and What They Really Mean)
Septic System On Property
Many investors like to buy properties in the countryside; however, this can be risky. Over the years, many rural homes decided to upgrade their septic tanks to use city sewer. What most investors fail to realize is that there could be an abandoned and unused septic tank remaining on the property that could cost you a lot of money. Before you decide to buy the property, you should have th local health department inspect the existing sewer system and inform you of any repairs or removals that will be necessary.
New investors think that they can do termite inspections on their own. This can be a very costly mistake! If you are getting a loan to do your rehab, then the bank will require you to hire a professional; however, if you pay cash for the property, then no termite inspection will be required. Regardless of who does the inspection, make certain that they thoroughly check out all areas of the house. Many inspectors try to avoid inspecting crawl spaces and areas that are hard to access.
New investors almost never purchase rehab insurance, and insurance is the one thing that no investor should ever skimp on. Getting this insurance is a must! Accidents happen frequently on rehab work sites, and having insurance is the only thing that will protect you if someone gets hurt. Rehab insurance is not cheap. As a general guideline, rehab insurance will probably cost you more than a home renter policy and less than a vacant property policy. Be sure to get multiple quotes because their prices will vary widely.
You need to plan a nice amount into your budget for utilities, and schedule work around the season that will save you the most money. Are you rehabbing during the Winter months? Keeping the place warm for your workers can really take away from your profit. Electric isn’t cheap either! Tools don’t power themselves, and workers can’t work in the dark.
Coordinate With City Planning
You need to check with the city and see if any road work in planned for the street your rehab is on. If this work occurs during the time you are planning on rehabbing your property, then it could severely increase the size of your budget. If you find yourself unable to access the property, due to city repairs being done, then your budget will get destroyed and your project will be stalled. Also, if the city does street repairs while you own the property, then it will hurt the resell value of your property.
Beware of Homeowner Associations
Investing in a neighborhood, just because it looks good, isn’t always the best choice. There are some hidden risks that you should be aware of before you make your decision to invest. One big pitfall to avoid is purchasing a property where a homeowner association is in charge of your financial decisions. (Related: How to Find the Best Tenants for Your Rental Property)
Each homeowner association has a set monthly fee for home owners in their neighborhood; therefore, it is important to get your house fixed and sold quickly. Also, any repairs that you perform on your home must be approved by the association before you make them. These expenses can really add up because the homeowner association will force you to use the designs and materials that they have chosen for you.
Historical Society Houses
Be very careful about buying a house in a historical area. It is very similar to a homeowner association. You have almost no choice in which materials you use for your home repairs. Repairing a historical house can be a very expensive proposition. Many of the materials originally used to build the house are no longer being manufactured; therefore, historical houses almost always involve hiring expensive tradespeople to bring the house up to the requirements of the historical society. Plus, the approval times for your plans can take forever. Be a smart investor and leave this type of rehab to the professionals.
In conclusion, rehabbing property can be a profitable investment, but you will only make money if you do it correctly. Keeping accurate records is the key. It is important to think hard about all of the cost that can occur during the project. Each expense by itself may not seem like much, but when you total the cost together the amount really can add up.