The Hidden Costs of Flipping a House - GoPrime Mortgage, Inc. (2024)

The Hidden Costs of Flipping a House

Have you ever watched the shows on HGTV and wondered if you could buy and flip a house? They make flipping a house look so easy. It appears to take days to turn what was once a tragic before picture into a luxurious abode that will garner tens of thousands of dollars more than the initial cost. If you’ve ever thought you wanted to try your hand at flipping, it may be helpful to look at the hidden costs. At GoPrime, we don’t specialize in loans for house flipping, and there are many reasons why. Here are the things you’ll need to look out for.

High Cost of Financing

When you do watch the home renovation shows on TV, what you see is a very romanticized version of the experience. What you don’t see is the high cost of financing a home in desperate need of repair. It appears that the experience would be lucrative when you sell the newly renovated home, but makingupthe cost of material is only a fraction of the formula.

To get a loan to flip a house, you’ll need to be able to put cash down. Flipping is consideredhigh riskand your loan will be assessed very differently than a primary residence. In fact, many mortgage lenders don’t offer these packages, including GoPrime in NC.

Appraisal Costs

There are a lot of things tied up in the appraisal of the house you’re buying in order to renovate and flip. You need the appraisal to qualify for a mortgage, based primarily on the ‘After-Improved Value’,(AIV). More importantly ona flip, you want to know your numbers to ensure your profit margins work out at end of the project.

Here’s the kicker. You’ll havehidden costs on any renovation project, that will impactboth your net numbers, and any material budget cuts, could impact the final AIV.In the vast majority of cases, the post-flip appraisal will be an improvement, but does it justify the cost of the entire flip? The appraisal cost itself is small, all things considered, but there’s a lot riding on the outcome.

Home Inspections

For a flip,you’llneed more than a cursory inspection before buying. Any time you do work on the house you’vebought;you’ll need to reach out to the local municipality for inspections. And all of this will be dependent on your specific city or town and the building codes and requirements.

When the work on the house is completed, you may also want to get a pre-inspection. The longer your flipped house is on the market without selling, the more money you’llloseas you continue to payon thehigh costloan and all the other associated costs.

Taxes and Insurance

According to the IRS, flipping a house is not considered a passive income stream. Instead, the money you make on flipping a home will be taxed as regular income rather than capital gains. That means a much higher tax rate than what people see with capital gains.

The important thing if you’re going to flip a house is to keep track of all your financials. There may be tax deductions, but you’ll need to consult with an accountant to find all the details.

We are also not insurance experts so we won’t be able to provide advice. But it is important to note that most traditional homeowner insurance policies are not set up to cover homes in the process of being flipped. You’ll need to discuss options with a professional if you decide to move forward with your project, and most likely obtain abuildersrisk policy during construction

Construction

Of course, the single biggest cost for most house flipping projects is the construction itself. The extent by which you need to renovate will depend on a number of factors. Some homes will need to be strippedto thestuds,andstarted as if from scratch. Others have good bones that just need TLC to make them shine.

But budgeting for the construction will be a huge part of your process. And know that it will likely take a lot more time and money than you initial expected, especially if you’re inexperienced.

Emotional Toll

What a lot of people don’t consider when they decide to take on a major renovation to flip a house is the emotional stakes.For example, if you partner with a friend, family member, or spouse to do this project know that you will butt heads and it will be challenging at all times.

Even if you work well together, the kind of work it takes to flip a home will be dirty, stressful, and sometimes even frustrating. It’s important to keep that in mind throughout the process.

Do you want to know more? GoPrime can refer you to additional resources, so call us today.